UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
_______________________________
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017
or
For transition period from to .
Commission File Number: 001-37841
Kadmon Holdings, Inc.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
450 East 29th Street, New York, NY
(Address of principal executive offices)
27‑3576929
(I.R.S. Employer
Identification No.)
10016
(Zip Code)
(212) 308‑6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Name of exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the Registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
(Do not check if a
smaller reporting
company)
Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of its
voting and non-voting common equity held by non-affiliates was approximately $115,222,352 based upon the closing price of the registrant’s
common stock on June 30, 2017.
The number of shares of the registrant’s common stock outstanding as of March 2, 2018 was 78,652,149.
Table of Contents
Kadmon Holdings, Inc.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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REFERENCES TO KADMON
In this Annual Report on Form 10-K, unless otherwise stated or the context otherwise requires:
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references to the “Company,” “Kadmon,” “we,” “us” and “our” following the date of the Corporate Conversion (July
26, 2016) refer to Kadmon Holdings, Inc. and its consolidated subsidiaries;
references to the “Company,” “Kadmon,” “we,” “us” and “our” prior to the date of the Corporate Conversion refer to
Kadmon Holdings, LLC and its consolidated subsidiaries; and
references to the “Corporate Conversion” or “corporate conversion” refer to all of the transactions related to the
conversion of Kadmon Holdings, LLC into Kadmon Holdings, Inc., including the conversion of all of the outstanding
membership units of Kadmon Holdings, LLC into shares of common stock of Kadmon Holdings, Inc. effected on
July 26, 2016. See Note 1, “Organization—Corporate Conversion, Initial Public Offering and Debt Conversion,” of
the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K for more
information.
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FORWARD‑LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward‑looking statements. All statements other than statements of historical
facts contained in this Annual Report on Form 10-K may be forward‑looking statements. Statements regarding our future results of
operations and financial position, business strategy and plans and objectives of management for future operations, including,
among others, statements regarding future capital expenditures and debt service obligations, are forward‑looking statements. In
some cases, you can identify forward‑looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or
“continue” or the negative of these terms or other similar expressions.
Forward‑looking statements involve known and unknown risks, uncertainties and other important factors that may cause
our actual results, performance or achievements to be materially different from any future results, performance or achievements
expressed or implied by the forward‑looking statements. We believe that these factors include, but are not limited to, the following:
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the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and
development programs;
our ability to advance product candidates into, and successfully complete, clinical trials;
our reliance on the success of our product candidates;
the timing or likelihood of regulatory filings and approvals;
our ability to expand our sales and marketing capabilities;
the commercialization of our product candidates, if approved;
the pricing and reimbursement of our product candidates, if approved;
the implementation of our business model, strategic plans for our business, product candidates and technology;
the scope of protection we are able to establish and maintain for intellectual property rights covering our product
candidates and technology;
our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual
property rights and proprietary technology of third parties;
cost associated with defending or enforcing, if any, intellectual property infringement, misappropriation or
other intellectual property violation, product liability and other claims;
regulatory developments in the United States, Europe and other jurisdictions;
estimates of our expenses, future revenues, capital requirements and our needs for additional financing;
the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;
our ability to maintain and establish collaborations or obtain additional grant funding;
the rate and degree of market acceptance, if any, of our product candidates;
developments relating to our competitors and our industry, including competing therapies;
our ability to effectively manage our anticipated growth;
our ability to attract and retain qualified employees and key personnel;
our ability to achieve cost savings and benefits from our efforts to streamline our operations and to not harm our
business with such efforts;
our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart
Our Business Startups Act (JOBS Act);
statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share
performance;
litigation, including costs associated with prosecuting or defending pending or threatened claims and any adverse
outcomes or settlements not covered by insurance;
our expected use of cash and cash equivalents and other sources of liquidity;
our ability to amend or refinance the 2015 Credit Agreement due June 17, 2018;
the future trading price of the shares of our common stock and impact of securities analysts’ reports on these prices;
and/or
other risks and uncertainties, including those listed under the caption “Risk Factors.”
The forward‑looking statements in this Annual Report on Form 10-K are only predictions, and we may not actually
achieve the plans, intentions or expectations included in our forward‑looking statements. We have based these forward‑looking
statements largely on our current expectations and projections about future events and financial trends that we believe may affect
our business, financial condition and results of operations. Because forward‑looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward‑looking statements as
predictions of future events. The events and circumstances reflected in our forward‑looking statements may not be achieved or
occur and actual results could differ materially from those projected in the forward‑looking statements.
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Item 1. Business
Overview
PART 1
We are a fully integrated biopharmaceutical company engaged in the discovery, development and commercialization of
small molecules and biologics to address disease areas of significant unmet medical needs, with a near-term clinical focus on
inflammatory and fibrotic diseases. We have very experienced research and clinical development teams, and we leverage their
skills to evaluate and develop various in-licensed products and potential drug candidates from our small molecule and biologics
platforms. By retaining global commercial rights to our clinical product candidates, we believe we have the ability to develop these
candidates ourselves while maintaining flexibility for commercial and licensing arrangements. Below is a brief description of our
lead product candidates:
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Inflammatory and Fibrotic Diseases. We are developing a portfolio of oral small molecule inhibitors of the Rho-
associated coiled-coil kinase (ROCK) signaling pathway to treat specific inflammatory and fibrotic diseases.
Dysregulation of ROCK-driven cellular functions is implicated in many chronic diseases. Research by Kadmon and
several academic institutions has demonstrated that inhibition of ROCK can regulate aberrant immune responses and
fibrotic processes.
o KD025. KD025 is an inhibitor of the Rho-associated coiled-coil kinase 2 (ROCK2) signaling pathway and the
most advanced candidate in our ROCK inhibitor platform. We are conducting three ongoing Phase 2 clinical
studies of KD025: a dose-finding, open-label study in chronic graft-versus-host disease (cGVHD); a randomized,
open-label study in idiopathic pulmonary fibrosis (IPF); and a randomized, placebo-controlled study in moderate
to severe psoriasis. In October 2017, we obtained orphan drug designation status in the United States for KD025
for the treatment of patients with cGVHD. Throughout 2017 and early 2018, we reported encouraging findings
from the ongoing Phase 2 clinical trial in cGVHD demonstrating that KD025 was well tolerated and resulted in
clinically significant responses in patients. In February 2018, we reported positive findings from the ongoing
Phase 2 clinical trial in IPF demonstrating clinical benefit and tolerability of KD025. We expect to continue to
report data from these ongoing studies during 2018.
o ROCK Inhibitor Platform. In addition to KD025, we have generated a portfolio of selective ROCK inhibitors in
preclinical development. Our platform includes a distinct series of oral ROCK2-selective and pan-ROCK
(ROCK1/2) inhibitors with varying specificity, distribution and solubility characteristics with the potential to
treat specific fibrotic and neurodegenerative diseases.
Genetic Diseases. We are developing two products for the treatment of genetic diseases: tesevatinib, an oral tyrosine
kinase inhibitor (TKI), for the treatment of polycystic kidney disease (PKD), and KD034, our portfolio of generic
formulations for the treatment of Wilson’s disease.
o Tesevatinib. Tesevatinib has demonstrated clinical activity against epidermal growth factor receptor (EGFR) and
Src family kinases, which are key molecular drivers of PKD, a genetic kidney disorder. We are developing
tesevatinib to treat autosomal dominant PKD (ADPKD) and autosomal recessive PKD (ARPKD). Data from our
ongoing open-label, Phase 2a clinical trial in ADPKD demonstrated that tesevatinib is well tolerated. In March
2016, we obtained orphan drug designation status in the United States for tesevatinib for the treatment of patients
with ARPKD. In September 2017, we initiated a Phase 1 clinical trial of tesevatinib in ARPKD. In November
2017, we initiated a randomized, placebo-controlled, Phase 2 clinical trial of tesevatinib in ADPKD. There are
currently no approved drug therapies for ADPKD or ARPKD in the United States.
o KD034. We are developing a portfolio of generic formulations of trientine hydrochloride called KD034 for the
treatment of Wilson’s disease, a genetic liver disease characterized by an inability to excrete copper. In December
2016, we submitted an Abbreviated New Drug Application (ANDA) for our bottled generic capsule formulation
of Syprine (trientine hydrochloride). In March 2017, we submitted a second ANDA for the same formulation in
proprietary blister packaging that offers room temperature stability, which we believe has the potential to address
shortcomings of the currently marketed trientine hydrochloride. We intend to use Kadmon Pharmaceuticals, LLC
(Kadmon Pharmaceuticals), our specialty‑focused commercial organization, to market our KD034 product
candidates, if approved.
Kadmon Pharmaceuticals markets and distributes products in a variety of therapeutic areas. We do not currently depend
on commercial revenues from Kadmon Pharmaceuticals to support our non-commercial operations, including drug development
efforts and debt obligations. Instead, we leverage our commercial infrastructure, including the regulatory,
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compliance, quality and chemistry, manufacturing and controls (CMC) teams of Kadmon Pharmaceuticals, to support the
development of our clinical-stage product candidates. We believe that our commercial infrastructure will be most advantageous to
us in the future, in connection with potential commercial collaborations as well as the anticipated commercialization of our
pipeline product candidates, if approved.
Our Strategy
Our goal is to develop first-in-class, innovative therapies for significant unmet medical needs, including inflammatory,
fibrotic and genetic diseases, for which we plan, in many cases, to seek breakthrough designation from the FDA. Our key strategies
to achieve this goal are listed below:
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Advance KD025 for the treatment of inflammatory and fibrotic diseases. We have three ongoing Phase 2 clinical
studies of KD025 in inflammatory and fibrotic diseases: a dose-finding, open-label study in cGVHD, a randomized,
open-label study in IPF and a randomized, placebo-controlled study in moderate to severe psoriasis. We expect to
continue to report data from these clinical trials throughout 2018. We also currently plan to initiate a Phase 2 clinical
study of KD025 in scleroderma in 2018.
Develop our ROCK inhibitor platform to produce novel treatments for fibrotic and neurodegenerative diseases.
We have generated a portfolio of selective ROCK inhibitors in preclinical development with varying specificity,
distribution and solubility characteristics to treat specific fibrotic and neurodegenerative diseases.
Advance tesevatinib for the treatment of ADPKD and ARPKD. We are evaluating the safety and tolerability of
tesevatinib in ADPKD in an ongoing Phase 2 clinical study and in ARPKD in a Phase 1 clinical study. PKD is a
disease that requires lifelong treatment, and we believe that tesevatinib’s tolerability profile makes it an attractive
therapeutic product candidate for these indications. To address ARPKD, a pediatric form of the disease, we have
developed a proprietary liquid formulation of tesevatinib for administration to children. We initiated a Phase 2,
randomized, placebo-controlled study of tesevatinib in ADPKD in November 2017 and a Phase 1 clinical study in
ARPKD in September 2017.
Leverage our drug discovery platforms to identify and develop new product candidates for additional unmet
medical needs. Our drug discovery platforms are focused on small molecules and biologics and support the future
growth of our pipeline. Our most advanced preclinical product candidate, KD033, is an anti-PD-L1/IL-15 fusion
protein, which inhibits the PD-L1 pathway to reduce immune checkpoint blockade while simultaneously directing an
IL-15 stimulated immune response to the tumor microenvironment.
Leverage our commercial infrastructure to market therapies for Wilson’s disease and support our clinical
development programs. We are seeking approval for a generic formulation of trientine hydrochloride (in a bottled
capsule and in blister packaging) for the treatment of Wilson’s disease under an ANDA for a generic of Syprine
(trientine hydrochloride). We intend to use Kadmon Pharmaceuticals to market this formulation, if approved, and
support our development programs and commercialization of our clinical-stage product candidates, if approved.
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Our Clinical‑Stage Pipeline
ROCK2 Inhibitor Platform (Lead Compound: KD025)
ROCK is an “on” switch in cells that regulates cell movement, shape and differentiation. Two ROCK isoforms exist:
ROCK1 and ROCK2, and dysregulation of ROCK-driven cellular functions is implicated in many chronic diseases. Kadmon’s
research has demonstrated that inhibition of ROCK signaling can regulate aberrant immune responses and fibrotic processes.
Kadmon’s ROCK inhibitor platform includes a distinct series of oral ROCK2 and pan-ROCK (ROCK1/2) inhibitors in
preclinical and clinical development. Our portfolio includes pan-ROCK and ROCK2-selective inhibitors for inflammatory and
fibrotic diseases and blood-brain barrier-penetrant pan-ROCK inhibitors for neurodegenerative diseases. We believe these product
candidates have the greatest potential based on characteristics including potency, solubility, bioavailability and, in some cases,
blood-brain barrier penetrance, to treat certain autoimmune, fibrotic and neurodegenerative diseases.
A central goal in the study of inflammatory disease is to develop therapies that down-regulate pro-inflammatory immune
responses while potentially preserving the immune system’s ability to fight infections and tumors. Our research has demonstrated
that selective ROCK2 inhibition affects key cellular functions that control and restore balance to the immune system. ROCK2
inhibition with KD025 reduces the production of pro-inflammatory cytokines, IL-17, IL-21 and IL-22 by T helper 17 (Th17) cells
through the down-regulation of STAT3, a key transcription factor and regulator of the inflammatory pathway. ROCK2 inhibition
concurrently increases the suppressive function of regulatory T cells (Tregs) through activation of STAT5, a controller of
regulatory cell function, helping to resolve inflammation with a minimal effect on the rest of the immune response.
In fibrotic diseases, ROCK signaling is up-regulated throughout the fibrotic process, effecting macrophage infiltration,
endothelial cell activation and myofibroblast differentiation. These processes result in the deposition of excess collagen and
creation of scar tissue. We believe that ROCK inhibition with KD025 has the potential to halt these processes to successfully treat
fibrotic diseases.
It is now well understood that neurodegenerative diseases have a neuroinflammatory component. These observations,
coupled with the effects of ROCK on neuronal cell behavior, indicate that ROCK inhibition may play an important role in the
treatment of neurodegenerative diseases, including, among many others, multiple sclerosis, Alzheimer’s disease and Huntington’s
disease. In the future, we may develop our preclinical compounds from our ROCK inhibitor platform for the treatment of certain
neurodegenerative diseases.
KD025 Clinical Program
To date, more than 300 subjects have been dosed with KD025 for inflammatory or fibrotic diseases or as healthy
volunteers. KD025 has demonstrated safety and clinical activity in eight completed clinical trials.
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KD025 for the Treatment of Chronic Graft-Versus-Host Disease
Medical Need: Chronic Graft-Versus-Host Disease
cGVHD is a life-threatening complication following stem cell transplantation from blood or bone marrow called
hematopoietic stem cell transplantation (HSCT) through which transplanted immune cells (graft) attack healthy cells (host),
leading to inflammation and fibrosis in multiple tissues. cGVHD occurs in approximately 50% of HSCT recipients, with
approximately 5,000 new cases in the United States annually. Preclinical research has shown that IL-21 and IL-17, two pro-
inflammatory cytokines regulated by the ROCK2 signaling pathway, play a key role in cGVHD pathogenesis.
KD025 in Chronic Graft-Versus-Host Disease
In our preclinical research that was published in the journal Blood in March 2016, we demonstrated that ROCK2
inhibition with KD025 targeted both the immunologic and fibrotic components of cGVHD and reversed clinical and
immunological symptoms of cGVHD in multiple models. In addition, KD025 does not adversely impact the immune system’s
ability to fight infections.
Ongoing Phase 2 Clinical Study of KD025 in Chronic Graft‑Versus‑Host Disease (KD025-208)
In September 2016, we initiated an open-label, dose-finding Phase 2 clinical study to evaluate the safety, tolerability and
activity of KD025 in patients with steroid dependent cGVHD and active disease. We are enrolling 52 cGVHD patients into three
cohorts: KD025 200 mg QD, 200 mg BID and 400 mg QD for 24 weeks. The cohorts are enrolled sequentially following the safety
assessment of the previous cohort. We currently expect to commence an expansion cohort (dose TBD) of approximately 40
patients following completion of the first three cohorts. The primary efficacy endpoint is the Overall Response Rate (ORR),
defined as the percentage of patients who meet the 2014 NIH Consensus Response Criteria Working Group overall response
criteria (Partial Response (PR) and Complete Response (CR)). The study is being conducted in the United States.
Phase 2 data presented in February 2018 showed that KD025 achieved ORRs of 65% and 69% in Cohorts 1 and 2,
respectively, including CRs in specific organs with fibrotic disease. Responses were durable, with 7 of 17 patients in Cohort 1
(41%) sustaining responses for 20 weeks or longer. Patients were also able to reduce and discontinue doses of corticosteroids and
other immunosuppressants. Clinical benefit was observed for both responders as well as non-responders. Importantly, KD025 was
well tolerated, with no treatment-related serious adverse events and no apparent increased risk of infection.
In 2018, we plan to continue our dialogue with regulatory authorities to obtain further guidance on a regulatory pathway
to approval for KD025 in cGVHD. In addition to the expansion cohort, we plan to initiate a new Phase 2 clinical trial of KD025 in
cGVHD in 2018.
KD025 for the Treatment of Idiopathic Pulmonary Fibrosis
Medical Need: Idiopathic Pulmonary Fibrosis
IPF is a progressive fibrotic disease of the lungs, with a median survival of three to five years from the time of diagnosis.
Approximately 128,000 people in the United States are living with IPF, with 48,000 new cases diagnosed annually. IPF is thought
to be caused by repetitive environmental injury to the lining of the lung airways and the resulting abnormal wound-healing
responses. IPF patients are in need of new therapies that provide clinical benefit.
KD025 in Fibrotic Disease
In addition to ROCK2’s potential role in inflammation, we believe the ROCK2 signaling pathway has significant potential
to treat fibrotic disease. Independent research from academic institutions has demonstrated that ROCK activity is increased in
idiopathic pulmonary fibrosis in humans as well as in animal lungs. In our preclinical research, ROCK2 inhibition with KD025
reduced fibrosis in multiple preclinical models, including lung fibrosis in a bleomycin mouse model system. These data suggest
that treatment with KD025 has potential therapeutic benefit in IPF by targeting key fibrotic processes mediated by the ROCK
signaling pathway.
Ongoing Phase 2 Clinical Study of KD025 in Idiopathic Pulmonary Fibrosis (KD025-207)
In June 2016, we initiated a randomized, open label, Phase 2 clinical study to examine the safety, tolerability and activity
of KD025 in IPF patients who have received or been offered pirfenidone and/or nintedanib. Enrollment is complete, with 39 IPF
patients randomized 2:1 to receive KD025 at 400 mg QD or best supportive care (BSC). We currently expect to commence an
expansion cohort of approximately 40 patients following completion of the first two cohorts. The primary
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efficacy endpoint is the percent change in forced vital capacity (FVC), a measure of lung function, from baseline to 24 weeks. The
study is being conducted in the United States.
In initial data announced in February 2018, KD025 demonstrated clinical benefit in IPF patients, with a median decline in
FVC of 48 mL at week 24, compared to a median decline of 175 mL in patients treated with BSC, an absolute difference of 127
mL and relative difference of 73%. KD025 was well tolerated, with no drug-related SAEs, and 18 out of 20 (90%) of KD025
patients evaluable at week 24 elected to continue KD025 beyond week 24.
In 2018, we plan to continue our dialogue with regulatory authorities to obtain further guidance on a regulatory pathway
to approval for KD025 in IPF. In addition to the expansion cohort, we plan to initiate a new Phase 2 clinical trial of KD025 in IPF
in 2018.
KD025 for the Treatment of Scleroderma
Medical Need: Scleroderma
Scleroderma (also known as systemic sclerosis) is a chronic multi-system disease characterized by skin thickening and
internal organ fibrosis. Approximately 75,000 to 100,000 people in the United States are living with scleroderma. There are no
FDA-approved therapies for scleroderma.
KD025 in Scleroderma
We are designing a Phase 2 clinical trial of KD025 in scleroderma (also known as scleroderma), an area in which ROCK
inhibition has demonstrated potential in preclinical models. In 2018, we plan to initiate a Phase 2 clinical study of KD025 in
scleroderma.
KD025 for the Treatment of Moderate to Severe Psoriasis
KD025 has demonstrated clinical activity in a completed Phase 2 clinical trial in moderate to severe psoriasis, resulting in
Psoriasis Area and Severity Index (PASI) score reductions in 85% of patients completing the study, with minimal side effects.
PASI scoring is a widely used visual measure of psoriasis severity. In completed Phase 2 and Phase 2a clinical studies in moderate
to severe psoriasis, KD025 resulted in the down-regulation of pro-inflammatory response with no evidence of any deleterious
impact on the rest of the immune system.
Medical Need: Moderate to Severe Psoriasis
Psoriasis is a chronic, immune‑mediated, inflammatory skin condition affecting as many as 7.5 million people in the
United States. Most psoriasis patients (approximately 80% to 90%) have chronic plaque psoriasis, characterized by recurrent
exacerbations and remissions of thickened, erythematous, scaly patches of skin that can occur anywhere on the body.
Approximately 15% to 25% of these patients have moderate to severe disease requiring systemic therapy. This subset of patients is
our targeted patient population.
KD025 Clinical Program in Moderate to Severe Psoriasis
Ongoing Placebo-Controlled Phase 2 Clinical Study of KD025 in Moderate to Severe Psoriasis (KD025-211)
Based on clinical data from our completed Phase 2 clinical study of KD025, we are conducting a randomized, double-
blind, placebo controlled Phase 2 clinical study of KD025 in moderate to severe psoriasis. This dose finding study is evaluating the
safety, tolerability and efficacy of KD025 in up to 180 patients with moderate to severe psoriasis who are candidates for systemic
therapy or phototherapy. The 16 week study consists of five cohorts of 30 patients each: KD025 200 mg once daily (QD), KD025
200 mg twice daily (BID), KD025 400 mg QD, KD025 600 mg QD (administered as 400 mg in the morning and 200 mg in the
evening) and matching placebo BID. The primary efficacy endpoint is the percentage of patients achieving a 75% reduction in
PASI score at Week 16. The study was initiated in September 2016 and is being conducted in the United States.
Tesevatinib Clinical Program
To date, more than 300 subjects have received at least one dose of tesevatinib for ADPKD, solid tumor malignancies or as
healthy volunteers in clinical pharmacology studies. In completed clinical studies, tesevatinib demonstrated activity through target
kinase inhibition. We have strategically deprioritized the development of tesevatinib in non-small cell lung cancer and
glioblastoma to focus on developing tesevatinib in ADPKD and ARPKD as well as our other clinical programs. As additional data
become available, these oncology programs could become prioritized, partnered, or terminated.
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Tesevatinib for the Treatment of Polycystic Kidney Disease
We are developing tesevatinib (KD019), an oral small molecule TKI, for the treatment of polycystic kidney disease, an
inherited kidney disorder. Tesevatinib has demonstrated clinical activity against activating mutations of EGFR and Src family
kinases, which are molecular pathways central to the progression of ADPKD and ARPKD. In addition, tesevatinib accumulates in
the kidneys, 15‑fold greater than in the blood. In rodent PKD models, tesevatinib-treated animals have dramatically fewer and
smaller renal cysts than vehicle-treated controls. We believe the inhibition of EGFR and Src by tesevatinib and its accumulation in
the kidneys make it an excellent potential therapeutic product candidate for PKD. These characteristics allow for lower dosage in
patients, making it potentially suitable for long‑term use. We believe that tesevatinib, if approved, could be a first‑line therapy for
ADPKD and ARPKD.
Tesevatinib is currently in a randomized, placebo-controlled Phase 2 study in ADPKD in the United States and a Phase 1
study in ARPKD in the United States.
Medical Need: Polycystic Kidney Disease
PKD is the most prevalent monogenic disease, with approximately 600,000 patients in the United States and 12.5 million
patients worldwide, affecting more individuals than all other monogenic diseases combined. There are two forms of the disease:
ADPKD, which presents in adulthood, and ARPKD, a rare autosomal recessive form affecting infants. ADPKD and ARPKD
demonstrate significant elevation in molecular signaling cascades frequently implicated in cancer cell growth, including EGFR and
Src family kinases. A key characteristic of PKD is the formation of enlarged, fluid‑filled cysts, which compromise kidney function
and lead to rapid progression to end-stage renal disease. EGFR in particular is implicated in the expansion of renal cysts in PKD.
The growth of large cysts over decades in ADPKD compromises kidney function and eventually results in the need for dialysis and
kidney transplant. ADPKD is one of the leading causes of end‑stage renal disease, with approximately 50% of patients requiring
dialysis by the age of 60.
ARPKD affects approximately one in 20,000 children born in the United States and is a more severe disease than
ADPKD, causing cyst formation in multiple organs, leading to significant morbidity and mortality in childhood, with those
surviving typically requiring dialysis by the age of 10.
There are no FDA‑approved therapies for either form of PKD. While the role of EGFR is well known in disease causation
and progression, other molecules have not been tested in PKD because the blood/serum concentrations required to impact the
kidney would be very high and would likely have an intolerable toxicity profile. Current standard of care for end‑stage PKD is
limited to dialysis and kidney transplant. Therefore, PKD represents a significant unmet medical need and a substantial
commercial opportunity as patients with PKD need therapies that can slow disease progression and increase survival.
PKD Clinical Program
Ongoing Phase 2 Placebo-Controlled Study of Tesevatinib in Autosomal Dominant Polycystic Kidney Disease (KD019‑211)
We initiated a Phase 2, randomized, double-blind, placebo-controlled trial of tesevatinib in November 2017. The study
evaluates the efficacy and safety of tesevatinib in up to 100 patients randomized 1:1 to receive tesevatinib 50 mg QD versus
matched placebo. The primary endpoint of the study is change from baseline in height-adjusted total kidney volume (TKV) in the
treatment arm versus placebo. The secondary endpoint of the study is the comparison of estimated glomerular filtration rate
(eGFR) in the treatment arm versus placebo. TKV and eGFR are two measures of kidney function. The randomized study design is
intended to provide data to enable subsequent registration trials and attract potential partners for co-development of advanced
clinical trials. The study is being conducted in the United States.
Ongoing Phase 2a Study of Tesevatinib in Autosomal Dominant Polycystic Kidney Disease (KD019‑101)
Kadmon is conducting an ongoing, single‑agent Phase 2a study of tesevatinib in ADPKD. Findings from this study have
demonstrated that tesevatinib is well tolerated and have also identified tesevatinib 50 mg QD as the optimal dose to treat ADPKD.
KD019‑101 was initiated as a dose‑finding Phase 1b/2a study of tesevatinib. The study enrolled 61 patients with a TKV at
entry of 1,333.5 mL (normal kidney volume is approximately 400 mL). The Phase 1b portion of the study demonstrated that
tesevatinib was generally well tolerated at 50, 100 and 150 mg QD and 150 mg dosed twice or three times weekly, with rashes
occurring in the 150 mg dose cohorts. No serious adverse events have occurred, and the 50 mg QD dose was associated with mild
rashes in less than 20% of patients. Patients from Study KD019‑101 may continue on tesevatinib therapy in Study KD019‑207, an
extension study to collect long‑term safety data. The study is being conducted in the United States.
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Data from the Phase 2a study presented at the American Society of Nephrology (ASN) Annual Meeting in November
2017 suggest that annualized changes in TKV and eGFR are encouraging.
Findings from this study have also demonstrated the tolerability of tesevatinib in ADPKD. The data indicated that
tesevatinib is a MATE 1/2-K transporter inhibitor. Inhibition of MATE 1/2-K may cause elevations of serum creatinine levels.
Normally, an increase in serum creatinine may indicate kidney damage, but in the setting of MATE 1/2-K inhibitors, these
increases occur without clinically significant alterations in kidney function. In the ongoing trial, serum creatinine levels increased
by 10% to 14% during the first 28 days of tesevatinib treatment and reversed upon treatment discontinuation. Importantly, levels of
cystatin C, another measure of renal function, were relatively unchanged during the same period. In a subset of 13 patients treated
with tesevatinib, all experienced elevations in serum creatinine that reversed when drug was stopped, and the drug did not appear
to reflect altered kidney function.
Ongoing Phase 1 Study of Tesevatinib in Autosomal Recessive Polycystic Kidney Disease (KD019‑103)
In March 2016, we obtained orphan drug designation status in the United States for tesevatinib for the treatment of
patients with ARPKD. Following the FDA’s acceptance of our Investigational New Drug (IND) application in December 2016, we
initiated a Phase 1 dose-finding clinical trial of tesevatinib for the treatment of ARPKD in September 2017. In order to
accommodate the ARPKD population, we developed a taste-masking liquid formulation of tesevatinib for dosing to children,
which is designed to enable titration, the process of gradually adjusting the dose of medication by body weight to reach the
appropriate dose. Developmental toxicology studies in animals, which are required for this pediatric patient population, indicated
that tesevatinib is generally well tolerated, with data supportive of clinical trial initiation. The Phase 1 study is an ascending single-
dose safety study in ARPKD patients ages five to 12. The study consists of three cohorts: tesevatinib 0.25 mg/kg, 0.50 mg/kg and
1.0 mg/kg, and we expect to enroll six to 18 subjects. The study is being conducted in the United States.
KD034 Clinical Program
KD034 represents our portfolio of formulations of trientine hydrochloride for second‑line treatment of Wilson’s disease.
Medical Need: Wilson’s disease
Wilson’s disease is a genetic disorder characterized by an inability to excrete copper, leading to severe hepatic,
neurologic, psychiatric and/or ophthalmic abnormalities. Approximately 10,000 people in the United States are diagnosed with
Wilson’s disease.
Currently approved Wilson’s disease therapies include penicillamine which has a high rate of serious and sometimes fatal
adverse events. Severe adverse effects requiring drug discontinuation of penicillamine occur in approximately 30% of patients.
Trientine hydrochloride, currently marketed under the brand name Syprine, is used as second-line therapy for patients intolerant of
penicillamine. The currently marketed formulation of trientine hydrochloride necessitates cold storage, potentially impacting
patient compliance. Since Wilson’s disease requires lifelong management and as the consequences of discontinuing therapy can be
fatal, well-tolerated, effective and convenient therapies are needed.
Key Differentiating Attributes of KD034
For broad market access purposes, we are developing a bottled generic 250 mg capsule formulation of trientine
hydrochloride that is identical to Syprine. We are also developing a generic 250 mg capsule formulation in a blister packaging that
offers room temperature stability, which we believe has the potential to address shortcomings of currently available trientine
hydrochloride.
KD034 Development Program for Wilson’s disease
We conducted an open-label bioequivalence clinical study in the United States, which showed that our generic capsule
formulation was equivalent to Syprine in healthy volunteers. We are also assessing stability of our generic capsule in blister
packaging.
Regulatory Strategy
In December 2016, we submitted an ANDA for our bottled generic formulation of trientine hydrochloride. In March
2017, we submitted a second ANDA for our generic form of trientine hydrochloride in blister packaging that offers room
temperature stability. We are in the process of working with the FDA with respect to certain questions relating to our formulation
and packaging. We intend to use Kadmon Pharmaceuticals, our specialty‑focused commercial organization, to market these
formulations, if approved.
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Our Drug Discovery Platforms and Preclinical Molecules
Drug Discovery Platforms
We have two drug discovery platforms that support our pipeline of clinical‑stage product candidates: small molecules and
biologics. We leverage our team of scientific experts and our advanced understanding of the molecular mechanisms of disease to
establish development paths for disease areas where significant unmet medical needs exist.
Kadmon Preclinical Pipeline
Small Molecules
ROCK Inhibitors
Using innovative medicinal chemistry, computational and structure-based design approaches, we have developed a
portfolio of proprietary, next-generation ROCK inhibitors to treat chronic diseases. Our ROCK inhibitor platform includes a
distinct series of oral ROCK2 and pan-ROCK (ROCK1/2) inhibitors in preclinical and clinical development. Our portfolio
includes pan-ROCK and ROCK2-selective inhibitors for inflammatory and fibrotic diseases and blood-brain barrier-penetrant pan-
ROCK inhibitors for neurodegenerative diseases.
GLUT Inhibitors
The emerging field of immuno-metabolism has identified the regulation of glucose transports (GLUT) as a requisite
component of immune cell growth and activation. We are developing oral, potent small molecule GLUT inhibitors that are
designed to block aberrant immune cell activity. In preclinical studies, our GLUT inhibitors were well tolerated and reduced
inflammation at therapeutically relevant doses.
Biologics
We have a fully human monoclonal antibody platform run by an experienced group of scientists. This team was involved
in the development of multiple commercially successful antibodies prior to joining Kadmon, including Erbitux (cetuximab) and
Cyramza (ramucirumab). Our scientists are developing monoclonal antibodies as well as fusion proteins and bispecific antibodies
that we believe represent the next generation of cancer therapeutics.
Our most advanced candidate from our biologics platform, KD033, is a novel anti PD-L1/IL-15 fusion protein that
combines the effects of two complementary immuno-oncology approaches to potentially achieve greater efficacy than single-agent
therapy. KD033 inhibits the PD‑L1 pathway to reduce immune checkpoint blockade while simultaneously directing an
IL‑15‑stimulated, specific immune response to the tumor microenvironment. KD033 potentially offers greater efficacy than
immuno-oncology monotherapy while avoiding toxicities associated with systemic administration of cytokine therapy.
Preclinical treatment with KD033 significantly prolonged the survival of colon‑tumor bearing mice, especially compared
to treatment with IL‑15 or anti‑PD‑L1 as single agents. In a separate mouse model, KD033 stimulated long‑lasting memory
CD8+ T cells to achieve persistent antitumor efficacy without additional treatment. KD033 has demonstrated significant tumor
inhibition in murine models that are resistant to PD-L1, PD-1 or CTLA-4 antibodies, suggesting that KD033 may deliver
promising clinical outcomes in cancer patients resistant or refractory to immuno-oncology monotherapy. We have presented
encouraging preclinical data on KD033 at scientific conferences.
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We are also developing KD035, a proprietary antibody targeting vascular endothelial growth factor receptor 2 (VEGFR2),
which inhibits the formation of new blood vessels (angiogenesis), thus blocking blood supply to tumors. New research has
demonstrated that inhibition of the VEGF/VEGFR2 pathway also reduces the expression of PD-1, activating the immune system to
attack tumors and potentially augmenting the efficacy of immune checkpoint therapies.
We entered into a collaboration and licensing agreement with Jinghua Pharmaceutical Group Co., Ltd. (Jinghua) in
November 2015 to develop anti-VEGFR2 and anti-PD-L1 monoclonal antibodies, KD035 and KD036, exclusively for Greater
China.
Research and Development
Research and development expenses consist primarily of costs incurred for the development of our product candidates.
For the years ended December 31, 2017, 2016 and 2015, we recognized $40.8 million, $35.8 million and $33.6 million,
respectively, in research and development expenses. For further detail about our research and development activities, refer to the
research and development sections in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in this Annual Report on Form 10-K.
Sales and Marketing
Kadmon Pharmaceuticals is our marketing and sales organization focused on specialty pharmaceuticals. Kadmon
Pharmaceuticals markets a portfolio of branded and generic ribavirin products used as part of a combination treatment for chronic
HCV infection (Ribasphere RibaPak and Ribasphere) and also distributes products in a variety of other therapeutic areas, including
tetrabenazine for the treatment of chorea associated with Huntington’s disease. Sales from our ribavirin portfolio of products
accounted for 33%, 77% and 82% of total revenue for the years ended December 31, 2017, 2016 and 2015, respectively.
Kadmon Pharmaceuticals is a fully integrated commercial organization encompassing managed care and specialty
pharmacy account directors, experienced regulatory, quality, compliance and CMC teams, marketing experts and sales specialists.
Kadmon Pharmaceuticals has long-standing relationships with specialty pharmacies. The specialty pharmacies through which we
distribute our products are fully independent of Kadmon. We do not have any ownership interest in or affiliations with any
specialty pharmacy, nor do we consolidate the financial results of any specialty pharmacies with our own.
We do not currently place significant value on our commercial operations from a revenue‑generation standpoint, as
revenues from such operations do not currently support our research and development efforts. We leverage our commercial
infrastructure to support the development of our clinical-stage product candidates by providing quality assurance, compliance,
regulatory and pharmacovigilance among other capabilities. We believe our commercial infrastructure will be most advantageous
to us in the future, in connection with the anticipated commercialization of our pipeline product candidates, if approved.
Strategic Collaborations and License Agreements
Symphony Evolution, Inc.
In August 2010, we entered into a license agreement with Symphony Evolution, Inc. (Symphony), under which
Symphony granted to us an exclusive, worldwide, royalty‑bearing, sublicensable license under certain Symphony patents,
copyrights and technology to develop, make, use, sell, import and export XL647 and the related technology in the field of
oncology and non‑oncology.
We are the licensee of granted patents in Australia, Canada, Europe, Japan and the United States. The patents claim
tesevatinib as a composition‑of‑matter, as well as use of tesevatinib to treat certain cancers. A pending U.S. application supports
additional composition‑of‑matter claims and methods of synthesis. The last to expire U.S. patent in this family has a term that ends
in May 2026 based on a calculated Patent Term Adjustment (PTA) and without regard to any potential Patent Term
Extension (PTE), which could further extend the term by an additional five years.
We are the licensee of a second family of granted patents in China and Europe, as well as applications in Canada, Eurasia,
Japan, Taiwan and the United States. These patents and applications disclose the use of tesevatinib to treat PKD. The last to expire
U.S. patent in this family would have a term that ends in 2031, though this term could be extended by obtaining a PTA and/or PTE.
The license agreement includes a series of acquisition and worldwide development milestone payments totaling up to
$218.4 million, and $14.1 million of these payments and other fees have been paid as of December 31, 2017. Additionally, the
license agreement includes commercial milestone payments totaling up to $175.0 million, none of which have been paid as of
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December 31, 2017, contingent upon the achievement of various sales milestones, as well as single‑digit sales royalties. The
royalty term expires with the last to expire patent.
Our agreement with Symphony will expire upon the expiration of the last to expire patent within the licensed patents. We
may terminate the agreement at any time upon six months written notice to Symphony. Either party may terminate the agreement
for any material breach by the other party that is not cured within a specified time period. Symphony may terminate the agreement
if we challenge the licensed patents. Either party may terminate the agreement upon the bankruptcy or insolvency of the other
party.
Nano Terra, Inc.
In April 2011, in connection with the acquisition of Surface Logix, Inc. (SLx) by Nano Terra, Inc. (Nano Terra), our
subsidiary Kadmon Corporation entered into a joint venture with SLx through the formation of NT Life Sciences, LLC (NT Life),
whereby Kadmon Corporation contributed $0.9 million at the date of formation in exchange for a 50.0% interest in NT Life.
Contemporaneously with our entry into the joint venture, we entered into an exclusive sub-license agreement with NT Life and
SLx, under which NT Life granted us rights to certain patents and know-how it licensed from SLx relating to the compound SLx-
2119 (KD025). Under this agreement, NT Life granted to us an exclusive, worldwide, royalty-bearing, sublicensable license (under
the patents and know how it licensed from SLx) to make, have made, use, sell, offer for sale, import and export certain products,
including KD025. NT Life also granted to us a worldwide, non-exclusive, non-transferable, sublicensable license under certain
SLx platform technology to make, have made, use, sell, offer for sale, import and export the products.
The initial purpose of the joint venture with SLx was to develop assets licensed to us from SLx and to define the royalty
obligations with respect to certain products not exclusively licensed to us. The joint venture is, however, currently inactive. We
expect that the joint venture will become active and develop certain intellectual property in the future.
Regarding KD025, we are the sublicensee of granted patents in the United States, as well as applications in Australia,
Canada, Europe, Japan and the United States, which claim KD025 as a composition‑of‑matter, as well as use of KD025 to treat
certain diseases. The last to expire U.S. patent in this family has a term that ends in October 2029 based on a calculated PTA and
without regard to any potential PTE, which could further extend the term by an additional five years.
In consideration for the rights granted to us by NT Life, we agreed to assume certain of Nano Terra’s payment obligations,
which are limited to the royalty percentages discussed in this paragraph, under the Agreement and Plan of Merger dated April 8,
2011, by and among Nano Terra, NT Acquisition, Inc., SLx, and Dion Madsen, as the Stockholder Representative of SLx (Merger
Agreement). Pursuant to these obligations, we are required to pay to the Stockholder Representative a royalty based on a
percentage of net sales of licensed products in the mid‑single digits, subject to specified deductions and adjustments. We are also
required to pay to NT Life a 10.0% royalty on the net sales remaining after giving effect to the royalty payment to the Stockholder
Representative. Pursuant to the assumption of Nano Terra’s payment obligations, if we further assign or sublicense our rights to
any licensed product to certain third parties, we are also required to pay to the Stockholder Representative a portion of any
sublicensing revenue relating to such licensed product ranging from the low twenty percents to the low forty percents, subject to
specified deductions and adjustments. We are also required to pay to NT Life any remaining sublicensing revenue after giving
effect to the foregoing sublicense revenue payment to the Stockholder Representative.
Unless earlier terminated, our agreement with NT Life will, with respect to a licensed product, end on a
country‑by‑country and licensed product‑by‑licensed product basis upon the latest of (a) the expiration or invalidation of the last
valid claim of a licensed patent right covering such licensed product in such country and (b) the expiration or termination of
payment obligations with respect to such licensed product in such country under the Merger Agreement. The agreement will, with
respect to the licensed SLx platform technology, end on a country‑by‑country basis upon the expiration or invalidation of the last
valid claim of a licensed patent right covering such SLx platform technology. We may terminate the agreement at any time upon
six months’ written notice to NT Life and if we provide such notice, NT Life may accelerate such termination upon thirty days’
prior written notice. Either party may terminate the agreement for any material breach by the other party that is not cured within a
specified time period. NT Life may terminate the agreement if we challenge the licensed patents. Either party may terminate the
agreement upon the bankruptcy or insolvency of the other party. The agreement shall terminate in the event we are dissolved.
In addition, the agreement shall terminate on a licensed product‑by‑licensed product basis in the event such licensed
product reverts to the Stockholder Representative because of a failure to satisfy the diligence requirements as set forth in the
Merger Agreement. More specifically, pursuant to our sub-license agreement with NT Life and SLx, we agreed to assume certain
of Nano Terra’s diligence obligations under the Merger Agreement such that we are obligated to use commercially reasonable
efforts to develop the licensed products, including KD025. With respect to KD025, our diligence obligations do not expire until the
completion of a certain specified Phase 2 clinical trial of KD025 in oncology. If, prior to the expiration of our
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diligence obligations, we fail to comply with such diligence obligations for any licensed product, including KD025, the
Stockholder Representative may require Nano Terra to assign all assets of SLx, including intellectual property, relating to such
licensed product to an entity designated by such Stockholder Representative, subject to Nano Terra’s and our rights to contest such
assignment. If such an assignment takes place, our sublicense rights to such intellectual property for such licensed product will
terminate.
If the agreement is terminated, among other things, we will be required to cease all development and commercialization
of the licensed products, including KD025, all licenses granted to us will terminate and we are obligated to grant NT Life a
perpetual, irrevocable, worldwide, exclusive license under certain intellectual property owned or controlled by us that relate to the
licensed products to develop and commercialize such licensed products.
Dyax Corp. (acquired by Shire Plc in January 2016)
In July 2011, we entered into a license agreement with Dyax Corp. (“Dyax”) for the rights to use the Dyax Antibody
Libraries, Dyax Materials and Dyax Know‑How (collectively “Dyax Property”). The agreement terminated on September 22,
2015, but we had a right to a commercial license of any research target within two years of expiration of the agreement. We
exercised this right to a commercial license of two targets in September 2017, resulting in a license fee payable to Shire Plc of $1.5
million, which was recorded to research and development expense for the year ended December 31, 2017. The agreement includes
the world‑wide, non‑exclusive, royalty‑free, non‑transferable licenses to be used in the research field, without the right to
sublicense. Additionally, we have the option to obtain a sublicense for use in the commercial field if any research target is
obtained. We were required to pay Dyax $0.6 million upon entering into the agreement and $0.3 million annually to maintain the
agreement. The initial payment was deferred and recorded as prepaid expense; $0.3 million of which will be amortized over the
term of the agreement, and $0.3 million of which was amortized in a manner consistent with that of the annual payments. All
subsequent annual payments will be and have been recorded as prepaid expense and amortized over the applicable term of one
year.
On September 13, 2012 we entered into a separate license agreement with Dyax whereby we obtained from Dyax the
exclusive, worldwide license to use research, develop, manufacture and commercialize DX‑2400 in exchange for payment of $0.5
million. All payments associated with this agreement were recorded as research and development expense at the time the
agreement was executed.
The DX‑2400 license requires us to make additional payments contingent on the achievement of certain development
milestones (such as receiving certain regulatory approvals and commencing certain clinical trials) and sales targets. None of these
targets have been achieved and, as such, no assets or liabilities associated with the milestones have been recorded in the
accompanying consolidated financial statements for the year ended December 31, 2017. The DX‑2400 license also includes royalty
payments commencing on the first commercial sale of any licensed product, which had not occurred as of December 31, 2017 and
2016.
Chiromics, LLC
In November 2011, we entered into a non‑exclusive license and compound library sale agreement with Chiromics, LLC
(Chiromics) under which Chiromics granted to us a non‑exclusive, royalty‑free license to use certain compound libraries and
related know‑how for the research, discovery and development of biological and/or pharmaceutical products. No patents were
licensed to us under this agreement. The Chiromics library is a collection of more than one million compounds used as a discovery
platform. The library was invented using a pioneering technology, which allows access to diverse molecules previously
unattainable with traditional synthetic methods. The molecular leads in the library are novel and have complex drug‑like properties
enabling the identification of biologically active molecular scaffolds.
We paid Chiromics $0.2 million upon execution of the agreement and a total of $0.3 million upon the delivery of the
compound libraries. We were also required to make quarterly payments of $0.2 million for the eight quarters following delivery of
the compound libraries. The agreement with Chiromics has no expiration date. Either party may terminate the agreement for any
material breach by the other party that is not cured within a specified time period or upon the bankruptcy or insolvency of the other
party.
MeiraGTx Limited
In April 2015, we executed several agreements which transferred our ownership of Kadmon Gene Therapy, LLC to
MeiraGTx Limited (“MeiraGTx”), a then wholly‑owned subsidiary of Kadmon. As part of these agreements, we also transferred
various property rights, employees and management tied to the intellectual property and contracts identified in the agreements to
MeiraGTx. At a later date, MeiraGTx ratified its shareholder agreement and accepted the pending equity subscription agreements,
which provided equity ownership to various parties. The execution of these agreements resulted in a
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48% ownership in MeiraGTx by us. After MeiraGTx was deconsolidated or derecognized, the retained ownership interest was
initially recognized at fair value and a gain of $24.0 million was recorded based on the fair value of this equity investment. Our
investment is being accounted for under the equity method at zero cost with an estimated fair value at the time of the transaction of
$24.0 million. This value was determined based upon the implied value established by the cash raised by MeiraGTx in exchange
for equity interests by third parties.
We assessed the applicability of ASC 810 to the aforementioned agreements and based on the corporate structure, voting
rights and contributions of the various parties in connection with these agreements, determined that MeiraGTx is a variable interest
entity; however, consolidation is not required as we are not the primary beneficiary based upon the voting and managerial structure
of the entity.
MeiraGTx, a limited company organized under the laws of England and Wales, was established to focus on the
development of novel gene therapy treatments for a range of inherited and acquired disorders. MeiraGTx is developing therapies
for ocular diseases, including rare inherited blindness, as well as xerostomia following radiation treatment for head and neck
cancer. MeiraGTx is also developing an innovative gene regulation platform that has the potential to expand the way that gene
therapy can be applied, creating a new paradigm for biologic therapeutics in the biopharmaceutical industry.
As part of a transition services agreement with MeiraGTx, we recognized $0.6 million of service revenue to license and
other revenue during the year ended December 31, 2017, and $1.0 million of service revenue to license and other revenue during
each of the years ended December 31, 2016 and 2015. During April 2016, we received 230,000 shares of MeiraGTx’s convertible
preferred Class C shares as a settlement for $1.2 million in receivables from MeiraGTx. Under ASC 323, the Class C shares of
MeiraGTx do not qualify as common stock or in-substance common stock and the $1.2 million was recorded as a cost method
investment. We also received cash payments of $0.3 million and $0.2 million for service revenue earned during 2017 and 2016,
respectively.
We assessed the recoverability of both the cost method and equity method investment in MeiraGTx at December 31, 2017
and 2016 and identified no events or changes in circumstances that may have a significant adverse impact on the fair value of this
investment. For the years ended December 31, 2017, 2016 and 2015, we recorded our share of MeiraGTx’s net loss of $7.6
million, $13.6 million and $2.8 million, respectively, inclusive of adjustments related to MeiraGTx’s 2015 financial statements that
resulted in us recording a loss on equity method investment of $3.9 million for the year ended December 31, 2016. We maintain a
25.6% ownership in MeiraGTx at December 31, 2017, inclusive of C preferred shares issued by MeiraGTx. For accounting
purposes, we have determined that the C preferred shares issued by MeiraGTx are not in-substance common stock. Accordingly,
we record 38.7% of MeiraGTx’s losses, which represents what our percentage would be if only A ordinary shares were
outstanding. Our maximum exposure associated with MeiraGTx is limited to our initial investment of $24.0 million, which has
been written down to zero at December 31, 2017 based on our absorption of MeiraGTx’s net losses.
AbbVie Inc.
In June 2013, we entered into a series of agreements with AbbVie Inc. (AbbVie) related to our ribavirin product. Pursuant
to an asset purchase agreement, as amended, we sold marketing authorizations and related assets for ribavirin in certain countries
outside the United States for a cash purchase price of $20.0 million, and we subsequently received an additional cash payment of
$19.0 million as consideration for certain future regulatory approvals and clinical milestones. Pursuant to a license agreement, as
amended, we licensed certain rights to develop, manufacture and market our proprietary, high‑dose formulation of ribavirin in the
United States for an upfront cash payment of $49.0 million, and we subsequently received a cash payment of $1 million as
consideration for the achievement of a certain milestone. Pursuant to a supply agreement, as amended, we agreed to supply AbbVie
with ribavirin tablets. Under the license agreement and asset purchase agreement, each as amended, we received aggregate upfront
payments totaling $69.0 million. Under the asset purchase agreement, as amended, AbbVie is required to pay royalty payments
equal to a low single‑digit percentage of annual net sales of the compound. Under the license agreement, as amended, for calendar
year 2016, AbbVie paid us a royalty based on the number of prescriptions dispensed by AbbVie. Under the license agreement, in
the event that AbbVie commercialized a product co‑packaged with ribavirin in the United States, beginning in 2017, AbbVie
would be required to pay royalty payments equal to a high double digit percentage of the reference selling point of ribavirin with
respect to such co‑packaged product. There are no royalty payments under the supply agreement. The license agreement, as
amended, will remain in effect unless it is terminated pursuant to the terms of the agreement. AbbVie may terminate the license
agreement, as amended, at any time upon prior written notice. There were no patents licensed to us in this series of agreements.
Zydus Pharmaceuticals USA, Inc.
In June 2008, we entered into an asset purchase agreement with Zydus Pharmaceuticals USA, Inc. (Zydus) where we
purchased all of Zydus’ rights, title and interest to high dosages of ribavirin. Under the terms of the agreement, we made paid a
one‑time purchase price of $1.1 million. We are required to pay a royalty based on net sales of products in the mid‑teen
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percents, subject to specified reductions and offsets. No patents were licensed to us under this agreement. In April 2013, we
entered into an amendment to the asset purchase agreement with Zydus which reduced the royalty payable on net sales of products
from the low twenty percents to the mid-teen percents.
In June 2008, we also entered into a non‑exclusive patent license agreement with Zydus, under which we granted Zydus a
non‑exclusive, royalty free, fully paid up, non‑transferable license under certain of our patent rights related to ribavirin. This
agreement will expire upon the expiration or termination of a specific licensed patent. Either party may terminate the agreement for
any material breach by the other party that is not cured within a specified time period or upon the bankruptcy or insolvency of the
other party.
We recorded royalty expenses of $0.1 million, $1.2 million and $2.7 million for the years ended December 31, 2017, 2016
and 2015, respectively.
Jinghua Pharmaceutical Group Co., Ltd.
In November 2015, we entered into a collaboration and license agreement with Jinghua. Under this agreement, we granted
to Jinghua an exclusive, royalty‑bearing, sublicensable license under certain of our intellectual property and know‑how to use,
develop, manufacture, and commercialize certain monoclonal antibodies in China, Hong Kong, Macau and Taiwan.
In partial consideration for the rights granted to Jinghua under the agreement, we received an upfront payment of
$10.0 million in the form of an investment in our Class E redeemable convertible membership units. We are eligible to receive
from Jinghua a royalty equal to a low double‑digit percentage of net sales of product in the territory. In addition to such payments,
we are eligible to receive milestone payments for the achievement of certain development milestones, totaling up to $40.0 million.
We earned a $2.0 million milestone payment in March 2016, which was recorded as license and other revenue during the year
ended December 31, 2016. We earned a $2.0 million milestone payment in February 2017, which was recorded as license and
other revenue during the year ended December 31, 2017. No revenue was recognized for the year ended December 31, 2015. We
are also eligible to receive a portion of sublicensing revenue from Jinghua ranging from a percentage in the low double‑digits to
the low thirties based on the development stage of a product. No royalty or sublicensing revenue was received from Jinghua during
the three years ended December 31, 2017.
Our agreement with Jinghua will continue on a product‑by‑product and country‑by‑country basis until the later of
10 years after the first commercial sale of the product in such country or the date on which there is no longer a valid claim
covering the licensed antibody contained in the product in such country. Either party may terminate the agreement for any material
breach by the other party that is not cured within a specified time period or upon the bankruptcy or insolvency of the other party.
No patents were licensed to us under this agreement.
Camber Pharmaceuticals, Inc.
In February 2016, we entered into a supply and distribution agreement with Camber Pharmaceuticals, Inc. (Camber) for
the purposes of marketing, selling and distributing tetrabenazine, a medicine that is used to treat the involuntary movements
(chorea) of Huntington’s disease. The initial term of the agreement was twelve months. In May 2016, we amended our agreement
with Camber to include the marketing, selling and distributing of valganciclovir, a medicine that is used for the treatment of CMV
retinitis, a viral inflammation of the retina of the eye, in patients with acquired immunodeficiency syndrome (AIDS) and for the
prevention of CMV disease, a common viral infection complicating solid organ transplants, in kidney, heart and kidney pancreas
transplant patients. In August 2016, we amended our agreement with Camber to include the marketing, selling and distributing of
several other products that have not had meaningful sales to date. In February 2017, we entered into a third amendment to the
supply and distribution agreement with Camber extending the initial term of the agreement by an additional twelve months. The
supply and distribution agreement with Camber terminated on February 23, 2018.
Under the agreement, as amended, we obtained commercial supplies of the Camber products at a contracted price and
distributed them through our existing field force. We retained 100% of the revenue generated from the sale of the Camber
products. We recognized revenue from the sales of tetrabenazine of $1.0 million and $0.6 million during the years ended
December 31, 2017 and 2016. No revenue was generated from sales of tetrabenazine in 2015. We recognized revenue from the
sales of valganciclovir of $0.2 million and $0.9 million during the years ended December 31, 2017 and 2016. No revenue was
generated from sales of valganciclovir in 2015. No meaningful revenue was generated from sales of other Camber products for the
years ended December 31, 2017, 2016 and 2015.
Our Intellectual Property
The proprietary nature of, and protection for, our product candidates, their methods of use, and our technologies are an
important part of our strategy to discover and develop small molecules and biologics that address areas of significant unmet
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medical needs in inflammatory, fibrotic and neurodegenerative diseases, oncology, genetic diseases, and in the area of
immuno‑oncology. We are the owner or exclusive licensee of patents and applications relating to certain of our product candidates,
and are pursuing additional patent protection for them and for our other product candidates and technologies. We also rely on trade
secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Additionally, we maintain copyrights and trademarks, both registered and unregistered.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for
commercially important products, product candidates, technologies, inventions and know‑how related to our business and our
ability to defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid
and enforceable patents and proprietary rights of third parties. We also rely on know‑how, continuing technological innovation and
in‑licensing opportunities to develop, strengthen and maintain the proprietary position of our development programs. We actively
seek to protect our proprietary information, including our trade secrets and proprietary know‑how, by requiring our employees,
consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their
employment or engagement. The chart below identifies which of our product candidates are covered by patents and patent
applications that we own or license, the relevant expiration periods and the major jurisdictions. Additional patent applications have
been filed to extend the patent life on some of these products, but there can be no assurance that these will issue as filed.
Product Candidate
KD025
KD025
Tesevatinib
Tesevatinib
KD033
KD034
KD035
Ribavirin
Metabolic Inhibitors
GLUT Inhibitors
PD‑L1/VEGFR Antibody
Description/
Indications
ROCK2 Inhibitor/Psoriasis,
Fibrosis
ROCK2 Inhibitor/cGVHD
Multi‑kinase
Inhibitor/Oncology
Multi‑kinase
Inhibitor/Polycystic Kidney
Disease
Monoclonal Antibody,
Immunoconjugate/Oncology
Chelating Agent/Wilson’s
Disease
VEGFR2 Monoclonal
Antibody/Oncology,
Angiogenesis
Nucleoside Inhibitor/Hepatitis
Metabolic Inhibitors/Viral
Infection
Glucose Uptake
Inhibitors/Immunological and
Infectious Diseases
Bispecific Antibody/Oncology
US Patent
Numbers
8,357,693
8,916,576
15,303,420
7,576,074
8,658,654
9,364,479
Pending
Pending
Pending
6,720,000
7,538,094
7,723,310
9,029,413
Pending
Patent
Expiration(0)
2029+
2035
2026+
2031*
2035*
2036*
2033*
Patent
Type
Utility
Utility
Utility
Utility
Major
Jurisdictions
CA, CN, EA, EP,
JP, US
CA, CN, EA, EP,
JP, US
AU, CA, EP, JP,
US
CA, CN, EA, EP,
TW, US
Claim
Type
Composition of Matter/
Method of Use
Method of Use
Composition of Matter/
Method of Use
Method of Use
Utility
US, CN, TBD
Provisional
US, TBD
Composition of Matter/
Method of Use
Formulation
Utility
CN, EA, EP, JP,
US
Composition of Matter/
Method of Use
2028+
Utility
US
Composition of Matter
2028*
2036*
Utility
CA, EP, JP, US
Method of Use
Provisional
US, TBD
Method of Use
Pending
2037*
Provisional
US, TBD
Composition of Matter/
Method of Use
_________________________
(0) Indicates the expiration date of a main patent within a patent family.
+ Indicates the expiration date of a granted patent for which a Patent Term Adjustment (PTA) has been fixed by the United
States Patent and Trademark Office. The date may be lengthened by a Patent Term Extension (PTE) upon regulatory
approval.
* Indicates the calculated expiration date of a pending patent application based solely on a twenty‑year term from the
international filing date, without regard to the outcome of patent prosecution or obtaining a PTA and/or PTE.
Manufacturing and Supply
We currently do not own or operate manufacturing facilities for the production of our product candidates. We currently
outsource to a limited number of external service providers the production of all active pharmaceutical ingredients (API), drug
substances and drug products, and we expect to continue to do so to meet the preclinical and clinical requirements of our product
candidates. We do not have long‑term agreements with these third parties. We have framework agreements with most of our
external service providers, under which they generally provide services to us on a short‑term, project‑by‑project basis. We have
long‑term relationships with our manufacturing and supply chain partners for our commercial products.
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Currently, our drug substance or API raw materials for our product candidates can be supplied by multiple source
suppliers. Our API drug raw material for our ribavirin portfolio of products is approved to be supplied by a single source, which
we believe has the capacity and quality control to meet ongoing demands. We typically order raw materials and services on a
purchase order basis and do not enter into long‑term dedicated capacity or minimum supply arrangements.
Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, which
govern record keeping, manufacturing processes and controls, personnel, quality control and quality assurance, among others. The
contract manufacturing organizations that we use to manufacture our product candidates and our ribavirin portfolio are obligated to
operate under current Good Manufacturing Practice regulations (cGMP) conditions.
Competition
We compete directly with companies that focus on cGVHD, IPF, psoriasis and PKD, and companies dedicating their
resources to novel forms of therapies for these indications. We also face competition from academic research institutions,
governmental agencies and other various public and private research institutions. With the proliferation of new drugs and therapies
in these areas, we expect to face increasingly intense competition as new technologies become available. Any product candidates
that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available
in the future.
Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and
human resources than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more
resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large and established companies. These competitors
also compete with us in recruiting and retaining top qualified scientific and management personnel and establishing clinical trial
sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our
programs.
The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their
efficacy, safety, dosing convenience, price, the effectiveness of companion diagnostics in guiding the use of related therapeutics,
the level of generic competition and the availability of reimbursement from government and other third‑party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that
are safer, more effective, less expensive, more convenient or easier to administer, or have fewer or less severe effects than any
products that we may develop. Our competitors also may obtain FDA, European Medicines Agency (EMA) or other regulatory
approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a
strong market position before we are able to enter the market. Even if our product candidates achieve marketing approval, they
may be priced at a significant premium over competitive products if any have been approved by then.
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There are a number of currently marketed therapies and products in late‑stage clinical development to treat cGVHD, IPF,
psoriasis and PKD, including:
cGVHD
IPF
Psoriasis
PKD
Imbruvica (ibrutinib)
Rituxan (rituximab)
Corticosteroids
Calcineurin inhibitors
Esbriet (pirfenidone)
Ofev (nintedanib)
Systemic treatments
tolvaptan (1)
Soriatane (acitretin)
Cyclosporine
Methotrexate
Otezla (apremilast)
Biologics
Taltz (ixekizumab)
Enbrel (etanercept)
Humira (adalimumab)
Cosentyx (secukinumab)
Remicade (infliximab)
(1) While there are no approved treatments in the United States for this indication, we understand that there are certain off-label uses for
tolvaptan.
Certain products in development may provide efficacy, safety, dosing convenience and other benefits that are not provided
by currently marketed therapies. As a result, they may provide significant competition for any of our product candidates for which
we obtain marketing approval.
Government Regulation
Government Regulation and Product Approval
Government authorities in the United States and in other countries extensively regulate, among other things, the research,
development, testing, manufacture (including manufacturing changes), quality control, approval, labeling, packaging, storage,
record‑keeping, promotion, advertising, distribution, marketing, export and import of products such as those we are developing.
The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance
with applicable statutes and regulations, require the expenditure of substantial resources.
U.S. Drug Development Process
In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (FDCA), and in the case of
biologics, also the Public Health Service Act (PHS Act), and various implementing regulations. Most biological products meet the
FDCA’s definition of “drug” and are subject to FDA drug requirements, supplemented by biologics requirements.
Failure to comply with the applicable U.S. requirements at any time during the product development process, approval
process, or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include the
FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product
recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government
contracts, restitution, disgorgement or civil or criminal penalties. The process required by the FDA before a drug or biologic may
be marketed in the United States generally involves the following:
·
·
·
·
·
completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory
Practices regulations;
submission to the FDA of an IND, which must become effective before human clinical studies may begin;
approval by an independent institutional review board (IRB), at each clinical site before each trial may be initiated;
performance of adequate and well‑controlled human clinical studies according to “good clinical practices” (GCP)
regulations, to establish the safety and efficacy of the proposed drug or biologic for its intended use;
preparation and submission to the FDA of a New Drug Application (NDA) or Biologics License Application (BLA);
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·
·
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product, or
components thereof, are produced to assess compliance with cGMP to assure that the facilities, methods, and controls
are adequate to preserve the drug’s identity, strength, quality, and purity; and
FDA review and approval of the NDA or BLA.
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that
any approvals for our product candidates will be granted on a timely basis, if at all.
Once a pharmaceutical or biological product candidate is identified for development, it enters the preclinical testing stage.
Preclinical tests include laboratory evaluations of product chemistry, toxicity, formulation and stability, as well as animal studies.
When a sponsor wants to proceed to test the product candidate in humans, it must submit an IND in order to conduct clinical trials.
An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data
and any available clinical data or literature, to the FDA as part of the IND. The sponsor must also include a protocol detailing,
among other things, the objectives of the initial clinical study, the parameters to be used in monitoring safety and the effectiveness
criteria to be evaluated if the initial clinical study lends itself to an efficacy evaluation. Some preclinical testing may continue even
after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises
concerns or questions related to a proposed clinical study and places the study on a clinical hold within that 30‑day time period. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical study can begin. Clinical
holds also may be imposed by the FDA at any time before or during clinical studies due to safety concerns or non‑compliance, and
may be imposed on all product candidates within a certain pharmaceutical class. The FDA also can impose partial clinical holds,
for example, prohibiting the initiation of clinical studies of a certain duration or for a certain dose.
All clinical studies must be conducted under the supervision of one or more qualified investigators in accordance with
GCP regulations. These regulations include the requirement that all research subjects provide informed consent in writing before
their participation in any clinical study. Further, an IRB must review and approve the plan for any clinical study before it
commences at any institution, and the IRB must conduct continuing review and reapprove the study at least annually. An IRB
considers, among other things, whether the risks to individuals participating in the clinical study are minimized and are reasonable
in relation to anticipated benefits. The IRB also approves the information regarding the clinical study and the consent form that
must be provided to each clinical study subject or his or her legal representative and must monitor the clinical study until
completed.
Each new clinical protocol and any amendments to the protocol must be submitted for FDA review, and to the IRBs for
approval. Protocols detail, among other things, the objectives of the clinical study, dosing procedures, subject selection and
exclusion criteria, and the parameters to be used to monitor subject safety.
Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health
(NIH), for public dissemination on their ClinicalTrials.gov website.
Human clinical studies are typically conducted in three sequential phases that may overlap or be combined:
·
·
·
Phase 1. The product is initially introduced into a small number of healthy human subjects or patients and tested for
safety, dosage tolerance, absorption, metabolism, distribution and excretion and, if possible, to gain early evidence on
effectiveness. In the case of some products for severe or life‑threatening diseases, especially when the product is
suspected or known to be unavoidably toxic, the initial human testing may be conducted in patients.
Phase 2. Involves clinical studies in a limited patient population to identify possible adverse effects and safety risks,
to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance
and optimal dosage and schedule.
Phase 3. Clinical studies are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded
patient population at geographically dispersed clinical study sites. These clinical studies are intended to establish the
overall risk/benefit relationship of the product and provide an adequate basis for product labeling.
Progress reports detailing the results of the clinical studies must be submitted at least annually to the FDA and safety
reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events. Phase 1, Phase 2
and Phase 3 testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend
or terminate a clinical study at any time on various grounds, including a finding that the research subjects or patients are being
exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical
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study at its institution if the clinical study is not being conducted in accordance with the IRB’s requirements or if the drug has been
associated with unexpected serious harm to patients.
Concurrent with clinical studies, companies usually complete additional animal studies and must also develop additional
information about the chemistry and physical characteristics of the product and finalize a process for manufacturing the product in
commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently
producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the
identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and
stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its
shelf life.
United States Review and Approval Processes
Assuming successful completion of the required clinical testing, the results of product development, preclinical studies
and clinical studies, along with descriptions of the manufacturing process, analytical tests conducted on the drug, proposed labeling
and other relevant information, are submitted to the FDA as part of an NDA for a new drug, or a BLA for a biological drug
product, requesting approval to market the product.
The submission of an NDA or BLA is subject to the payment of a substantial application user fee although a waiver of
such fee may be obtained under certain limited circumstances. For example, the agency will waive the application fee for the first
human drug application that a small business or its affiliate submits for review. The sponsor of an approved NDA or BLA is also
subject to annual product and establishment user fees. For FDA fiscal year 2017 the application fee for an application with clinical
data was $2,038,100. Sponsors are also subject to the product and establishment fees. For fiscal 2017, the product fee was $97,750,
and the establishment fee was $512,200.
In addition, under the Pediatric Research Equity Act of 2003 (PREA), an NDA or BLA applications (or supplements to
applications) for a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration
must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant
pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe
and effective, unless the applicant has obtained a waiver or deferral.
In 2012, the Food and Drug Administration Safety and Innovation Act (FDASIA) amended the FDCA to require that a
sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient,
new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan (PSP),
within sixty days of an End‑of‑Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must
include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age
groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request
for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along
with supporting information. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission
of data or full or partial waivers. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments
to an agreed‑upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from
preclinical studies, early phase clinical studies, and/or other clinical development programs.
The FDA also may require submission of a Risk Evaluation and Mitigation Strategy (REMS) to mitigate any identified or
suspected serious risks. The REMS could include medication guides, physician communication plans, assessment plans, and
elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA reviews all NDAs and BLAs submitted to ensure that they are sufficiently complete for substantive review
before it accepts them for filing. The FDA may request additional information rather than accept an application for filing. In this
event, the application must be re‑submitted with the additional information. The re‑submitted application also is subject to review
before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in‑depth substantive review.
The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use
and whether its manufacturing is cGMP‑compliant. For biologics, the applicant must demonstrate that the product is safe, pure,
and potent (interpreted to include effectiveness), and that the facilities designed for its production meet standards to ensure the
product will consistently be safe, pure, and potent.
The FDA may approve an NDA or BLA only if the methods used in, and the facilities and controls used for, the
manufacture processing, packing, and testing of the product are adequate to ensure and preserve its identity, strength, quality, and
purity. Drug cGMPs are established in 21 C.F.R. Parts 210 and 211, and biologic drug products must meet the drug standards as
well as the supplemental requirements in 21 C.F.R. Part 600 et seq.
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Before approving an NDA or BLA, the FDA often will inspect the facility or facilities where the product is or will be
manufactured.
The FDA may refer the NDA or BLA to an advisory committee for review, evaluation and recommendation as to whether
the application should be approved and under what conditions. An advisory committee is a panel of experts, including clinicians
and other scientific experts, who provide advice and recommendations when requested by the FDA. The FDA is not bound by the
recommendation of an advisory committee, but it considers such recommendations when making decisions.
Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to ensure that
clinical data supporting the submission were developed in compliance with GCP.
The approval process is lengthy and difficult and the FDA may refuse to approve an NDA or BLA if the applicable
regulatory criteria are not satisfied, or may require additional clinical data or other data and information. Even if such data and
information are submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria for approval. Data
obtained from clinical studies are not always conclusive and the FDA may interpret data differently than an applicant interprets the
same data.
After the FDA’s evaluation of an application, the FDA may issue an approval letter, or, in some cases, a complete
response letter to indicate that the review cycle is complete and that the application is not ready for approval. A complete response
letter generally contains a statement of specific conditions that must be met to secure final approval of the application and may
require additional clinical or preclinical testing for the FDA to reconsider the application. The deficiencies identified may be
minor, for example, requiring labeling changes, or major, for example, requiring additional clinical studies. Additionally, the
complete response letter may include recommended actions that the applicant might take to place the application in a condition for
approval. If a complete response letter is issued, the applicant may either resubmit the application, addressing all of the
deficiencies identified in the letter, or withdraw the application or request an opportunity for a hearing.
Even with submission of additional information, the FDA ultimately may decide that the application does not satisfy the
regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue
an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for
specific indications.
If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the
indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may
require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may
require post‑approval studies, including Phase 4 clinical studies, to further assess safety and effectiveness after approval and may
require testing and surveillance programs to monitor the safety of approved products that have been commercialized. After
approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional
labeling claims, are subject to further testing requirements and FDA review and approval.
ANDAs and Section 505(b)(2) New Drug Applications
Most drug products obtain FDA marketing approval pursuant to an NDA or BLA (described above) for innovator
products, or an ANDA for generic products. Relevant to ANDAs, the Hatch‑Waxman amendments to the FDCA established a
statutory procedure for submission and FDA review and approval of ANDAs for generic versions of branded drugs previously
approved by the FDA (such previously approved drugs are also referred to as listed drugs). Because the safety and efficacy of
listed drugs have already been established by the brand company (sometimes referred to as the innovator), the FDA does not
require a demonstration of safety and efficacy of generic products. However, a generic manufacturer is typically required to
conduct bioequivalence studies of its test product against the listed drug. The bioequivalence studies for orally administered,
systemically available drug products assess the rate and extent to which the API is absorbed into the bloodstream from the drug
product and becomes available at the site of action. Bioequivalence is established when there is an absence of a significant
difference in the rate and extent for absorption of the generic product and the listed drug. For some drugs (e.g., locally acting drugs
like topical anti‑fungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or
extent of absorption are difficult or impossible to measure. In addition to the bioequivalence data, an ANDA must contain patent
certifications and chemistry, manufacturing, labeling and stability data.
The third alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which enables the
applicant to rely, in part, on the FDA’s findings of safety and efficacy of an existing product, or published literature, in support of
its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new
uses of previously approved products. Section 505(b)(2) permits the filing of an NDA where at least some of the information
required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right
of reference. The applicant may rely upon the FDA’s findings with respect to certain preclinical or clinical studies conducted for an
approved product. The FDA may also require companies to perform additional studies or
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measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or
some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the
Section 505(b)(2) applicant.
In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA
certain patents of the applicant or that are held by third parties whose claims cover the applicant’s product. Upon approval of an
NDA, each of the patents listed in the application for the drug is then published in the Orange Book. Any subsequent applicant
who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA
referencing a drug listed in the Orange Book must make one of the following certifications to the FDA concerning patents: (1) the
patent information concerning the reference listed drug product has not been submitted to the FDA; (2) any such patent that was
filed has expired; (3) the date on which such patent will expire; or (4) such patent is invalid or will not be infringed upon by the
manufacture, use or sale of the drug product for which the application is submitted. This last certification is known as a
paragraph IV certification. A notice of the paragraph IV certification must be provided to each owner of the patent that is the
subject of the certification and to the holder of the approved NDA to which the ANDA or 505(b)(2) application refers. The
applicant may also elect to submit a “section viii” statement certifying that its proposed label does not contain (or carves out) any
language regarding the patented method‑of‑use rather than certify to a listed method‑of‑use patent.
If the reference NDA holder or patent owners assert a patent challenge directed to one of the Orange Book listed patents
within 45 days of the receipt of the paragraph IV certification notice, the FDA is prohibited from approving the application until
the earlier of 30 months from the receipt of the paragraph IV certification expiration of the patent, settlement of the lawsuit or a
decision in the infringement case that is favorable to the applicant. The ANDA or 505(b)(2) application also will not be approved
until any applicable non‑patent exclusivity listed in the Orange Book for the branded reference drug has expired as described in
further detail below. Thus approval of a Section 505(b)(2) NDA or ANDA can be stalled until all the listed patents claiming the
referenced product have expired, until any non‑patent exclusivity, such as exclusivity for obtaining approval of a new chemical
entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and
subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case
that is favorable to the ANDA or Section 505(b)(2) applicant.
Expedited Programs
Fast Track Designation
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet
certain criteria. Specifically, new drugs (including biological drug products) are eligible for Fast Track designation if they are
intended to treat a serious or life‑threatening disease or condition for which there is no effective treatment and demonstrate the
potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and
the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the
drug or biologic as a Fast Track product concurrently with, or at any time after, submission of an IND, and the FDA must
determine if the product candidate qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request.
The FDA may initiate review of sections of a Fast Track drug’s NDA or BLA before the application is complete. This
rolling review is available if the applicant provides, and the FDA approves, a schedule for the submission of each portion of the
NDA or BLA and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does
not begin until the last section of the application is submitted. Additionally, the Fast Track designation may be withdrawn by the
FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical study process.
Accelerated Approval
Under the FDA’s accelerated approval regulations, the FDA may approve a drug or biologic for a serious or
life‑threatening illness that fills an unmet medical need, providing a meaningful therapeutic benefit to patients over existing
treatments, based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be
measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or
mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack
of alternative treatments. In clinical studies, a surrogate endpoint is a marker, such as a measurement of laboratory or clinical signs
of a disease or condition that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints
can often be measured more easily or more rapidly than clinical endpoints. A product candidate approved on this basis is subject to
rigorous post‑marketing compliance requirements, including the completion of post‑approval clinical studies sometimes referred to
as Phase 4 studies to confirm the effect on the clinical endpoint. Failure to conduct required post‑approval studies, or to confirm a
clinical benefit during post‑marketing studies, will allow the FDA to withdraw the product from the market on an expedited basis.
All promotional materials for product candidates approved under accelerated approval regulations are subject to prior review by
the FDA.
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Breakthrough Designation
The FDASIA amended the FDCA to require the FDA to expedite the development and review of a breakthrough therapy.
A drug or biologic product can be designated as a breakthrough therapy if it is intended to treat a serious or life‑threatening disease
or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on
one or more clinically significant endpoints. A sponsor may request that a drug or biologic product be designated as a
breakthrough therapy concurrently with, or at any time after, the submission of an IND, and the FDA must determine if the product
candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. If so designated, the
FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the
sponsor throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to
gather preclinical and clinical data is as efficient as practicable, involving senior managers and experienced review staff in a
cross‑disciplinary review, assigning a cross‑disciplinary project lead for the FDA review team to facilitate an efficient review of
the development program and to serve as a scientific liaison between the review team and the sponsor, and taking steps to ensure
that the design of the clinical studies is as efficient as practicable.
Priority Review
Priority review is granted where there is evidence that the proposed product would be a significant improvement in the
safety or effectiveness of the treatment, diagnosis, or prevention of a serious condition. If criteria are not met for priority review,
the application is subject to the standard FDA review period of 10 months after the FDA accepts the application for filing. Priority
review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support
approval.
Post‑Approval Requirements
Drugs and biologics manufactured or distributed pursuant to FDA approvals are subject to extensive and continuing
regulation by the FDA, including, among other things, requirements relating to recordkeeping (including certain electronic record
and signature requirements), periodic reporting, product sampling and distribution, advertising and promotion and reporting of
certain adverse experiences, deviations, and other problems with the product. After approval, most changes to the approved
product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are
continuing, annual user fee requirements for any marketed products and the establishments at which such products are
manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on
the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved
label. Further, manufacturers must continue to comply with cGMP requirements, which are extensive and require considerable
time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require
prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications
and additional labeling claims, are also subject to further FDA review and approval.
Manufacturers and certain other entities involved in the manufacturing and distribution of approved products are required
to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the
FDA and certain state agencies for compliance with cGMP and other laws. The cGMP requirements apply to all stages of the
manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the
product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and
test each product batch or lot prior to its release.
Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being
implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and
documentation requirements upon the sponsor and any third‑party manufacturers that the sponsor may decide to use. Accordingly,
manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP
compliance.
The FDA may impose a number of post‑approval requirements as a condition of approval of an application. For example,
the FDA may require post‑marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the
product’s safety and effectiveness after commercialization.
The FDA may withdraw a product approval if compliance with regulatory requirements is not maintained or if problems
occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse
events of unanticipated severity or frequency, problems with manufacturing processes, or failure to comply with regulatory
requirements, may result in restrictions on the product or even complete withdrawal of the product from the market.
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Potential implications include required revisions to the approved labeling to add new safety information; imposition of
post‑market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS
program. Other potential consequences include, among other things:
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·
·
·
·
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or
product recalls;
warning letters or holds on post‑approval clinical trials;
refusal of the FDA to approve pending NDAs/BLAs or supplements to approved NDAs/BLAs, or suspension or
revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market.
Drugs and biologics may be promoted only for the approved indications and in accordance with the provisions of the approved
label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off‑label uses, and a
company that is found to have improperly promoted off‑label uses may be subject to significant liability.
In addition, the distribution of prescription drugs and biologics is subject to the Prescription Drug Marketing Act
(PDMA), which regulates the distribution of the products and product samples at the federal level, and sets minimum standards for
the registration and regulation of distributors by the states. Both the PDMA and state laws limit the distribution of prescription
pharmaceutical product samples and impose requirements to ensure accountability in distribution.
From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory
provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation,
FDA regulations, guidances and policies are often revised or reinterpreted by the agency in ways that may significantly affect our
business and our product candidates. It is impossible to predict whether further legislative or FDA regulation or policy changes
will be enacted or implemented and what the impact of such changes, if any, may be.
Patent Term Restoration
Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, some of our
U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act
of 1984, commonly referred to as the Hatch‑Waxman Act. The Hatch‑Waxman Act permits a patent restoration term of up to five
years as compensation for patent term effectively lost during product development and the FDA regulatory review process.
However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s
approval date. The patent term restoration period is generally one‑half the time between the effective date of an IND and the
submission date of an NDA plus the time between the submission date of an NDA/BLA and the approval of that application,
except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent
applicable to an approved drug is eligible for the extension. Extensions are not granted as a matter of right and the extension must
be applied for prior to expiration of the patent and within a 60-day period from the date the product is first approved for
commercial marketing. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application
for any patent term extension or restoration. In the future, we may apply for Patent Term Extensions, defined as the length of the
regulatory review of products covered by our granted patents, for some of our currently owned or licensed applications and patents
to add patent life beyond their current expiration dates. Such extensions will depend on the length of the regulatory review;
however, there can be no assurance that any such extension will be granted to us.
Marketing Exclusivity
Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications. The
specific scope varies, but fundamentally the FDCA provides a five‑year period of non‑patent marketing exclusivity within the
United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the
FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible
for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2)
NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of
reference to all the data required for approval. However, an application may be submitted after four years if it contains a
certification of patent invalidity or non‑infringement. The FDCA also provides three years of marketing exclusivity for an NDA,
505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were
conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for
new indications, dosages or strengths of an existing drug. This three‑year exclusivity covers only the conditions of
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use associated with the new clinical investigations and does not prohibit the FDA from approving applications for drugs containing
the original active agent. Five‑year and three‑year exclusivity will not delay the submission or approval of a full NDA. However,
an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and
adequate and well‑controlled clinical studies necessary to demonstrate safety and effectiveness.
Pediatric exclusivity is another type of exclusivity in the United States. Pediatric exclusivity, if granted, provides an
additional six months to the term of any existing regulatory exclusivity, including the non‑patent exclusivity periods described
above. This six‑month exclusivity may be granted based on the voluntary completion of a pediatric clinical study in accordance
with an FDA‑issued “Written Request” for such a clinical study.
With respect to biologics, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education
Reconciliation Act (collectively, the PPACA) signed into law on March 23, 2010, includes a subtitle called the Biologics Price
Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated licensure pathway for biological products that are
biosimilar to or interchangeable with an FDA‑licensed reference biological product. To date, only one biosimilar has been licensed
under the BPCIA in the United States (in September 2015), with many more well into the process for approval. Numerous
biosimilars have already been approved in Europe. The FDA has issued several guidance documents outlining an approach to
review and approval of biosimilars, although there has been significant litigation and questions over interpretation of such
guidelines.
Biosimilarity, which requires that the product be “highly similar” and there be no clinically significant differences
between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical
studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference
product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in
any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic
may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished
efficacy relative to exclusive use of the reference biologic. However, complexities associated with the larger, and often more
complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant
hurdles to implementation of the abbreviated approval pathway that are still being worked out by the FDA.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the
date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made
effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12‑year period of
exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the
competing product containing the sponsor’s own preclinical data and data from adequate and well‑controlled clinical trials to
demonstrate the safety, purity and potency of their product. The BPCIA also created certain exclusivity periods for biosimilars
approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will,
in fact, be readily substituted by pharmacies, which are governed by state pharmacy law.
The BPCIA is complex and only beginning to be interpreted and implemented by the FDA. In addition, recent
government proposals have sought to reduce the 12‑year reference product exclusivity period. Other aspects of the BPCIA, some
of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate
impact, implementation, and meaning of the BPCIA is subject to significant uncertainty.
Orphan Designation and Exclusivity
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs (including biological drug products)
intended to treat a rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the
United States or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation
that costs of research and development of the drug for the indication can be recovered by sales of the drug in the United States.
Orphan drug designation must be requested before submitting an NDA or BLA.
After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed
publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review
and approval process. The first applicant to receive FDA approval for a particular active ingredient to treat a particular disease or
condition with FDA orphan drug designation is entitled to a seven‑year exclusive marketing period in the United States for that
product, for that indication. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver
of the NDA/BLA application user fee.
During the exclusivity period, the FDA may not approve any other applications to market the same drug for the same
disease or condition, except in limited circumstances, such as if the second applicant demonstrates the clinical superiority of its
product to the product with orphan drug exclusivity through a demonstration of superior safety, superior efficacy, or a major
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contribution to patient care, or if the manufacturer of the product with orphan exclusivity is not able to assure sufficient quantities
of the product. “Same drug” means a drug that contains the same identity of the active moiety if it is a drug composed of small
molecules, or of the principal molecular structural features if it is composed of macromolecules and is intended for the same use as
a previously approved drug, except that if the subsequent drug can be shown to be clinically superior to the first drug, it will not be
considered to be the same drug. Drug exclusivity does not prevent the FDA from approving a different drug for the same disease or
condition, or the same drug for a different disease or condition.
Pharmaceutical Coverage, Pricing and Reimbursement
In the United States, sales of Ribasphere RibaPak and any products for which we may receive regulatory approval for
commercial sale will depend in part on the availability of coverage and reimbursement from third‑party payors. Third‑party payors
include government authorities, managed care providers, private health insurers and other organizations.
Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain
regulatory approval. The process for determining whether a payor will provide coverage for a biologic or drug may be separate
from the process for setting the reimbursement rate that the payor will pay for the product. Some of the additional requirements
and restrictions on coverage and reimbursement levels imposed by third‑party payors influence the purchase of healthcare services
and products. Third‑party payors may limit coverage to specific biologics and drugs on an approved list, or formulary, which might
not include all of the FDA‑approved biologics or drugs for a particular indication, or place biologics and drugs at certain formulary
levels that result in lower reimbursement levels and higher cost‑sharing obligation imposed on patients. Moreover, a payor’s
decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate
third‑party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on
our investment in product development. Further, one payor’s determination to provide coverage does not assure that other payors
will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement may differ
significantly from payor to payor.
Third‑party payors are increasingly challenging the price and examining the medical necessity and cost‑effectiveness of
medical products and services, in addition to their safety and efficacy. In order to obtain and maintain coverage and reimbursement
for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to
demonstrate the medical necessity and cost‑effectiveness of any products, in addition to the costs required to obtain regulatory
approvals. Our product candidates may not be considered medically necessary or cost‑effective. If third‑party payors do not
consider a product to be cost‑effective compared to other available therapies, they may not cover the product after approval as a
benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit.
The U.S. government and state legislatures have shown significant interest in implementing cost containment programs to
limit the growth of government‑paid healthcare costs, including price controls, restrictions on reimbursement and coverage and
requirements for substitution of generic products for branded prescription drugs. Adoption of government controls and measures,
and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit our drugs and
product candidates from coverage and limit payments for pharmaceuticals.
In addition, we expect that the increased emphasis on managed care and cost containment measures in the United States
by third‑party payors and government authorities to continue and will place pressure on pharmaceutical pricing and coverage.
Coverage policies and third‑party reimbursement rates may change at any time. Even if favorable coverage and reimbursement
status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and
reimbursement rates may be implemented in the future.
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Other Healthcare Laws and Compliance Requirements
Healthcare providers, physicians, and third‑party payors often play a primary role in the recommendation and prescription
of any currently marketed products and product candidates for which we may obtain marketing approval. Our current and future
arrangements with healthcare providers, physicians, third‑party payors and customers, and our sales, marketing and educational
activities, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations (at the federal and state
level) that may constrain our business or financial arrangements and relationships through which we market, sell and distribute our
products for which we obtain marketing approval.
In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we
conduct our business. The laws that govern certain of our operations include the following, but are not limited to:
a)
b)
c)
d)
e)
f)
federal and state laws relating to the Medicare and Medicaid programs and any other federal healthcare program;
federal and state laws relating to healthcare fraud and abuse, including, without limitation, the federal Anti-Kickback
Statute (42 U.S.C. § 1320a-7b(b)), the federal False Claims Act (31 U.S.C. §§ 3729 et seq.), the False Statements
Statute, (42 U.S.C. § 1320a-7b(a)), the Exclusion Laws (42 U.S.C. § 1320a-7), the federal Physician Payment
Sunshine Act (42 U.S.C. § 1320a-7h), the Drug Supply Chain Security Act (21 U.S.C. § 351 et seq.), the Anti-
Inducement Statute (42 U.S.C. § 1320a-7a(a)(5)), the Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a) and
criminal laws relating to healthcare fraud and abuse, including but not limited to 18 U.S.C. §§ 286, 287 and 1001,
and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, (Pub.L. 104-191);
state laws relating to Medicaid or any other state healthcare or health insurance programs;
federal or state laws relating to billing or claims for reimbursement submitted to any third party payor, employer or
similar entity, or patient;
any other federal or state laws relating to fraudulent, abusive or unlawful practices connected in any way with the
provision or marketing of healthcare items or services, including laws relating to the billing or submitting of claims
for reimbursement for any items or services reimbursable under any state, federal or other governmental healthcare or
health insurance program or any private payor; and
federal and state laws relating to health information privacy and security, including HIPAA, and any rules or
regulations promulgated thereunder, and the Health Information Technology for Economic and Clinical Health Act,
enacted as part of the American Recovery and Reinvestment Act of 2009 and any regulations promulgated
thereunder.
If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that
apply to us, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines,
imprisonment, exclusion from participation in government healthcare programs, injunctions, recall or seizure of products, total or
partial suspension of production, denial or withdrawal of pre‑marketing product approvals, private qui tam actions brought by
individual whistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including
government contracts and the curtailment or restructuring of our operations, any of which could adversely affect our ability to
operate our business and our results of operations.
Foreign Regulation of Drugs and Biologics
In order to market any product outside of the United States, we will need to comply with numerous and varying
regulatory requirements of other countries and jurisdictions regarding development, approval, commercial sales and distribution of
our products, and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our
products, if approved. Whether or not we obtain FDA approval for a product, we must obtain the necessary approvals by the
comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those
countries. The approval process varies between countries and jurisdictions and can involve additional product testing and
additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ
from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure
regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively
impact the regulatory process in others.
Employees
As of December 31, 2017, we employed 101 people, including 55 in research and development, 11 in commercial
operations and 35 in a general and administrative capacity, including executive officers. We also engage a number of temporary
employees and consultants. None of our employees is represented by a labor union with respect to his or her employment with us.
We have not experienced any work stoppages, and we consider our relations with our employees to be good.
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Facilities
Our corporate headquarters are located in New York, New York, and consist of approximately 35,771 square feet of space
under a lease that expires in October, 2025. In addition, we also have locations in Warrendale, Pennsylvania; Cambridge,
Massachusetts and Monmouth Junction, New Jersey. We believe that our facilities are adequate for our current needs and for the
foreseeable future.
Corporate Information
We were established in September 2010 as a Delaware limited liability company under the name Kadmon Holdings, LLC.
In July 2016, we converted to a Delaware corporation pursuant to a statutory conversion and changed our name to Kadmon
Holdings, Inc. We completed our IPO in August 2016. Our common stock is currently listed on The New York Stock Exchange
under the symbol “KDMN.” We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, and
therefore we are subject to reduced public company reporting requirements. Our principal executive offices are located at 450 East
29th Street, New York, New York 10016, and our telephone number is (212) 308-6000. Our website address is www.kadmon.com.
The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form
10-K or any other filings we make with the U.S. Securities and Exchange Commission (SEC).
Available Information
We make available on or through our website certain reports and amendments to those reports that we file with, or furnish
to, the SEC in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act. These include our Annual
Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or
through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it
to, the SEC. Our website address is www.kadmon.com. Copies of this information may be obtained at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and
other information regarding our filings, at www.sec.gov. The information on, or that can be accessed through, our website is not
incorporated by reference into this Annual Report on Form 10-K or any other filings we make with the SEC.
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Item 1A. Risk Factors
Described below are various risks and uncertainties that may affect our business. These risks and uncertainties are not
the only ones we face. You should recognize that other significant risks and uncertainties may arise in the future, which we cannot
foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. Certain risks
and uncertainties, including ones that we currently deem immaterial or that are similar to those faced by other companies in our
industry or business in general, may also affect our business. If any of the risks described below actually occur, our business,
financial condition or results of operations could be materially and adversely affected.
Risks Related to Our Financial Position
We have incurred substantial losses since our inception, anticipate that we will continue to incur losses for the foreseeable
future and may not achieve or sustain profitability. We expect to continue to incur significant expenses related to the
development of our clinical product candidates for at least the next several years, and we anticipate that our expenses will
increase substantially as a result of multiple initiatives.
Since inception, we have incurred substantial operating losses. Our consolidated net loss was $79.8 million, $208.8
million and $147.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our accumulated deficit was
$237.4 million and $155.7 million at December 31, 2017 and 2016, respectively.
To date, we have financed our clinical development operations primarily through issuance of common stock in our IPO, a
private placement of our common stock and warrants to purchase common stock, private placements of our membership units,
debt financing, public registered offerings of our common stock and warrants to purchase common stock and, to a lesser extent,
through equipment lease financings. We expect to continue to incur significant expenses related to the development of our clinical
product candidates for at least the next several years. We anticipate that our expenses will increase substantially as we:
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initiate or continue our clinical trials related to our most advanced product candidates;
continue the research and development of our other product candidates;
seek to discover additional product candidates;
seek regulatory approvals for our product candidates;
incur expenses associated with operating as a public company;
scale up our sales, marketing and distribution infrastructure and product sourcing capabilities to commercialize
additional products we may acquire or license from others or for which we may develop and obtain regulatory
approval; and/or
scale up our operational, financial and management information systems and personnel, including personnel to
support our product development and planned additional commercialization efforts.
In the absence of substantial revenue from the sale of products in our ribavirin portfolio and other products that we
distribute, including tetrabenazine, or from other sources (the amount, timing, nature or source of which cannot be predicted), we
expect our substantial losses to continue and we may need to discontinue operations. Our ability to generate sufficient revenues
from our existing products or from any of our product candidates in development, and to transition to profitability and generate
consistent positive cash flow is uncertain. We may continue to incur losses and negative cash flow and may never transition to
profitability or positive cash flow.
Our level of indebtedness could adversely affect our business and limit our ability to plan for, or respond to, changes in our
business.
Since our inception, we have incurred substantial indebtedness in order to fund acquisitions, research and development
activities and the operations of our commercial pharmaceutical business. At December 31, 2017, we had approximately
$34.6 million outstanding under our senior secured non‑convertible term loan (the 2015 Credit Agreement), which has a maturity
date of June 17, 2018. In addition, we have incurred recurring losses from operations and have an accumulated deficit of $237.4
million at December 31, 2017.
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Our level of indebtedness could adversely affect our business by, among other things:
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requiring us to dedicate a substantial portion of our cash from operations and from financings to payments on our
indebtedness, thereby reducing the availability of our cash for other purposes, including research and development,
investment in our commercial operations and business development efforts;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate,
thereby placing us at a disadvantage to our competitors that may have less debt;
limiting our flexibility in consolidating our corporate operations due to certain covenants that require us to maintain
minimum liquidity in our business; and/or
increasing our vulnerability to adverse economic and industry conditions.
We may not be able to generate sufficient cash to pay our indebtedness, and we may be forced to take other actions to satisfy
our payment obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on, or to refinance, our debt obligations depends on our future performance,
which will be affected by financial, business and economic conditions and other factors. We will not be able to control many of
these factors, such as economic conditions in the industry in which we operate and competitive pressures. Our cash flow and cash
on hand may not be sufficient to allow us to pay principal and interest on our debt and to meet our other obligations. If our cash
flow and other capital resources are insufficient to timely fund our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These
alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the
terms of existing or future debt agreements may restrict our ability to pursue any of these alternatives.
Our 2015 Credit Agreement matures on June 17, 2018. We may not be able to comply with the covenants under the 2015 Credit
Agreement or refinance our debt under this facility before the maturity date, in which event our ability to continue our
operations would be materially and adversely impacted.
Our 2015 Credit Agreement matures on June 17, 2018. Pursuant to the 2015 Credit Agreement, we are required to comply
with certain financial covenants and to satisfy a clinical development milestone by December 31, 2017. The clinical development
milestone was deemed satisfied in a letter agreement entered into on December 22, 2017 with a majority of lenders under our 2015
Credit Agreement. A failure to comply with these covenants is an event of default, which, if not cured or waived, could result in
the acceleration of the debt under our 2015 Credit Agreement. The 2015 Credit Agreement also required us to raise $17.0 million
of capital by December 31, 2017, which was satisfied in September 2017. No assurances can be given that we will be able to
comply with these covenants or that we will be able to refinance this debt on or before the maturity date.
Subsequent debt financing, if available at all, may involve agreements that include covenants limiting or restricting our
ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are
unable to comply with our covenants under these facilities, refinance our debt under these facilities or negotiate an extension of
such facilities prior to their maturity dates, the lenders thereunder may accelerate our indebtedness and exercise the remedies
available to them as secured creditors, including foreclosure on our tangible and intangible property that we have pledged as
security. In that event, our ability to continue our operations may be materially and adversely impacted. If we raise additional funds
through marketing and distribution arrangements or collaborations, strategic alliances or licensing arrangements with third parties,
we may be required to pledge certain assets, grant licenses on terms that may not be favorable to us or relinquish valuable rights to
our technologies, future revenue streams, research programs or product candidates. If we are unable to raise additional funds
through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development
or commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop
and market ourselves.
We will need additional funding in the future, which may not be available to us, and this may force us to delay, reduce or
eliminate our product development programs or commercialization efforts.
We will need to expend substantial resources for research and development and commercialization of our marketed
products, including costs associated with:
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clinical trials for our product candidates;
discovery of additional product candidates;
life‑cycle management of our marketed products;
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the continued commercialization of our commercial products; and/or
preparing for potential commercialization of our late‑stage product candidates and, if one or more of those product
candidates receive(s) regulatory approval, to fund the launch of that (those) product(s).
We do not expect that our existing cash, cash equivalents and restricted cash will be sufficient to enable us to fund the
completion of development and commercialization of any of our product candidates. We do not have any additional committed
external source of funds. Additionally, our revenues may fall short of our projections or be delayed, or our expenses may increase,
which could result in our capital being consumed significantly faster than anticipated. Our expenses may increase for many
reasons, including:
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clinical trial‑related expenses for our product candidates;
the potential launch and marketing of our late‑stage product candidates; and/or
manufacturing scale‑up for commercialization of our late‑stage product candidates.
To the extent that we need to raise additional capital through the sale of equity or convertible debt securities, investors in our
common stock will be diluted, and the terms of any newly issued securities may include liquidation or other preferences that
adversely affect the value of our common stock.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.
Based on our recurring losses from operations, the deficiency in stockholders’ capital and a contractual obligation to raise
$40.0 million of additional equity capital by the end of the second quarter of 2017 pursuant to the second amendment to the 2015
Credit Agreement we entered into in November 2016, our independent registered public accounting firm has included an
explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2016
expressing substantial doubt about our ability to continue as a going concern. Pursuant to the third amendment to the 2015 Credit
Agreement entered into on March 31, 2017 (the “Third Amendment”), the contractual obligation to raise $40.0 million was
extended from June 30, 2017 to December 31, 2017. We raised approximately $22.7 million in a private placement in March 2017,
requiring us to raise an additional $17.0 million by December 31, 2017, which was satisfied in September 2017. We expect to incur
further losses over the next several years as we develop our business, and we will require significant additional funding to continue
operations. If we are unable to continue as a going concern, we may be unable to meet our debt obligations, which could result in
an acceleration of our obligation to repay such amounts, and we may be forced to liquidate our assets. In such a scenario, the
values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial
statements.
We are or have been party to certain litigation, which could adversely affect our business, results of operations and
financial condition.
We are party to, or have been party to, various litigation claims and legal proceedings. We believe that the plaintiff’s
claims in the currently ongoing litigation (which is in the appellate process ) have no merit and intend to vigorously defend the
action. We similarly believe that the plaintiffs’ claims in recent litigations also had no merit. However, litigation is inherently
uncertain, and any adverse outcome(s) could negatively affect our business, results of operations and financial condition. In
addition, litigation can involve significant management time and attention and be expensive, regardless of outcome. During the
course of litigation, there may be announcements of the results of hearings and motions and other interim developments related to
the litigation. If securities analysts or investors regard these announcements as negative, the trading price of our shares of common
stock may decline. In addition, we evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable
outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish
reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based
on the information available to management at the time and involve a significant amount of management judgment. Actual
outcomes or losses may differ materially from our current assessments and estimates. See Note 17, “Contingencies” of the notes to
our audited consolidated financial statements included in this Annual Report on Form 10-K for more information.
Our ability to utilize our net operating loss carry‑forwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history and may never achieve profitability. To the extent that we continue
to generate losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. As of
December 31, 2017, we had unused federal and state net operating loss (“NOL”) carry‑forwards of approximately $419.2 million
and $362.0 million, respectively, that may be applied against future taxable income. At December 31, 2017, we have fully reserved
the deferred tax asset related to our NOL carry‑forwards as reflected in our audited consolidated financial statements. These carry-
forwards expire at various dates through December 31, 2037. Under Section 382 of the Code, if a
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corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership
by one or more 5‑percent stockholders (or certain groups of non‑5‑percent stockholders) over a three‑year period), the
corporation’s ability to use its pre‑change NOL carry‑forwards and other pre‑change tax attributes to offset its post‑change income
would be limited. We experienced ownership changes under Section 382 of the Code in 2010, 2011 and 2016, which may limit our
ability to utilize NOL carry-forwards. We did not reduce the gross deferred tax assets related to the NOL carry-forwards, however,
because the limitations do not hinder our ability to potentially utilize all of the NOL carry-forwards. We may experience ownership
changes in the future as a result of future shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use
our pre‑change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in
increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended
or otherwise limited, which could accelerate or permanently increase state taxes owed by us.
Risks Related to Our Clinical Development Pipeline
Clinical development is a lengthy and expensive process with a potentially uncertain outcome. Our long‑term success depends
upon the successful development and commercialization of our product candidates. To obtain regulatory approval to market
our products, preclinical studies and costly and lengthy clinical trials are required. The conduct of preclinical studies and
clinical trials is subject to numerous risks and results of the studies and trials are highly uncertain.
We currently have no internally clinically‑developed products approved for sale and we cannot guarantee that we will
ever develop such products. To date, we have invested a significant portion of our efforts and financial resources in the acquisition
and development of our product candidates. Our long‑term success depends upon the successful development, regulatory approval
and commercialization of these product candidates. If we fail to obtain regulatory approval to market and sell our product
candidates, or if approval is delayed, we will be unable to generate revenue from the sale of these products, our potential for
generating positive cash flow will be diminished and the capital necessary to fund our operations will be increased. Two of our
product candidates, KD025 and tesevatinib, are in clinical trials and we have additional product candidates in preclinical
development. Our business depends significantly on the successful development, regulatory approval and commercialization of our
product candidates, which may never occur.
We cannot be certain as to what type and how many clinical trials the FDA, or equivalent foreign regulatory agencies, will
require us to conduct before we may successfully gain approval to market any of our product candidates. Prior to approving a new
drug or biologic, the FDA generally requires that the effectiveness of the product candidate (which is not typically fully
investigated until Phase 3) be demonstrated in two adequate and well‑controlled clinical trials. In some situations, the FDA
approves drugs or biologics on the basis of a single well‑controlled clinical trial establishing effectiveness. However, if the FDA or
the EMA determines that our Phase 3 clinical trial results do not demonstrate a statistically significant, clinically significant benefit
with an acceptable safety profile, or if the FDA or EMA requires us to conduct additional Phase 3 clinical trials in order to gain
approval, we will incur significant additional development costs and commercialization of these products would be prevented or
delayed and our business would be adversely affected.
Our ongoing clinical trials may be subject to delays or setbacks for a variety of common and unpredictable reasons.
We may experience unforeseen delays or setbacks in our ongoing clinical trials, such as trial initiation timing, trial
redesign or amendments, timing and availability of patient enrollment or successful trial completion. Such delays and setbacks are
common and unpredictable in pharmaceutical drug development. Clinical trials can be delayed for a variety of reasons, including
delays related to:
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regulatory objections to commencing a clinical trial, continuing a clinical trial that is underway, or proceeding to the
next phase of investigation, including inability to reach agreement with the FDA or non‑U.S. regulators regarding the
scope or design of our clinical trials or for other reasons such as safety concerns that might be identified through
preclinical testing and animal studies or clinical trials, at any stage;
reaching agreement on acceptable terms with prospective contract research organizations (CROs), and clinical trial
sites (the terms of which can be subject to extensive negotiation and may vary significantly among different CROs
and trial sites);
failure of CROs or other third‑party contractors to comply with contractual and regulatory requirements or to perform
their services in a timely or acceptable manner;
difficulty identifying and engaging qualified clinical investigators;
obtaining institutional review board (IRB) approval at each site;
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difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting
the enrollment criteria for our study and competition from other clinical trial programs for the same indication as
product candidates we seek to commercialize;
having patients complete a trial or return for post‑treatment follow‑up;
clinical sites deviating from trial protocol or dropping out of a trial;
inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy
or lack of efficacy, particularly for those patients receiving a placebo;
withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of
a site to participate in our clinical trials;
adding new clinical trial sites;
inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other
clinical trial programs, including some that may be for the same indication as our product candidates;
changes in applicable regulatory policies and regulations;
insufficient data to support regulatory approval;
difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or
manufacturing sufficient quantities of the product candidate for use in clinical trials.
Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and
nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the
clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being
studied in relation to other available therapies, including any new drugs that may be approved for the indications we are
investigating. Furthermore, we rely on clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we
have agreements governing their committed activities, we have limited influence over their actual performance.
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which
such trials are being conducted, by the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities.
Such authorities may impose such a suspension or termination due to a number of factors, including:
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failure by us, CROs or clinical investigators to conduct the clinical trial in accordance with regulatory requirements
or our clinical protocols;
failed inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the
imposition of a clinical hold;
unforeseen safety or efficacy issues or any determination that a clinical trial presents unacceptable health risks;
failure to demonstrate a benefit from using a drug; or
lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays,
requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs
and other third parties, changes in governmental regulations or administrative actions, or other reasons.
If we experience delays in the completion or termination of any clinical trial of our product candidates, the commercial
prospects of our product candidates will be harmed and our ability to generate product revenues from any of these product
candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product
candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of
these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that
cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory
approval of our product candidates.
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If serious adverse events or other undesirable side effects are identified during the use of product candidates in
investigator‑sponsored trials, it may adversely affect our development of such product candidates.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or
halt non‑clinical studies and clinical trials, or could make it more difficult for us to enroll patients in our clinical trials. If serious
adverse events or other undesirable side effects, or unexpected characteristics of our product candidates are observed in
investigator‑sponsored trials, further clinical development of such product candidate may be delayed or we may not be able to
continue development of such product candidate at all, and the occurrence of these events could have a material adverse effect on
our business. Undesirable side effects caused by our product candidates could also result in the delay or denial of regulatory
approval by the FDA or other regulatory authorities or in a more restrictive label than we expect.
The regulatory approval processes of the FDA and similar foreign authorities are lengthy, time consuming, expensive and
inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, our business
will be substantially harmed.
The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes
many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion
of the regulatory authorities. Securing marketing approval requires the submission of extensive preclinical and clinical data and
supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and
efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and
inspection of manufacturing facilities by, the regulatory authorities. In addition, approval policies, regulations or the type and
amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and
may vary among jurisdictions. It is possible that none of our existing product candidates or any product candidates we may seek to
develop in the future will ever obtain regulatory approval.
Our product candidates could fail to receive regulatory approval for many reasons, including:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical
trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a
product candidate is safe and effective for its proposed indication;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable
foreign regulatory authorities for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical
studies or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to support a submission for
regulatory approval in the United States or elsewhere;
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of
third‑party manufacturers with which we contract for clinical and commercial supplies; and/or
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change
in a manner rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to
obtain regulatory approval to market our product candidates, including KD025, tesevatinib and/or KD034, which would
significantly harm our business, results of operations and prospects.
In addition, even if we were to obtain approval, regulatory authorities may:
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approve any of our product candidates for fewer or more limited indications than we request;
may not approve the price we intend to charge for our products;
may grant approval contingent on the performance of costly post‑marketing clinical trials; or
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may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the
successful commercialization of that product candidate.
If we do not achieve our projected development goals in the timeframes we announce and expect, or we face significant
competition from other biotechnology and pharmaceutical companies, the commercialization of our products may be delayed, our
operating results may be lower that we expect, the credibility of our management may be adversely affected and, as a result, the
value of our common stock may decline.
Even if we obtain regulatory approval for our product candidates, they may never be successfully launched or become
profitable, in which case our business, prospects, operating results and financial condition may be materially harmed.
In order to successfully launch our product candidates and have them become profitable, we anticipate that we will have
to dedicate substantial time and resources and hire additional personnel to expand and enhance our commercial infrastructure,
which will at a minimum include the following:
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ensure the quality of the product candidate manufactured by our suppliers and by us;
expand our sales and marketing force;
expand and enhance programs and other procedures to educate physicians and drive physician adoption of our
product candidates;
create additional policies and procedures, and hire additional personnel to carry out those policies and procedures, to
ensure customer satisfaction with our products;
obtain reimbursement for hospitals and physicians; and/or
expand and enhance our general and administrative operations to manage our anticipated growth in operations and to
support public company activities.
Because of the numerous risks and uncertainties associated with launch and profitability of our product candidates, we are
unable to predict the extent of any future losses, or when we will become profitable, if ever.
Our product candidates may have undesirable side effects that may delay or prevent marketing approval or, if approval is
obtained, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.
Undesirable or unexpected side effects caused by our product candidates could cause us or regulatory authorities to
interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the
FDA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of
these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign
regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all
targeted indications. The drug‑related side effects could affect patient recruitment, the ability of enrolled patients to complete the
trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and
prospects significantly.
Additionally, if one or more of our product candidates receives marketing approval and we or others later identify
undesirable or unexpected side effects caused by such products, a number of potentially significant negative consequences could
result, including:
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we could be sued and held liable for harm caused to patients;
sales of the product may decrease significantly; and/or
our reputation may suffer.
In addition, a regulatory agency may:
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suspend or withdraw approvals of such product;
suspend any ongoing clinical trials;
refuse to approve pending applications or supplements to approved applications filed by us, our collaborators or our
potential future collaborators;
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require additional warnings on the label;
require that we create a medication guide outlining the risks of such side effects for distribution to patients;
issue warning letters;
mandate modifications to promotional materials or require us to provide corrective information to healthcare
practitioners;
require us or our collaborators to enter into a consent decree, which can include imposition of various fines,
reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
impose other civil or criminal penalties;
impose restrictions on operations, including costly new manufacturing requirements; and/or
seize or detain products or require a product recall.
Non‑compliance may also result in potential whistleblower lawsuits and the potential for liability under the False Claims
Act or other laws and regulations, as discussed above. Any of these events could prevent us from achieving or maintaining market
acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and
prospects.
The results of previous clinical trials may not be predictive of future results, and the results of our current and planned clinical
trials may not satisfy the requirements of the FDA or non‑U.S. regulatory authorities.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive
results, and we or any of our current and future collaborators may decide, or regulators may require us, to conduct additional
clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not
interpret data as favorably as we do, which may delay, limit or prevent regulatory approval.
We will be required to demonstrate with substantial evidence through well‑controlled clinical trials that our product
candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale.
Success in early clinical trials does not mean that future larger registration clinical trials will be successful because product
candidates in later‑stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and
non‑U.S. regulatory authorities despite having progressed through initial clinical trials. Product candidates that have shown
promising results in early clinical trials may still suffer significant setbacks in subsequent registration clinical trials. Similarly, the
outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and preliminary
and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical industry,
including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier clinical trials.
Further, at various points during the course of the preclinical and clinical trial process, companies must assess both the
statistical and clinical significance of trial results. In this context, “statistical significance” refers to the likelihood that a result or
relationship is caused by something other than random chance or error. Statistical significance is measured by a “p‑value,” which
indicates the probability value that the results observed in a study were due to chance alone. A p‑value of < 0.05 is generally
considered statistically significant, meaning that the probability of the results occurring by chance alone is less than five percent.
The lower the p‑value, the less likely that the results observed were random. “Clinical significance,” on the other hand, is a
qualitative assessment of the results observed. Where we use the term “clinically significant,” we have not necessarily made a
formal statistical assessment of the probability that the change in patient status was attributable to the study drug as opposed to
chance alone, nor does such a statement necessarily mean that study endpoints have been met or the protocol has been completed.
A clinically significant effect is one that is determined to have practical importance for patients and physicians, and includes
benefits that are often defined by peer‑reviewed literature as having a meaningful impact on a patient’s condition. An effect that is
statistically significant may or may not also be clinically significant. When a study fails to result in statistical significance, the
FDA may not consider such study to serve as substantial evidence of safety and effectiveness required for approval. Even if a study
results in statistical significance, the FDA may also consider clinical significance in evaluating a marketing application. For
example, the FDA typically requires more than one pivotal clinical study to support approval of a new drug. However, the FDA
has indicated that approval may be based on a single study in limited situations in which a trial has demonstrated a clinically
significant effect. In either case, the clinical or statistical significance of a particular study result in no way guarantees that FDA or
other regulators will ultimately determine that the drug being investigated is safe and effective.
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In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in
the design of a clinical trial may not become apparent until the clinical trial is well advanced. We may be unable to design and
execute a clinical trial to support regulatory approval.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same
product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient
populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We
do not know whether any Phase 1, Phase 2, Phase 3 or other clinical trials we or any of our collaborators may conduct will
demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.
Further, our product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials
or registration trials. The FDA or other non‑U.S. regulatory authorities may disagree with our trial design and our interpretation of
data from preclinical studies and clinical trials. In addition, any of these regulatory authorities may change requirements for the
approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal Phase 3 clinical
trial that has the potential to result in the FDA or other agencies’ approval. In addition, any of these regulatory authorities may also
approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the
performance of costly post‑marketing clinical trials. The FDA or other non‑U.S. regulatory authorities may not approve the
labeling claims that we believe would be necessary or desirable for the successful commercialization of our product candidates.
We may not be successful in our efforts to use and expand our drug discovery platforms to build a pipeline of product
candidates.
A key element of our strategy is to leverage our drug discovery platforms to identify and develop new product candidates
for additional diseases with significant unmet medical needs. Although our research and development efforts to date have
contributed to the development of product candidates directed at inflammatory and fibrotic diseases, oncology and genetic
diseases, we may not be able to develop product candidates that are safe and effective. Even if we are successful in continuing to
build our pipeline, the potential product candidates that we identify may not be suitable for clinical development, including as a
result of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that
will receive marketing approval and achieve market acceptance. If we do not continue to successfully develop and begin to
commercialize product candidates, we will face difficulty in obtaining product revenues in future periods, which could result in
significant harm to our financial position and adversely affect the price of our common stock.
Biologics carry particular risks and uncertainties, which could have a negative impact on future results of operations.
Through our drug discovery platform, we are currently engaged in the development of novel highly active bi‑functional
proteins for immunotherapy in various indications. The successful development, testing, manufacturing and commercialization of
biologics is a long, expensive and uncertain process. There are particular risks and uncertainties with biologics, including:
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There may be limited access to and supply of normal and diseased tissue samples, cell lines, pathogens, bacteria, viral
strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the
United States and the European Union, could result in restricted access to, or transport or use of, such materials. If we
lose access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials,
we may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and
other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to
other pharmaceutical products. For example, in the United States, a BLA including both preclinical and clinical trial
data and extensive data regarding the manufacturing procedures is required for human vaccine candidates and FDA
approval is required for the release of each manufactured commercial lot.
· Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative
technologies to handle living micro‑organisms. Each lot of an approved biologic must undergo thorough testing for
identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and
validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight
deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and
quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the
manufacturing process, we may be required to provide preclinical and clinical data showing the comparable identity,
strength, quality, purity or potency of the products before and after such changes.
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Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant
material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines
may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions,
or closure of product facilities due to possible contamination.
Any of these events could result in substantial costs and result in a material adverse effect on our business and results of
operations.
We face substantial competition, which may result in others discovering, developing and commercializing products before or
more successfully than our products and product candidates.
The development and commercialization of new therapeutics is highly competitive. We face competition (from major
pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide) with respect to our
current product candidates and will face competition with respect to any product candidates that we may seek to develop or
commercialize in the future. We compete directly with companies that focus on cGVHD, IPF, psoriasis and PKD, and companies
dedicating their resources to novel forms of therapies for these indications. We also face competition from academic research
institutions, governmental agencies and other various public and private research institutions. Many of these competitors are
attempting to develop therapeutics for our target indications. With the proliferation of new drugs and therapies in these areas, we
expect to face increasingly intense competition as new technologies become available. Any product candidates that we
successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the
future.
There are products already approved for many of the diseases we are targeting. Many of these approved products are well
established therapies and are widely accepted by physicians, patients and third‑party payors. This may make it difficult for us to
achieve our business strategy of replacing existing therapies with our product candidates. Our commercial operations face
significant direct competition and our competitors may develop products that are safer, more effective, more convenient or less
costly than any that we are developing or that would render our product candidates obsolete or non‑competitive. Our competitors
may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.
Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and
human resources than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result
in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also
prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing
clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for,
our programs.
Our product candidates for which we intend to seek approval may face competition sooner than anticipated, and for biologics
there is additional uncertainty as the relevant law is relatively new and there is limited precedent.
Although we plan to pursue all available FDA exclusivities for our product candidates, we may face competition sooner
than anticipated. Market and data exclusivity provisions under the Federal Food, Drug, and Cosmetic Act (FDCA) can delay the
submission or the approval of certain applications for competing products. The FDCA provides a five‑year period of non‑patent
data exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity, running from
the time of NDA approval. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing
the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the five‑year
exclusivity period for a new chemical entity, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by
another company that references the previously approved drug. However, the FDA may accept an ANDA or 505(b)(2) NDA for
review after four years if it contains a certification of patent invalidity or non‑infringement.
The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing
NDA or 505(b)(2) NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the
applicant are deemed by the FDA to be essential to the approval of the application, for example (for new indications, dosages,
strengths or dosage forms of an existing drug). This three‑year exclusivity covers only the conditions of use associated with the
new clinical investigations and, as a general matter, does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for
generic versions of the original, unmodified drug product.
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Five‑year and three‑year exclusivity will not delay the submission or approval of a full NDA. However, an applicant
submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and
well‑controlled clinical trials necessary to demonstrate safety and effectiveness.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
(PPACA), signed into law on March 23, 2010, includes a subtitle called the BPCIA, which created an abbreviated approval
pathway for biological products that are biosimilar to or interchangeable with an FDA‑licensed reference biological product. Under
the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the
reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the
FDA until 12 years from the date on which the reference product was first licensed. During this 12‑year period of exclusivity,
another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing
product containing the sponsor’s own preclinical data and data from adequate and well‑controlled clinical trials to demonstrate the
safety, purity and potency of their product. The law is complex and is still being interpreted and implemented by the FDA. As a
result, its ultimate impact, implementation and meaning are subject to uncertainty. While it is uncertain when such processes
intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the
future commercial prospects for our biological products.
We believe that any of our product candidates approved as a biological product under a BLA should qualify for the
12‑year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or
otherwise, or that the FDA will not consider our product candidates to be reference products for competing products, potentially
creating the opportunity for competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the
BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once
approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for
non‑biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still
developing.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product
candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and product candidates that
we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or
for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to
capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and
development programs and product candidates for specific indications may not yield any commercially viable products. If we do
not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable
rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been
more advantageous for us to retain sole development and commercialization rights.
Even if we obtain FDA approval of any of our product candidates, we may never obtain approval or commercialize our
products outside of the United States, which would limit our ability to realize their full market potential.
None of our product candidates are approved for sale in any jurisdiction, including international markets, and we have
limited experience in obtaining regulatory approval in international markets. In order to market any products outside of the United
States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and
efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory
approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary
among countries and can involve additional product testing and validation and additional administrative review periods. Seeking
foreign regulatory approvals could result in significant delays, difficulties and costs for us and may require additional preclinical
studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to
country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory
requirements is costly, time consuming, uncertain and subject to unanticipated delays.
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In addition, our failure to obtain regulatory approval in any country may delay or have negative effects on the process for
regulatory approval in other countries. If we fail to comply with regulatory requirements in international markets or to obtain and
maintain required approvals, our target market will be reduced and our ability to realize the full market potential of our products
will be harmed. As described above, such effects include the risks that:
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any current or future product candidates we may seek to develop may not generate preclinical or clinical data that are
deemed sufficient by regulators in a given jurisdiction;
product candidates may not be approved for all indications requested, or any indications at all, in a given jurisdiction
which could limit the uses of any future product candidates we may seek to develop and have an adverse effect on
product sales and potential royalties; or
such approval in a given jurisdiction may be subject to limitations on the indicated uses for which the product may be
marketed or require costly post‑marketing follow‑up studies.
Foreign regulators may have requirements for marketing authorization holders or distributors to have a legal or physical
presence in that country. Consideration of and compliance with these requirements may result in additional time and expense
before we can pursue or obtain marketing authorization in foreign jurisdictions. If we do receive approval in other countries, we
may enter into sales and marketing arrangements with third parties for international sales of any approved products.
The environment in which our regulatory submissions may be reviewed changes over time, which may make it more difficult to
obtain regulatory approval of any of our product candidates.
The environment in which our regulatory submissions are reviewed changes over time. Average review times at the FDA
for NDAs and BLAs fluctuate, and we cannot predict the review time for any submission with any regulatory authorities. Review
times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.
Moreover, in light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members
of Congress, the Government Accountability Office, medical professionals and the general public have raised concerns about
potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further
limit use of the drug products and establishment of Risk Evaluation and Mitigation Strategies that may, for instance, restrict
distribution of drug or biologic products. The increased attention to drug safety issues may result in a more cautious approach by
the FDA to clinical trials. Data from preclinical studies and clinical trials may receive greater scrutiny with respect to safety, which
may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or
additional clinical trials that may result in substantial additional expense, a delay or failure in obtaining approval or approval for a
more limited indication than originally sought.
In addition, data obtained from preclinical studies and clinical trials are subject to different interpretations, which could
delay, limit or prevent regulatory review or approval of our product candidates. Changes in FDA personnel responsible for review
of our submissions could also impact the manner in which our data are viewed. Further, regulatory attitudes toward the data and
results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the
emergence of new information (including on other products), policy changes and agency funding, staffing and leadership. We do
not know whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.
We may seek breakthrough therapy designation by the FDA for any of our product candidates but there is no assurance that we
will request or receive such designation, and, in any event, even if we do receive such designation, it may not lead to a faster
development or regulatory review or approval process, and it does not increase the likelihood that our product candidates will
receive marketing approval in the United States.
We may apply for breakthrough therapy designation for some of our product candidates. The FDA is authorized to
designate a product candidate as a breakthrough therapy if it finds that the product is intended, alone or in combination with one or
more other drugs, to treat a serious or life‑threatening disease or condition, and preliminary clinical evidence indicates that the
product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant
endpoints, such as substantial treatment effects observed early in clinical development. For products designated as breakthrough
therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path
for clinical development while minimizing the number of patients placed in ineffective control regimens. Products designated as
breakthrough therapies by the FDA may also be eligible for accelerated approval.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our
product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to
make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not
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result in a faster development process, review or approval compared to product candidates without the breakthrough therapy
designation and, in any event, does not assure ultimate approval by the FDA. In addition, even if one or more of our product
candidates qualify as breakthrough therapies, the FDA may later decide that the product candidates no longer meet the conditions
for qualification or decide that the time period for FDA review or approval will not be shortened.
We may seek Fast Track, Accelerated Approval and/or Priority Review designation of some of our product candidates. There is
no assurance that the FDA will grant such designations and, even if it does grant any such designation for one of our product
candidates, that designation may not ultimately lead to a faster development or regulatory review or approval process, and it
does not increase the likelihood that our product candidates will receive marketing approval in the United States.
We may seek Fast Track, Accelerated Approval and/or Priority Review designation and review for our product
candidates. We have not, at this point, had any specific discussions with the FDA about the potential for any of our product
candidates to take advantage of these potential pathways. The FDA has broad discretion whether or not to grant any of these
designations, so even if we believe a particular product candidate is eligible for such a designation, we may not experience a faster
development process, review or approval compared to conventional FDA procedures. In addition, the FDA may withdraw any such
designation if it believes that the designation is no longer supported by data from our clinical development program. In addition,
any such designation does not have any impact on the likelihood that a product candidate will ultimately be granted marketing
approval in the United States.
We plan to seek orphan product designation for certain of our product candidates for certain indications, and we may be
unable to obtain orphan product designation, and even if we do, we may be unable to maintain the benefits associated with
orphan product designation, including the potential for marketing exclusivity. Moreover, if our competitors are able to obtain
orphan product designation and the associated exclusivity for their products that are competitors with our product candidates,
the applicable regulatory authority may be prohibited from approving our products for a significant period of time.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively
small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product candidate as an orphan
drug if it is a drug intended to treat a rare disease or condition, which is generally defined as having a prevalence of less than
200,000 affected individuals in the United States or a patient population greater than 200,000 in the United States where there is no
reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the United States,
orphan designation entitles a party to financial incentives such as opportunities for grant funding toward clinical trial costs, tax
advantages and user‑fee waivers. In the European Union, EMA’s Committee for Orphan Medicinal Products grants orphan drug
designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-
threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the European Union. Additionally,
orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously
debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European
Union would be sufficient to justify the necessary investment in developing the drug or biologic product.
Generally, if a product candidate with an orphan drug designation subsequently receives the first marketing approval for
the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the
FDA or the EMA from approving another marketing application for the same drug for the same indication for that time period,
except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the
manufacturer is unable to assure sufficient product quantity. The applicable period is seven years in the United States and 10 years
in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug
designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may
be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to
assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.
Moreover, even if we obtain orphan designation, we may not be the first to obtain marketing approval of our product
candidate for the orphan‑designated indication due to the uncertainties associated with developing pharmaceutical products. In
addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the
orphan‑designated indication. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively
protect the product from competition because different drugs with different active moieties can be approved for the same condition.
Even after an orphan product is approved, the FDA can subsequently approve the same drug with the same active moiety for the
same condition if the FDA concludes that the later drug is safer, more effective, or makes a major contribution to patient care.
Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any
advantage in the regulatory review or approval process. In addition, while we intend to seek orphan drug designation for our
product candidates, we may never receive such designations.
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Independent clinical investigators or CROs that we engage may not devote sufficient time or attention to conducting our
clinical trials or may not be able to repeat their past success.
We expect to continue to depend on independent clinical investigators and may depend on CROs to conduct some of our
clinical trials. CROs may also assist us in the collection and analysis of data. There is a limited number of third‑party service
providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing
performance of third‑party service providers can be difficult, time consuming and cause delays in our development programs.
These investigators and CROs, if any, will not be our employees and we will not be able to control, other than by contract, the
amount of resources, including time, which they devote to our product candidates and clinical trials. If independent investigators or
CROs fail to devote sufficient resources to the development of our product candidates, or if their performance is substandard, it
may delay or compromise the prospects for approval and commercialization of any product candidates that we develop. In
addition, the use of third‑party service providers requires us to disclose our proprietary information to these parties, which could
increase the risk that this information will be misappropriated. Further, the FDA requires that we comply with standards,
commonly referred to as cGCP for conducting, recording and reporting clinical trials to assure that data and reported results are
credible and accurate and that the rights, integrity and confidentiality of trial subjects are protected. Failure of clinical investigators
or CROs to meet their obligations to us or comply with cGCP procedures could adversely affect the clinical development of our
product candidates and harm our business.
We may not be able to attract collaborators or external funding for the development and commercialization of our product
candidates.
Our product development programs and potential commercialization of our product candidates will require substantial
additional capital to fund expenses. As part of our ongoing strategy, we may seek additional collaborative arrangements with
pharmaceutical and biotechnology companies or other third parties or external funding for certain of our development programs
and/or seek to expand existing collaborations to cover additional commercialization and/or development activities. We have a
number of research programs and early‑stage clinical development programs. At any time, we may determine that in order to
continue development of a product candidate or program or successfully commercialize a drug we need to identify a collaborator
or amend or expand an existing collaboration. Potentially, and depending on the circumstances, we may desire that a collaborator
either agree to fund portions of a drug development program led by us, or agree to provide all the funding and directly lead the
development and commercialization of a program. We face significant competition in seeking appropriate collaborators.
Collaborations are complex and time‑consuming to negotiate and document. We may also be restricted under existing
collaboration agreements from entering into agreements on certain terms with other potential collaborators. No assurance can be
given that any efforts we make to seek additional collaborative arrangements will be successfully completed on acceptable terms, a
timely basis or at all.
If we are unable to negotiate favorable collaborations, we may have to curtail the development of a particular product
candidate, reduce or delay its development program and its potential commercialization, reduce the scope of our sales or marketing
activities, and/or increase our expenditures and undertake development or commercialization activities at our own expense. If we
elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain
additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be
able to bring our product candidates to market and generate product revenue.
Risks Related to Our Marketed Products and Product Candidates
Our current and, in part, our future revenue depends on our ribavirin marketed product portfolio and products we distribute
for third parties.
Our current and, in part, our future revenue depends upon continued sales of our ribavirin portfolio of products, which has
represented a substantial portion of our total revenues to date. No meaningful revenue was generated from sales of our other
products for the years ended December 31, 2017, 2016 and 2015, and our revenue will likely be dependent on sales from our
ribavirin product portfolio for the next few years.
RibaPak and Ribasphere face significant direct competition from other generic high-dose ribavirin offerings, as well as
competition from lower dose and lower cost generic versions of ribavirin. With scrutiny on drug costs, payors may look for ways
to reduce their overall cost of treatment by switching from RibaPak and other generic high-dose formulations of ribavirin to a
lower dose and lower cost generic version of ribavirin. If healthcare providers receive pressure from patients, or they are
encouraged by insurers, to prescribe less expensive generics, or insurers impose additional formulary controls or restrictions on
coverage of RibaPak and Ribasphere, our business would be significantly harmed.
Additionally, our competitors have developed and introduced and are continuing to develop and introduce additional
products for chronic HCV infection that may, or may not, require the use of ribavirin in combination, or may require lower doses
or shorter durations of treatment with ribavirin.
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The treatment of chronic HCV infection is rapidly changing as multiple new therapies have entered, such as Viekira Pak
(AbbVie), Harvoni (Gilead Sciences, Inc.), Olysio (Janssen Pharmaceuticals, Inc.) and Zepatier (Merck & Co.), and will continue
to enter the market that (either now or in the future) may not require the use of ribavirin as part of the treatment protocol. Multiple
ribavirin free treatment regimens, including novel direct acting antivirals, have entered the market and become the new standard of
care. As a result, we expect sales of our ribavirin portfolio of products to continue to decline in 2017 and beyond.
If RibaPak and Ribasphere are unable to be used successfully in combination with new therapies or if new therapies in
development are able to achieve sufficiently high sustained virologic cure rates without ribavirin, we may be unable to compete
effectively and our business would be materially and adversely affected. Additionally, generic manufacturers of ribavirin and direct
high‑dose ribavirin competitors may try to compete with RibaPak and Ribasphere by reducing their prices or adopting other
competitive marketing and promotional tactics that could harm our business.
We cannot be certain how profitable, if at all, the commercialization of our marketed products will be.
To become and remain profitable, we must compete effectively against other therapies with our products, including our
ribavirin portfolio of products, or any of our product candidates for which we obtain marketing approvals, as well as developing
and eventually commercializing product candidates with significant market potential. This will require us to be successful in a
range of challenging activities, including discovering product candidates, completing preclinical testing and clinical trials for our
product candidates and obtaining regulatory approval for these line extensions and product candidates, in addition to the
manufacturing, marketing and selling of those products for which we may obtain regulatory approval. We may never succeed in
these activities and may never generate revenues that are significant or large enough to achieve profitability.
In addition to the risks discussed elsewhere in this section, our ability to continue to generate revenues from our
commercialized products will depend on a number of factors, including, but not limited to:
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achievement of broad market acceptance and coverage by third‑party payors for our products;
the effectiveness of our collaborators’ efforts in marketing and selling our products;
our ability to successfully manufacture, or have manufactured, commercial quantities of our products at acceptable
cost levels and in compliance with regulatory requirements;
our ability to maintain a cost‑efficient organization and, to the extent we seek to do so, to collaborate successfully
with additional third parties;
our ability to expand and maintain intellectual property protection for our products successfully;
the efficacy and safety of our products; and/or
our ability to comply with regulatory requirements, which are subject to change.
Because of the numerous risks and uncertainties associated with our commercialization efforts, we may not be able to
achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or
annual basis. A failure to become and remain profitable would depress the value of our company and could impair our ability to
raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our
company could also cause you to lose all or part of your investment.
Our inability to accurately estimate demand for our products, the uptake of new products or the timing of fluctuations in the
inventories maintained by customers makes it difficult for us to accurately forecast sales and may cause our financial results to
fluctuate.
We are unable to accurately estimate demand for our products, including uptake from new products, as demand is
dependent on a number of factors. We sell products primarily to wholesalers and specialty pharmacies. These customers maintain
and control their own inventory levels by making estimates to determine end user demand. Our customers may not be effective in
matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by our customers can cause
our operating results to fluctuate unexpectedly. Adverse changes in economic conditions or other factors may cause our customers
to reduce their inventories of our products, which would reduce their orders from us, even if end user demand has not changed. If
our inventory exceeds demand from our customers and exceeds its shelf life, we will be required to destroy unsold inventory and
write off its value. As our inventory and distribution channels fluctuate from quarter to quarter, we may continue to see fluctuations
in our earnings and a mismatch between prescription demand for our products and our revenues.
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In addition, the non‑retail sector in the United States, which includes government institutions, including state drug
assistance programs, correctional facilities and large health maintenance organizations, may be inconsistent in terms of buying
patterns and may cause quarter over quarter fluctuations that do not necessarily mirror patient demand. Federal and state budget
pressure may cause purchasing patterns to not reflect patient demand.
If we discover safety issues with any of our products or if we fail to comply with continuing U.S. and applicable foreign
regulations, commercialization efforts for the product could be negatively affected, the approved product could be subject to
withdrawal of approval or sales could be suspended, and our business could be materially harmed.
Our products are subject to continuing regulatory oversight, including the review of additional safety information. Drugs
are more widely used by patients once approval has been obtained and therefore side effects and other problems may be observed
after approval that were not seen or anticipated, or were not as prevalent or severe, during pre‑approval clinical trials or nonclinical
studies. The subsequent discovery of previously unknown problems with a product, or public speculation about adverse safety
events, could negatively affect commercial sales of the product, result in restrictions on the product or lead to the withdrawal of the
product from the market.
If we or our collaborators fail to comply with applicable continuing regulatory requirements, we or our collaborators may
be subject to fines, suspension or withdrawal of regulatory approvals for specific products, product recalls and seizures,
injunctions, consent decrees or other operating restrictions and/or criminal prosecutions. In addition, the manufacturers we engage
to make our products and the manufacturing facilities in which our products are made are subject to periodic review and inspection
by the FDA and foreign regulatory authorities. If problems are identified during the review or inspection of these manufacturers or
manufacturing facilities, it could result in our inability to use the facility to make our product or a determination that inventories
are not safe for commercial sale.
If physicians, nurses, pharmacists, patients, the medical community and/or third‑party payors do not accept our drugs or
product candidates, we may be unable to generate significant revenue in future periods.
Our drugs may not gain or maintain market acceptance among physicians, nurses, pharmacists, patients, the medical
community and/or third‑party payors. Effectively marketing our products and any of our product candidates, if approved, requires
substantial efforts and resources, both prior to launch and after approval; and marketing efforts are subject to numerous regulatory
restrictions as well as fraud and abuse laws. The demand for our drugs and degree of market acceptance of our product candidates
will depend on a number of factors including:
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limitations or warnings contained in the approved labeling for any of our drugs or product candidates;
changes in the standard of care for the targeted indications for any of our drugs or product candidates;
lower demonstrated efficacy, safety and/or tolerability compared to other drugs;
prevalence and severity of adverse side‑effects;
lack of cost‑effectiveness;
limited or lack of reimbursement and coverage from government authorities, managed care plans and other
third‑party payors;
a decision to wait for the approval of other therapies in development that have significant perceived advantages over
our drug;
the clinical indications for which the product is approved;
adverse publicity about any of our drugs or product candidates or favorable publicity about competitive products;
the timing or market introduction of any approved products as well as competitive products;
the extent to which our drugs and product candidates are approved for inclusion on formularies of hospitals and
manages care organizations;
whether our drugs and product candidates are designated under physician treatment guidelines as first‑line therapies
or as a second‑ or third‑line therapies for particular diseases;
convenience and ease of administration;
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availability of alternative therapies at similar or lower cost, including generic and over‑the‑counter products;
other potential advantages of alternative treatment methods;
ineffective sales, marketing and/or distribution support; and/or
potential product liability claims.
If any of our drugs or product candidates fails to maintain or achieve, as applicable, market acceptance, we will not be
able to generate significant revenue in future periods.
Failure to comply with FDA promotional rules may subject us to withdrawal, and correction, of related product promotion,
seizure of product and other administrative or enforcement actions as well as the potential for ancillary liability under the False
Claims Act (False Claims Act) and/or product liability litigation.
The FDA regulates the promotion of our products, which may only be promoted within their approved indication for use.
Promotional materials and activity must be presented with fair balance of the risks and benefits of any product in a manner which
is not otherwise inaccurate or misleading. The FDCA and the FDA’s implementing regulations require that manufacturers label,
advertise and promote their products with appropriate safety warnings and adequate directions for their FDA‑approved use.
However, the FDA does not have the legal authority to regulate the practice of medicine. Although physicians are permitted, based
on their medical judgment, to prescribe products for indications other than those approved by the FDA, manufacturers are
prohibited from promoting their products for such off‑label uses. We also distribute tetrabenazine tablets, which are indicated for
the treatment of chorea.
Due to the evolving chronic HCV infection treatment landscape, the indication for RibaPak and Ribasphere is inconsistent
with the current standard of care. This increases the risk of potential off‑label promotional activity, which could result in increased
regulatory scrutiny. If the FDA determines that our promotional materials, training or other activities constitute off‑label
promotion, it could request that we modify our training or promotional materials or other activities or subject us to regulatory
enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. Violation of
the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may
also lead to investigations or allegations of violations of federal and state healthcare fraud and abuse laws and state consumer
protection laws. The FDA or other regulatory authorities could also request that we enter into a consent decree or a corporate
integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored, changed
or curtailed.
Although recent decisions of the United States Supreme Court, the U.S. Court of Appeals for the Second Circuit and the
U.S. District Court for the Southern District of New York have clarified that the United States may not, consistent with the First
Amendment, restrict or punish a pharmaceutical manufacturer’s truthful and non‑misleading speech promoting the lawful use of an
approved drug, there are still significant risks in this area. It is unclear how these court decisions will impact the FDA’s
enforcement practices, and there is likely to be substantial disagreement and difference of opinion regarding whether any particular
statement is truthful and not misleading.
In the past we have been subject to enforcement action relating to allegations of improper promotion of our products, and
we may be subject to such action in the future.
If we cannot successfully manage the promotion of our currently marketed products, and product candidates, if approved,
we could become subject to significant liability which would materially adversely affect our business and financial condition. It is
also possible that other federal, state or foreign enforcement authorities, or private parties, might take action if they believe that an
alleged improper promotion led to inappropriate use of one of our products and/or the submission and payment of claims for an
off‑label use, which could result in significant fines or penalties under other statutory provisions, such as the False Claims Act and
similar laws. Even if it is later determined that we were not in violation of these laws, we may face negative publicity, incur
significant expenses defending our actions and have to divert significant management resources from other matters. In addition,
there are a number of specific FDA requirements related to drug labeling and advertising, and failure to adhere to these
requirements could result in our products being deemed “misbranded.”
The manufacture of pharmaceutical products is a highly exacting and complex process, and if our suppliers encounter
problems manufacturing our products, our business could suffer.
The manufacture of pharmaceutical products is a highly exacting and complex process, due in part to strict regulatory
requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to
follow specific protocols and procedures, problems with raw materials, delays related to the construction of new facilities or the
expansion of existing facilities, including those intended to support future demand for our products, changes in manufacturing
production sites and limits to manufacturing capacity due to regulatory requirements, changes in the types of products
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produced, physical limitations that could inhibit continuous supply, man‑made or natural disasters and environmental factors. If
problems arise during the production of a batch of product, that batch of product may have to be discarded and we may experience
product shortages or incur added expenses. This could, among other things, lead to increased costs, lost revenue, damage to
customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to
other batches or products. If problems are not discovered before the product is released to the market, recall and product liability
costs may also be incurred.
Risks Related to Government and Regulatory Agencies
If we engage in research or commercial activities involving any of our products or pipeline assets in a manner that violates
federal or state healthcare laws, including fraud and abuse laws, false claims laws, disclosure laws, government price reporting
and healthcare information privacy and security laws or other similar laws, we may be subject to corporate or individual civil,
criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid
and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and
curtailment of our operations.
Our business operations and activities are subject to extensive federal, state and local fraud and abuse and other healthcare
laws and regulations, such as the False Claims Act and the federal Anti‑Kickback Statute, the Foreign Corrupt Practices Act
(FCPA), federal Physician Payment Sunshine Act, the federal Drug Supply Chain Security Act, federal Civil Monetary Penalty
statute, the PPACA program integrity requirements, patient privacy laws and regulation, criminal laws relating to healthcare fraud
and abuse, including but not limited to the Health Insurance Portability and Accountability Act, federal consumer protection and
unfair competition laws, federal government price reporting laws and state law equivalents of each of these. These laws and
regulations constrain, among other things, the business or financial arrangements and relationships through which we may research
and develop any product candidate, as well as market, sell and distribute any approved products.
In addition, any sales of our products or product candidates, if approved, commercialized outside the United States will
also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
We have entered into consulting agreements, scientific advisory board and other financial arrangements with physicians,
including some who prescribe our products and may prescribe our product candidates, if approved. Compensation for some of
these arrangements includes the provision of stock options. While these arrangements were structured to comply with all
applicable laws, including state and federal anti‑kickback laws, to the extent applicable, regulatory agencies may view these
arrangements as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other
significant penalties. Moreover, while we do not submit claims and our customers make the ultimate decision on how to submit
claims, we may provide reimbursement guidance and support to our customers and patients. If a government authority were to
conclude that we provided improper advice to our customers and/or encouraged the submission of false claims for reimbursement,
we could face action against by government authorities.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and
regulations will involve substantial costs. The sales and marketing practices of our industry are the subject of immense scrutiny
from federal and state government agencies. Despite sequestration measures, governmental enforcement funding continues at
robust levels and enforcement officials are interpreting fraud and abuse laws broadly. It is possible that governmental authorities
will conclude that our business practices do not comply with current or future statutes, regulations or case law interpreting
applicable fraud and abuse or other healthcare laws and regulations. The risk of our being found in violation of these laws is
increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their
provisions are subject to a variety of interpretations. Even if we are not determined to have violated these laws, government
investigations into these issues typically require the expenditure of significant resources, divert our management’s attention from
the operation of the business, and generate negative publicity, which could harm our business. If our past or present operations are
found to be in violation of any such laws or any other governmental regulations that may apply to us, we may be subject to,
without limitation, civil, criminal and administrative penalties, damages, monetary fines, disgorgement, exclusion from
participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished
profits and future earnings and/or the curtailment or restructuring of our operations. If we were to be excluded from federal
healthcare programs, it would mean that no federal healthcare program payment could be made for any of our products.
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We may pursue the FDA 505(b)(2) pathway for one of our product candidates (KD034 liquid formulation), and if we are not
able to successfully do so, seeking approval of this product candidate through the 505(b)(1) NDA pathway would require full
reports of investigations of safety and effectiveness. Even if we are able to pursue the 505(b)(2) pathway, we could be subject to
legal challenges and regulatory changes which might result in extensive delays or result in our 505(b)(2) application being
unsuccessful.
Section 505(b)(2) of the FDCA permits the filing of an NDA where at least some of the information required for approval
comes from studies that were not conducted by or for the applicant and for which the applicant has not obtained a right of
reference. Section 505(b)(2), if applicable to us, would allow an NDA we submit to the FDA to rely in part on data in the public
domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the
development program for a product candidate by potentially decreasing the amount of clinical data that we would need to generate
in order to obtain FDA approval. We plan to pursue this pathway for one of our product candidates: KD034.
If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we would need to
reconsider our plans for this product and might not be able to commercialize it in a cost‑efficient manner, or at all. If we were to
pursue approval under the 505(b)(1) NDA pathway, would be subject to the full requirements and risks described for our other
product candidates.
In some instances over the last few years, certain brand‑name pharmaceutical companies and others have objected to the
FDA’s interpretation of Section 505(b)(2) and legally challenged decisions by the agency. If an FDA decision or action relative to
our product candidate, or the FDA’s interpretation of Section 505(b)(2) more generally, is successfully challenged, it could result in
delays or even prevent the FDA from approving a 505(b)(2) application for KD034.
The pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements
designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. A
claim by the applicant that a patent is invalid or will not be infringed is subject to challenge by the patent holder, requirements may
give rise to patent litigation and mandatory delays in approval (i.e., a 30‑month stay) of a 505(b)(2) application. It is not
uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or
impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or
even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may
substantially delay approval while it considers and responds to the petition.
In the Federal Register of February 6, 2015, the FDA published a proposed rule to implement statutes that govern the
approval of 505(b)(2) applications and ANDAs. The FDA also requested comment on its proposal to amend certain regulations
regarding 505(b)(2) applications and ANDAs to facilitate compliance with and efficient enforcement of the FD&C Act. Comments
on the proposed rule will inform the FDA’s rulemaking on ANDAs and 505(b)(2) applications, and at this time the implications of
these potential regulatory changes is uncertain.
Even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to
accelerated product development or earlier approval.
Even if approved pursuant to the Section 505(b)(2) regulatory pathway, a drug may be subject to the same post‑approval
limitations, conditions and requirements as any other drug.
Our commercial success depends on adequate reimbursement and coverage from third‑party commercial and government
payors for our products, and changes to coverage or reimbursement policies, as well as healthcare reform measures, may
materially harm our sales and potential revenue.
Our current sales in the United States of Ribasphere tablets and capsules and RibaPak are dependent on the formulary
approval and the extent of reimbursement from third‑party payors, including government programs (such as Medicare and
Medicaid) and private payor healthcare and insurance programs. Coverage and reimbursement for our products can differ
significantly from payor to payor. Even when we obtain coverage and reimbursement for our products, we may not be able to
maintain adequate coverage and reimbursement in the future.
There is significant uncertainty related to the third‑party coverage and reimbursement of newly approved products. We
intend to seek approval to market our product candidates in the United States, Europe and other selected foreign jurisdictions.
Market acceptance and commercial success of our product candidates in both domestic and international markets will depend
significantly on the availability of adequate coverage and reimbursement from third‑party payors for any of our product candidates.
Obtaining coverage and reimbursement approval for a product from a government or other third‑party payor is a time
consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost‑effectiveness
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data for the use of our products to each third‑party payor separately, with no assurance that coverage and adequate reimbursement
will be obtained or applied consistently. We may not be able to provide data sufficient to gain acceptance with respect to coverage
and reimbursement. Additionally, coverage may be more limited than the purposes for which the product is approved by the FDA
or similar regulatory authorities outside of the United States. Assuming that coverage is obtained for a given product, the resulting
reimbursement rates might not be adequate or may require co‑payments that patients find unacceptably high. Patients, physicians,
and other healthcare providers may be less likely to prescribe, dispense or use, as applicable, our products unless coverage is
provided and reimbursement is adequate to cover a significant portion of the cost of our products.
Government payors and other third‑party payors, such as private health insurers and health maintenance organizations,
decide which drugs they will cover and the amount of reimbursement. Coverage decisions may depend upon clinical and economic
standards that disfavor new drug or biologic products when more established or lower‑cost therapeutic alternatives are already
available or subsequently become available. Based upon a number of factors, including clinical and economic standards, our
products may not qualify for coverage and reimbursement. Coverage and reimbursement by a third‑party payor may depend upon a
number of factors, including, but not limited to, the third‑party payor’s determination that use of a product is:
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a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost‑effective;
neither experimental nor investigational;
prescribed by a practitioner acting within the scope of license and health plan participation agreements;
documented adequately in the patient’s medical record;
dispensed by a participating pharmacy; and/or
logged and documented appropriately by the dispensing pharmacy.
The market for our products will depend significantly on access to third‑party payors’ drug formularies for which
third‑party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to
downward pricing pressures on pharmaceutical companies. Also, third‑party payors may refuse to include a particular branded
drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other
alternative is available. If coverage and reimbursement of our future products is unavailable or limited in scope or amount, or if
pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
In the United States, our products may be subject to discounts from list price and rebate obligations, and we have
experienced increased pricing pressure and restrictions on patient access, such as prior authorizations, due to new and expensive
therapies that have entered the hepatitis C market. Third‑party payors have from time to time refused to include our products in
their formularies, limit the type of patients for whom coverage will be provided, or restrict patient access to our products through
formulary control or otherwise, in favor of less‑costly generic versions of ribavirin or other treatment alternatives. Any change in
formulary coverage, treatment paradigm, reimbursement levels, discounts or rebates offered on our products may impact our
anticipated revenues.
In the United States, governmental and commercial third‑party payors are developing increasingly sophisticated methods
of controlling healthcare costs. We believe that pricing pressure for our products will continue, and future coverage and
reimbursement will likely be subject to increased restrictions. For example, the PPACA, which has already imposed significant
healthcare cost containment measures, also encourages the development of comparative effectiveness research and any adverse
findings for our products from such research may reduce the extent of coverage and reimbursement for our products. The PPACA
created the Patient‑Centered Outcomes Research Institute to review the effectiveness of treatments and medications in
federally‑funded healthcare programs. The PCORI publishes the results of its studies. An adverse finding result may result in a
treatment or product being removed from Medicare or Medicare coverage.
Managed care organizations continue to seek price discounts and in some cases, to impose restrictions on the coverage of
particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by
Medicaid programs, which may result in managed care organizations influencing prescription decisions for a larger segment of the
population, which could constrain pricing, formulary position or reimbursement for our products. Economic pressure on
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state budgets may also have a similar impact on Medicaid coverage and reimbursement. A reduction in the availability or extent of
reimbursement or removal from and restrictions in use on formularies from U.S. government programs and other third‑party
payors could have a material adverse effect on the sales of RibaPak.
If adequate coverage and reimbursement by third‑party payors, including Medicare and Medicaid in the United States, is
not available, our ability to continue to successfully market the RibaPak and Ribasphere line of ribavirin products will be
materially adversely impacted and it would cause irreversible damage to our financial position, unless we are successful in
developing or acquiring rights to promote another product. We can make no assurances that we can do so on a timely basis or on
favorable terms, if at all. In certain countries in the European Union and some other international markets, governments provide
healthcare at low‑cost to consumers and regulate pharmaceutical pricing, patient eligibility or reimbursement levels to control costs
for the government‑sponsored healthcare system. We expect to see strong efforts to reduce healthcare costs in our international
markets, including: patient access restrictions; suspensions on price increases; prospective and possibly retroactive price
reductions, mandatory discounts and rebates, and other recoupments; recoveries of past price increases; and greater importation of
drugs from lower‑cost countries to higher‑cost countries. In addition, certain countries set prices by reference to the prices in other
countries where our products are marketed. Thus, our inability to secure adequate prices in a particular country may not only limit
the marketing of our products within that country, but may also adversely affect our ability to obtain acceptable prices in other
markets.
Healthcare reform measures could hinder or prevent our product candidates’ commercial success and could increase our costs.
In both the United States and certain foreign jurisdictions, there have been, and we expect there will continue to be, a
number of legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably.
Among policy makers and payors in the United States and elsewhere, there is a significant interest in promoting changes in
healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding individual access to
healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly
affected by major legislative initiatives. For example, in 2010, the PPACA was enacted, which was intended to expand healthcare
coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals,
strengthening of program integrity measures and enforcement authority, and expansion of the Medicaid program. The PPACA
substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the
pharmaceutical industry. Several provisions of the new law, which have varying effective dates, may affect us and will likely
increase certain of our costs. In this regard, the PPACA includes the following provisions:
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an annual, non‑deductible fee on any entity that manufactures or imports certain branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government healthcare
programs that began in 2011;
an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of
the average manufacturer price for branded and generic drugs, respectively;
an extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled
in Medicaid managed care organizations;
new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extensions;
changes to the Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50%
point‑of‑sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage
gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid
coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with
income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid
rebate liability;
a new requirement to annually report drug samples that manufacturers and distributors provide to licensed
practitioners or to pharmacies of hospitals or other healthcare entities;
a licensure framework for follow‑on biologic products;
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a new Patient‑Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative
clinical effectiveness research, along with funding for such research; and
creation of the Independent Payment Advisory Board which has the authority to recommend certain changes to the
Medicare program that could result in reduced payments for prescription drugs.
The reforms imposed by the new law will significantly impact the pharmaceutical industry; however, the full effects of
the PPACA cannot be known until these provisions are implemented and the CMS and other federal and state agencies issue and
finalize all applicable regulations or guidance. We will continue to evaluate the PPACA, the implementation of regulations or
guidance related to various provisions of the PPACA by federal agencies, as well as trends and changes that may be encouraged by
the legislation and that may potentially have an impact on our business over time. The cost of implementing more detailed record
keeping systems and otherwise complying with these regulations could substantially increase our costs. The changes to the way
our products are reimbursed by the CMS could reduce our revenues. Both of these situations could adversely affect our results of
operations. There have been judicial and Congressional challenges to certain aspects of the PPACA, and we expect there will be
additional challenges and amendments to the PPACA in the future. Significant uncertainty exists regarding the effect of the
PPACA, particularly in light of the recent election and campaign pledges to repeal or reform the PPACA.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes
included aggregate reductions to Medicare payments to providers and suppliers of up to 2% per fiscal year, which went into effect
in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional
Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,
which, among other things, further reduced Medicare payments to several providers and suppliers, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. These new laws and future
healthcare reform laws may result in additional reductions in Medicare and other healthcare funding.
There also have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels and
elsewhere directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. In addition, there
has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed
products. Additional changes could be made to governmental healthcare programs that could significantly impact the success of
our products or product candidates. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of
the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce
costs of healthcare may adversely affect:
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the demand for any products for which we may obtain regulatory approval;
our ability to set a price that we believe is fair for our products;
our ability to generate revenues and achieve or maintain profitability;
the level of taxes that we are required to pay; and/or
the availability of capital.
Government price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our
current and future products.
International operations are also generally subject to extensive price and market regulations and there are many proposals
for additional cost‑containment measures, including proposals that would directly or indirectly impose additional price controls or
reduce the value of our intellectual property portfolio or may make it economically unsound to launch our products in certain
countries. We cannot predict the extent to which our business may be affected by these or other potential future legislative or
regulatory developments. Future price controls or other changes in pricing regulation could restrict the amount that we are able to
charge for our current and future products, which would adversely affect our revenue and results of operations.
Additionally, in some countries, pricing negotiations with governmental authorities can take considerable time after the
receipt of marketing approval for a product candidate. Political, economic and regulatory developments may further complicate
pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been obtained. Reference
pricing used by various European Union member states and parallel distribution or arbitrage between low‑priced and high‑priced
member states, can further reduce prices. To obtain reimbursement or pricing approval in some countries, we may be required to
conduct additional clinical trials that compare the cost‑effectiveness of our product candidates to other available therapies, which is
time‑consuming and costly. If reimbursement of our product candidates is unavailable or limited in scope or
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amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of
our products in such country.
Guidelines and recommendations published by government agencies, professional societies, and private foundations and
organizations can reduce the use of our products and product candidates, if approved.
Government agencies promulgate regulations and guidelines applicable to certain drug classes which may include our
products and product candidates that we are developing. In addition, from time to time, professional societies, practice
management groups, private health/science foundations and organizations publish guidelines or recommendations directed to
certain healthcare and patient communities. These recommendations may relate to such matters as usage, dosage, route of
administration and use of concomitant therapies. Regulations or guidelines suggesting the reduced use of certain drug classes
which may include our products and product candidates that we are developing or the use of competitive or alternative products as
the standard of care to be followed by patients and healthcare providers could result in decreased use of our product candidates or
negatively impact our ability to gain market acceptance and market share.
We could be adversely affected by violations of the FCPA and similar worldwide anti‑bribery laws.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making payments to
non‑U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are
also subject to anti‑bribery laws in the jurisdictions in which we operate. Although we have policies and procedures designed to
ensure that we, our employees and our agents comply with the FCPA and other anti‑bribery laws, there is no assurance that such
policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and
intermediaries with respect to our business or any businesses that we acquire. We do business in a number of countries in which
FCPA violations have recently been enforced. Failure to comply with the FCPA, other anti‑bribery laws or other laws governing
the conduct of business with foreign government entities, including local laws, could disrupt our business and lead to severe
criminal and civil penalties, including imprisonment, criminal and civil fines, loss of our export licenses, suspension of our ability
to do business with the federal government, denial of government reimbursement for our products and/or exclusion from
participation in government healthcare programs. Other remedial measures could include further changes or enhancements to our
procedures, policies, and controls and potential personnel changes and/or disciplinary actions, any of which could have a material
adverse effect on our business, financial condition, results of operations and liquidity. We could also be adversely affected by any
allegation that we violated such laws.
If our processes and systems are not compliant with regulatory requirements, we could be subject to restrictions on marketing
our products or could be delayed in submitting regulatory filings seeking approvals for our product candidates.
We have a number of regulated processes and systems that are required to obtain and maintain regulatory approval for our
drugs and product candidates. These processes and systems are subject to continual review and periodic inspection by the FDA and
other regulatory bodies. If compliance issues are identified at any point in the development and approval process, we may
experience delays in filing for regulatory approval for our product candidates, or delays in obtaining regulatory approval after
filing. Any later discovery of previously unknown problems or safety issues with approved drugs or manufacturing processes, or
failure to comply with regulatory requirements, may result in restrictions on such drugs or manufacturing processes, withdrawal of
drugs from the market, the imposition of civil or criminal penalties or a refusal by the FDA and/or other regulatory bodies to
approve pending applications for marketing approval of new drugs or supplements to approved applications, any of which could
have a material adverse effect on our business. Given the number of high profile adverse safety events with certain drug products,
regulatory authorities may require, as a condition of approval, costly risk evaluation and mitigation strategies, which may include
safety surveillance, restricted distribution and use, patient education, enhanced labeling, expedited reporting of certain adverse
events, pre‑approval of promotional materials and restrictions on direct‑to‑consumer advertising. For example, any labeling
approved for any of our product candidates may include a restriction on the term of its use, or it may not include one or more
intended indications. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs
during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure
compliance with any new post‑approval regulatory requirements. Any of these restrictions or requirements could force us or our
collaborators to conduct costly studies.
In addition, we are a party to agreements that transfer responsibility for complying with specified regulatory requirements,
such as packaging, storage, advertising, promotion, record‑keeping and submission of safety and other post‑market information on
the product or compliance with manufacturing requirements, to our collaborators and third‑party manufacturers. Approved
products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring
that quality control and manufacturing procedures conform to current good manufacturing practices (cGMP). As such, we and our
contract manufacturers, which we are responsible for overseeing and monitoring for compliance, are subject to continual review
and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to
expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. The
FDA may hold us responsible for any deficiencies or noncompliance of our
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contract manufacturers in relation to our product candidates and commercial products. If our collaborators or third‑party
manufacturers do not fulfill these regulatory obligations, any drugs we market or for which we or they obtain approval may be
deemed adulterated, which carries significant legal implications, and may be subject to later restrictions on manufacturing or sale,
which could have a material adverse effect on our business.
Risks Related to Our Intellectual Property Rights
If we are unable to obtain and maintain patent protection for our products and product candidates, or if the scope of the patent
protection obtained is not sufficiently broad, our competitors could develop and commercialize products and product candidates
similar or identical to ours, and our ability to successfully commercialize our products and product candidates may be adversely
affected.
Our commercial success will depend, in part, on our ability to obtain and maintain patent protection in the United States
and other countries with respect to our products and product candidates. We seek to protect our proprietary position by filing patent
applications in the United States and abroad related to our products and product candidates that are important to our business. We
cannot be certain that patents will be issued or granted with respect to applications that are currently pending or that we apply for
in the future with respect to one or more of our products and product candidates, or that issued or granted patents will not later be
found to be invalid and/or unenforceable.
The patent prosecution process is expensive and time‑consuming, and we may not be able to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify
patentable aspects of our research and development output before it is too late to obtain patent protection. Although we enter into
non‑disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development
output, such as our employees, collaboration partners, consultants, advisors and other third parties, any of these parties may breach
the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent
protection.
We may license patent rights that are valuable to our business from third parties, in which event we may not have the right
to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or
medicines underlying such licenses. We cannot be certain that these patents and applications will be prosecuted and enforced in a
manner consistent with the best interests of our business. If any such licensors fail to maintain such patents, or lose rights to those
patents, the rights we have licensed may be reduced or eliminated and our right to develop and commercialize any of our products
that are the subject of such licensed rights could be adversely affected. In addition to the foregoing, the risks associated with patent
rights that we license from third parties also apply to patent rights we own.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal
and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity,
enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not
result in patents being issued, and even if issued, the patents may not meaningfully protect our products or product candidates,
effectively prevent competitors and third parties from commercializing competitive products or otherwise provide us with any
competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or
alternative products in a non‑infringing manner. Changes in the patent laws, implementing regulations or interpretation of the
patent laws in the United States and other countries may also diminish the value of our patents or narrow the scope of our patent
protection.
The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and many
companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. For those
countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use or sale of our
proprietary medicines and technology or to prevent third parties from selling or importing products made using our inventions in
and into the United States and other jurisdictions. Competitors may use our technologies in jurisdictions where we have not
obtained patent protection to develop their own products, and further, may export otherwise infringing products to territories where
we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our
products and our intellectual property rights may not be effective or sufficient to prevent them from competing.
We may not be aware of all third-party intellectual property rights potentially relating to our product candidates.
Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United
States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we
cannot be certain that we were the first to make the inventions claimed in our owned or any licensed patents or pending patent
applications, or that we were the first to file for patent protection of such inventions.
Assuming the other requirements for patentability are met, prior to March 2013, in the United States, the first to make the
claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled
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to the patent. Beginning in March 2013, the United States transitioned to a first‑inventor‑to‑file system in which, assuming the
other requirements for patentability are met, the first‑inventor‑to‑file a patent application will be entitled to the patent. We may be
subject to a third‑party preissuance submission of prior art to the U.S. Patent and Trademark Office (U.S. PTO) or become
involved in opposition, derivation, revocation, reexamination, post‑grant and inter partes review or interference proceedings
challenging our patent rights or the patent rights of others. Participation in these proceedings can be very complex, expensive and
may divert our management’s attention from our core business. Furthermore, an adverse determination in any such submission,
proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our
technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or
commercialize medicines without infringing third‑party patent rights.
Even if our patent applications do issue as patents, they may not issue in a form that will provide us with any meaningful
protection, prevent competitors or other third parties from competing with us or otherwise provide us with any competitive
advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative
technologies or products in a non-infringing manner.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be
challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in
patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or
commercializing similar or identical products, or limit the duration of the patent protection of our products and product candidates.
Given the amount of time required for the development, testing and regulatory review of new product candidates, patents
protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual
property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Patent protection may not be available for some of our products or the processes under which they are used or manufactured. Our
Ribasphere (ribavirin) tablets, capsules and the RibaPak products were approved under an ANDA in the United States. Although
we hold patents for the RibaPak product, other generic manufacturers may file ANDAs in the United States seeking FDA
authorization to manufacture and market additional generic versions of RibaPak, together with Paragraph IV certifications that
challenge the scope, validity or enforceability of the RibaPak patents. If we must spend significant time and money protecting or
enforcing our intellectual property rights, potentially at great expense, our business and financial condition may be harmed.
Issued patents covering one or more of our products could be found invalid or unenforceable if challenged in court.
If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering one of
our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or
unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are
commonplace. Although we have conducted due diligence on patents we have exclusively in‑licensed, the outcome following legal
assertions of invalidity and unenforceability during patent litigation is unpredictable. Grounds for a validity challenge could be an
alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non‑enablement. Grounds
for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant
information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims
before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include
re‑examination, post-grant review, inter partes review, interference proceedings, derivation proceedings,and equivalent proceedings
in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in
such a way that they no longer cover our products and product candidates. The outcome following legal assertions of invalidity and
unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no
invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a
legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our
product candidates. Such a loss of patent protection would have a material adverse impact on our business.
Third‑party claims of intellectual property infringement, misappropriation or other violation may prevent or delay our
development and commercialization efforts.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third
parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual
property rights in the pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter partes
reexamination proceedings before the U.S. PTO, and corresponding foreign patent offices. Numerous U.S. and foreign issued
patents and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing development
candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our
product candidates may be subject to claims of infringement of the patent rights of third parties.
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Third parties may assert that we are employing their proprietary technology without authorization and may assert
infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit.
There may be third‑party patents or patent applications with claims to materials, formulations, methods of manufacture or methods
for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue,
there may be currently pending patent applications which may later result in issued patents that our product candidates may
infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these
patents. If any third‑party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our
product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such
patents may be able to block our ability to commercialize such product unless we obtained a license under the applicable patents,
or until such patents expire.
Similarly, if any third‑party patents were held by a court of competent jurisdiction to cover aspects of our formulations,
processes for manufacture or methods of use, the holders of any such patents may be able to block our ability to develop and
commercialize the applicable product unless we obtained a license or until such patent expires. In either case, such a license may
not be available on commercially reasonable terms or at all. Even if we or our future strategic collaborators were able to obtain a
license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property and
it could require us to make substantial licensing and royalty payments.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability
to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit,
would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the
event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and
attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third
parties, which may be impossible or require substantial time and monetary expenditure. Claims that we have misappropriated the
confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition,
results of operations and prospects.
Most of our competitors are larger than we are and have substantially greater resources and may be able to sustain the
costs of complex patent litigation longer than we could. The uncertainties associated with litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our clinical trials, continue our internal research programs, in‑license
needed technology or enter into strategic collaborations that would help us bring our product candidates to market.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive,
time‑consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we
may be required to file infringement claims, which can be expensive and time‑consuming. In addition, in an infringement
proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may
refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in
question. Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of
inventions with respect to our patents or patent applications or those of our licensors. An adverse result in any litigation or defense
proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.
An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from
the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable
terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and
distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our
intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There
could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to patents, we rely on trade secrets, technical know‑how and proprietary information concerning our business
strategy in order to protect our competitive position in medical research and development. Trade secrets are difficult to
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protect, and it is possible that our trade secrets and know‑how will over time be disseminated within the industry through
independent development and intentional or inadvertent disclosures.
We seek to protect our trade secrets, in part, by entering into non‑disclosure and confidentiality agreements with parties
who have access to them, such as our employees, collaboration partners, consultants, advisors and other third parties. We also enter
into confidentiality and invention or patent assignment agreements with our employees and consultants. However, we cannot
guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets. Our
agreements with research and development collaboration partners contain contractual limitations regarding the publication and
public disclosure of data and other information generated during the course of research. Despite these efforts, any of these parties
may breach the agreements and intentionally or inadvertently disclose or use our proprietary information, including our trade
secrets, and we may not be able to obtain adequate remedies for such breaches.
Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time
consuming and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or
unwilling to protect trade secrets. If any of our trade secrets or the equivalent knowledge, methods and know‑how were to be
lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from
using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently
developed by a competitor or other third party, our competitive position would be harmed. If we do not apply for patent protection
prior to such publication or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential
information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights
have limitations and may not adequately protect our business, or permit us to maintain our competitive advantage. For example:
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others may be able to make compounds that are similar to our product candidates but that are not covered by the
claims of the patents that we own or have exclusively licensed;
we or our licensors or collaboration partners might not have been the first to make the inventions covered by the
issued patent or pending patent application that we own or have exclusively licensed;
we or our licensors or collaboration partners might not have been the first to file patent applications covering certain
of our or their inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our intellectual property rights;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own or have exclusively licensed may not provide us with any competitive advantages or may
be held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights
and then use the information learned from such activities to develop competitive products for sale in our major
commercial markets;
we may not develop additional proprietary technologies that are patentable; and/or
the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed
confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their
former employers.
As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed
at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although
we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know‑how
of others in their work for us, we may be subject to claims that we or our employees, consultants or
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independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other
proprietary information, of any of our employee’s former employer or other third parties. Litigation may be necessary to defend
against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against
such claims, litigation could result in substantial costs and be a distraction to management and other employees.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in
our patents or other intellectual property. We may also have, in the future, ownership disputes arising, for example, from
conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be
necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right
to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are
successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and
other employees.
If we do not obtain patent term extension for any product candidates we may develop, our business may be materially harmed.
Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidates we may
develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and
Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent
extension term of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term
extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one
patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it
may be extended. However, we may not be granted an extension because of, for example, failing to exercise due diligence during
the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of
relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent
protection afforded could be less than we request. If we are unable to obtain any patent term extension or the term of any such
extension is less than we request, third parties may obtain approval of competing products following our patent expiration, and our
business, financial condition, results of operations, and prospects could be materially harmed.
Risks Related to Our Dependence on Third Parties
We expect to continue to contract with third‑party suppliers for the production of our commercial product portfolio as well as
our developmental product candidates for clinical trial use and, if approved, for commercialization.
We currently employ third parties for the manufacturing of our commercial products and product candidates. This
increases the risk that we will not have sufficient quantities of our products or product candidates within the timeframe and at an
acceptable cost which could delay, prevent or impair our development or commercialization efforts. Additionally, we may not be
able to quickly respond to changes in customer demand which could harm our business as a result of the inability to supply the
market or an excess of inventory that we are unable to sell.
The facilities used by our contract manufacturers to manufacture our product candidates must adhere to FDA
requirements, and are subject to inspections that may be conducted after we submit our marketing applications to the FDA in
connection with review of our application, and on an ongoing basis relevant to postmarketing compliance. Although we are subject
to regulatory responsibility for the quality of products manufactured by our contract manufacturers and oversight of their activities,
we do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for
compliance with the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drug
products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict
regulatory requirements of the FDA or others, they will be subject to enforcement action, and if substantial noncompliance is
identified and not corrected, they may be precluded from manufacturing product for the United States or other markets. In addition,
although the FDA will hold us responsible for due diligence in the selection of, and oversight in the operations of, our contract
manufacturers, we do not have direct control over the ability of our contract manufacturers to maintain adequate quality control,
quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority identified significant
compliance concerns with our contract manufacturers, we may need to find alternative manufacturing facilities, which would
significantly impact our ability to develop, obtain regulatory approval for or market our products or product candidates, if
approved.
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We have agreements with third‑party manufacturers for the provision of active pharmaceutical ingredient (API), drug
product manufacturing and packaging of our commercial products. Reliance on third‑party manufacturers carries additional risks,
such as not being able to comply with cGMP or similar regulatory requirements outside the United States. Our failure, or the
failure of our third‑party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us,
including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of
products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our
products.
We still currently rely on one third‑party supplier for the ribavirin API and tetrabenazine. In the event that any of these
third‑party manufacturers fail regulatory compliance, fail to meet quality assurance specifications or experience an unavoidable
extraordinary event, our business would be materially adversely affected.
Any products that we may develop may compete with other product candidates and commercialized products for access to
manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be
capable of manufacturing for us. Any performance failure or refusal to supply on the part of our existing or future suppliers could
delay clinical development, marketing approval or commercialization of our products. If our current suppliers cannot perform as
agreed, we may be required to replace one or more of these suppliers. Although we believe that there are a number of potential
long‑term replacements to each supplier, we may incur added costs and delays in identifying and qualifying any such
replacements.
We rely on third parties to store and distribute supplies for our clinical trials and for the manufacture of our product
candidates. Any performance failure on the part of our existing or future distributors could delay clinical development or
regulatory approval or our product candidates or commercialization of our products, producing additional losses and depriving us
of potential product revenue.
We have acquired or in‑licensed many of our products from external sources and may owe milestones or royalties based on the
achievement of future successes or penalties if certain diligence requirements are not met.
In certain cases, our license or acquisition agreements require us to conduct research or clinical trials within a specified
time frame, or we may owe a penalty or lose the right to the product for development. If we do not conduct the necessary research
or clinical trials within the specified time frame, we may be required to pay cash penalties to extend the time frame during which
studies may be conducted, our licensors may exercise a right to have the product returned or may have the right to terminate the
agreement, in which event we would not be able to market products covered by such agreement.
On some of the products we have licensed, we may be obligated in future periods to make significant development and
commercial milestone payments as well as royalties. As a result, we may have to raise additional capital (which would likely cause
our equity holders to experience dilution) to cover the required milestone payments. The milestone payments and royalties we may
owe on the sale of our products may reduce the overall profitability of our operations and if we are unable to sell sufficient product
to cover the costs of these milestone payments, our operating profitability, business and value of our equity securities may be
adversely impacted.
We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss
of significant rights, which would harm our business.
We are dependent on patents, know‑how and proprietary technology, both our own and licensed from others. We are party
to intellectual property license agreements with third parties and expect to enter into additional license agreements in the future.
Our current license agreements impose, and we expect that future license agreements will impose, various diligence, development,
commercialization, payment and other obligations. If we fail to comply with our obligations under these agreements, the licensor
may have the right to terminate the license agreement or may exercise a right to have the intellectual property that we license
returned. For example, under our exclusive sub-license agreement for KD025 with NT Life and SLx, if we fail to comply with our
diligence obligations, the former owners of the intellectual property licensed under such agreement may require us and our
licensors to return such intellectual property, in which case our license to such intellectual property would terminate.Any
termination of these licenses could result in the loss of significant rights and could have a material adverse effect on our ability to
commercialize our product candidates, including KD025 .
Disputes may also arise between us and our licensors regarding intellectual property subject to a license agreement,
including those relating to:
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the scope of rights granted under the license agreement and other interpretation‑related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is
not subject to the license agreement;
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our right to sublicense patent and other rights to third parties under collaborative development relationships;
whether we are complying with our diligence obligations with respect to the use of the licensed technology in relation
to our development and commercialization of our product candidates; and/or
the allocation of ownership of inventions and know‑how resulting from the joint creation or use of intellectual
property by our licensors and by us and our collaboration partners.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing
arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
We are generally also subject to all of the same risks with respect to protection of intellectual property that we license as we are for
intellectual property that we own. If we or our licensors fail to adequately protect this intellectual property, our ability to
commercialize our products could suffer.
We depend, in part, on our licensors to file, prosecute, maintain, defend and enforce patents and patent applications that are
material to our business.
In certain of our license agreements, the patents relating to our product candidates are controlled by certain of our
licensors. Such licensors generally have rights to file, prosecute, maintain and defend the patents we have licensed from such
licensors. We generally have the first right to enforce our patent rights, although our ability to settle such claims often requires the
consent of the licensor. If our licensors or any future licensees having rights to file, prosecute, maintain or defend our patent rights
fail to conduct these activities for patents or patent applications covering any of our product candidates, our ability to develop and
commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making,
using or selling competing products. We cannot be certain that such activities by our licensors have been or will be conducted in
compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights.
Pursuant to the terms of the license agreements with some of our licensors, the licensors may have the right to control
enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents and, even if we are permitted
to pursue such enforcement or defense, we cannot ensure the cooperation of our licensors. We cannot be certain that our licensors
will allocate sufficient resources or prioritize their or our enforcement of such patents or defense of such claims to protect our
interests in the licensed patents. Even if we are not a party to these legal actions, an adverse outcome could harm our business
because it might prevent us from continuing to license intellectual property that we may need to operate our business. In addition,
even when we have the right to control patent prosecution of licensed patents and patent applications, enforcement of licensed
patents, or defense of claims asserting the invalidity of those patents, we may still be adversely affected or prejudiced by actions or
inactions of our licensors and their counsel that took place prior to or after our assuming control.
We rely in part on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including
failing to meet deadlines for the completion of such trials.
We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as medical
institutions and clinical investigators, and may in the future rely on other third parties, to perform this function. Our reliance on
these third parties for clinical development activities reduces our control over these activities but does not relieve us of our
responsibilities. We remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. Moreover, we, along with medical institutions and clinical investigators, are
required to comply with “good clinical practices” or “GCP,” which is an international ethical and scientific quality standard for
designating, recording and reporting trials that involve the participation of human subjects, and which is implemented via
regulations and guidelines enforced by, among others, the FDA, the EMA, the Competent Authorities of the Member States of the
European Economic Area (EEA), and comparable foreign regulatory authorities for all of our products in clinical development.
GCP is designed to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality
of patients in clinical trials are protected. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors,
principal investigators and trial sites. If we or any of our CROs, study sites, or clinical investigators fail to comply with applicable
GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign
regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot
assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical
trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP
regulations. Our failure to comply with these regulations may require us to repeat clinical trials and create other regulatory and
litigation exposure, which would among other things delay the regulatory approval process.
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We face risks in connection with existing and future collaborations with respect to the development, manufacture and
commercialization of our products and product candidates.
The risks that we face in connection with our current and any future collaborations include the following:
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Our collaborators may change the focus of their development and commercialization efforts or may have insufficient
resources to effectively develop our product candidates. The ability of some of our products and product candidates
to reach their potential could be limited if collaborators decrease or fail to increase development or
commercialization efforts related to those products or product candidates.
Any future collaboration agreements may have the effect of limiting the areas of research and development that we
may pursue, either alone or in collaboration with third parties.
Collaborators may develop and commercialize, either alone or with others, drugs that are similar to or competitive
with the drugs or product candidates that are the subject of their collaborations with us.
Our collaboration agreements are subject to termination under various circumstances.
Risks Related to Our Operations
Our future success depends on our ability to retain our key executives and to attract, retain and motivate qualified personnel.
The biopharmaceutical industry has experienced a high rate of turnover of management personnel in recent years. Our
ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and
retain highly qualified managerial, scientific and medical personnel.
Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be
critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among
numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of
scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors,
including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy.
Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or
advisory contracts with other entities. This may limit their availability to us.
In order to induce valuable employees to continue their employment with us, we have provided equity incentives that vest
over time. The value to employees of equity incentives that vest over time is significantly affected by the success of our operations
and clinical trials for our new product candidates, much of which is beyond our control, and may at any time be insufficient to
counteract more lucrative offers from other companies.
Despite our efforts to retain valuable employees, members of our management, scientific and development teams may
terminate their employment with us on short notice. Our employment arrangements generally provide for at‑will employment,
which means that any of our employees could leave our employment at any time, with or without notice. The loss of the services of
any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our
business, financial condition and prospects. Our success also depends on our ability to continue to attract, retain and motivate
highly skilled junior, mid‑level and senior managers as well as junior, mid‑level and senior scientific and medical personnel.
We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense
competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical and other
businesses and institutions. Many of the other companies and institutions that we compete with for qualified personnel have greater
financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more
diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high
quality candidates than what we have to offer. If we are unable to continue to attract and retain high quality personnel, the rate and
success at which we can develop and commercialize product candidates will be limited.
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Our employees, independent contractors, principal investigators, agents, consultants, commercial partners and vendors may
engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could have a material adverse effect on our business.
We are exposed to the risk that our employees, independent contractors, principal investigators, agents, consultants,
commercial partners and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could
include intentional, reckless and/or negligent failures to:
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comply with regulations by the FDA and other similar foreign regulatory bodies;
provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies;
comply with manufacturing standards;
comply with federal and state data privacy, security, fraud and abuse and other healthcare laws and regulations in the
United States and similar foreign laws;
report financial information or data accurately; and/or
disclose unauthorized activities to us.
In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business
arrangements in the healthcare industry, are subject to extensive laws and regulations intended to prevent fraud, misconduct,
kickbacks, self‑dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing,
discounting, marketing and promotion, including off‑label uses of our products, structuring and commission(s), certain customer
incentive programs, patient assistance programs, and other business arrangements generally. Activities subject to these laws also
involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in
our preclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and
serious harm to our reputation. We have adopted a Code of Business Ethics. However, it is not always possible to identify and
deter misconduct by employees and other third‑parties, and the precautions we take to detect and prevent this activity may not be
effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other
actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the
risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us,
and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our
business and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages,
fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs or other sanctions,
contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our product candidates and marketed products.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates, whether by us, on
our behalf or by unaffiliated third parties or investigators, and will face an even greater risk for any products that we
commercialize. For example, we may be sued if any product we develop or sell allegedly causes injury or is found to be otherwise
unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of
defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a
breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend
ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our
product candidates, if approved, or our other marketed products. Even a successful defense would require significant financial and
management resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for our product candidates or products that we may develop or sell;
injury to our reputation;
withdrawal of clinical trial participants;
initiation of investigations by regulators;
costs to defend the related litigation;
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a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenues from product sales; and/or
the inability to commercialize our product candidates or our marketed products.
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential
product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry an aggregate of
$20.0 million of product liability insurance, which we believe is adequate for our commercial products and our clinical trials.
Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in
an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our
insurance policies also have various exclusions and we may be subject to a product liability claim for which we have no coverage.
We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are
not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Our operating results are subject to significant fluctuations.
Our quarterly revenues, expenses and net income (loss) have fluctuated in the past and are likely to fluctuate significantly
in the future due to the timing of charges and expenses that we may encounter. In recent periods, for instance, we have recorded
charges that include:
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impairments that we are required to take with respect to investments;
financing related costs and expenses;
milestone payments under license and collaboration agreements; and
payments in connection with acquisitions and other business development activity.
Our quarterly revenues, expenses and net income (loss) may fluctuate significantly from quarter to quarter and year to
year, such that a period to period comparison of our results of operations may not be a good indication of our future performance.
If we are unable to successfully implement our strategic plan, our business may be materially harmed.
We plan to continue to develop and commercialize novel drugs that will have a significant clinical impact on important
unmet medical needs while we continue to market our commercial products to eligible patients to generate revenue. Absent a
successful launch of one or more of our product candidates, we expect our total revenue to decline significantly as the HCV
treatment landscape continues to evolve. Furthermore, our patent protection for our RibaPak product expires in 2028. In order to
maintain a strong financial position, we are focusing our investment on development programs for our most advanced product
candidates. In an effort to mitigate our drug development risk and improve our chance of ultimate commercial success, we are
developing multiple product candidates in a wide variety of disease indications. There can be no assurance that our development
programs will be successful or that our research programs will result in drugs that we can successfully develop and commercialize.
Our business may become subject to economic, political, regulatory and other risks associated with international operations.
Our business is subject to risks associated with conducting business internationally. Some of our suppliers and
collaborative and clinical trial relationships are located outside the United States. Accordingly, our future results could be harmed
by a variety of factors, including:
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
differing regulatory requirements for drug approvals in foreign countries;
potentially reduced protection for intellectual property rights;
difficulties in compliance with non‑U.S. laws and regulations;
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changes in non‑U.S. regulations and customs, tariffs and trade barriers;
changes in non‑U.S. currency exchange rates and currency controls;
changes in a specific country’s or region’s political or economic environment;
trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non‑U.S.
governments;
negative consequences from changes in tax laws;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
workforce uncertainty in countries where labor unrest is more common than in the United States;
difficulties associated with staffing and managing foreign operations, including differing labor relations;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
and/or
business interruptions resulting from geo‑political actions, including war and terrorism, or natural disasters including
earthquakes, typhoons, floods and fires.
If we engage in future acquisitions or strategic collaborations, this may increase our capital requirements, dilute our equity
holders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
We may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary
products, intellectual property rights, technologies or businesses. Any potential acquisition or strategic collaboration may entail
numerous risks, including:
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increased operating expenses and cash requirements;
the assumption of additional indebtedness or contingent liabilities;
assimilation of operations, intellectual property and products of an acquired company, including difficulties
associated with integrating new personnel;
the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a
strategic merger or acquisition;
retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business
relationships;
risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and
their existing products or product candidates and regulatory approvals; and/or
our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in
undertaking the acquisition or even to offset the associated acquisition and maintenance costs.
In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large
one‑time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not
be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology
or products that may be important to the development of our business.
If we acquire or license technologies, products or product candidates, we will incur a variety of costs and may never realize
benefits from the transaction.
If appropriate opportunities become available, we might license or acquire technologies, resources, drugs or product
candidates. We might never realize the anticipated benefits of such a transaction, and we may later incur impairment charges
related to assets acquired in any such transaction. For example, due to a decline in demand for Ribasphere, we incurred an
intangible asset impairment charge of $31.3 million during the year ended December 31, 2015 related to Ribasphere product rights,
which were acquired in conjunction with the 2010 acquisition of Three Rivers Pharmaceuticals, LLC. In particular, due to the risks
inherent in drug development, we may not successfully develop or obtain marketing approval for the product candidates we
acquire. Future licenses or acquisitions could result in potentially dilutive issuances of equity securities, the
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incurrence of debt, the creation of contingent liabilities, impairment expenses related to goodwill, and impairment or amortization
expenses related to other intangible assets, which could harm our financial condition.
We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our
operations.
At December 31, 2017, we had 101 full‑time employees. As our development and commercialization plans and strategies
develop, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources.
Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit,
maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of
their attention away from our day‑to‑day activities and devote a substantial amount of time to managing these growth activities.
We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure,
give rise to operational errors, loss of business opportunities, loss of employees and reduced productivity among remaining
employees. Our expected growth could require significant capital expenditures and may divert financial resources from other
projects, such as the development of existing and additional product candidates. If our management is unable to effectively manage
our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced
and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our
product candidates and compete effectively with others in our industry will depend, in part, on our ability to effectively manage
any future growth.
We depend on information technology and a failure of those systems could adversely affect our business.
We rely on sophisticated information technology systems to operate our business. These systems are potentially
vulnerable to malicious intrusion, random attack, loss of data privacy, or breakdown. Although we have invested in the protection
of our data and information technology and also monitor our systems on an ongoing basis, there can be no assurance that these
efforts will prevent breakdowns or breaches in our information technology systems that could adversely affect our business.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly.
The trading prices of the securities of pharmaceutical and biotechnology companies have been highly volatile. The trading
price of our common stock also may be highly volatile and could be subject to wide fluctuations in response to various factors,
some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section, these factors include:
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adverse results or delays in the planned clinical trials of our product candidates or any future clinical trials we may
conduct, or changes in the development status of our product candidates;
any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse
development with respect to the applicable regulatory authority’s review of such filings, including without limitation
the FDA’s issuance of a “refusal to file” letter or a request for additional information;
regulatory or legal developments in the United States and other countries, especially changes in laws or regulations
applicable to our products and product candidates, including clinical trial requirements for approvals;
our inability to obtain or delays in obtaining adequate product supply for any approved product or inability to do so at
acceptable prices;
failure to commercialize our product candidates or if the size and growth of the markets we intend to target fail to
meet expectations;
additions or departures of key scientific or management personnel;
unanticipated serious safety concerns related to the use of our product candidates;
introductions or announcements of new products offered by us or significant acquisitions, strategic collaborations,
joint ventures or capital commitments by us, our collaborators or our competitors and the timing of such
introductions or announcements;
our ability or inability to effectively manage our growth;
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changes in the structure of healthcare payment systems;
our failure to meet the estimates and projections of the investment community or that we may otherwise provide to
the public;
publication of research reports about us or our industry, or positive or negative recommendations or withdrawal of
research coverage by securities analysts;
market conditions in the pharmaceutical and biotechnology sectors or the economy generally;
our ability or inability to raise additional capital through the issuance of equity or debt or collaboration arrangements
and the terms on which we raise it;
trading volume of our common stock;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our technologies; and/or
significant lawsuits, including patent or stockholder litigation.
The stock market in general, and market prices for the securities of pharmaceutical companies like ours in particular, have
from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies.
These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our
operating performance. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate
to the operating performance of those companies. In several recent situations when the market price of a stock has been volatile,
holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our
stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and
attention of our management and harm our operating results.
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about
our business, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities
analysts publish about us or our business. We do not currently have, and may never obtain research coverage by securities and
industry analysts. If no or few analysts commence research coverage of us, or one or more of the analysts who cover us issues an
adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases research coverage
of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
Future sales of our common stock or securities convertible into our common stock in the public market could cause our stock
price to fall.
Our stock price could decline as a result of sales of a large number of shares of our common stock or securities
convertible into our common stock or the perception that these sales could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate.
Certain holders of our shares have rights requiring us to file registration statements covering the sale of their shares or to
include their shares in registration statements that we may file for ourselves or other stockholders, subject to certain conditions.
Shares issued upon the exercise of stock options outstanding under our equity incentive plans or pursuant to future awards granted
under those plans will become available for sale in the public market to the extent permitted by the provisions of applicable vesting
schedules, any applicable market stand‑off and lock‑up agreements, Rule 144 and Rule 701 under the Securities Act, as well as, to
the extent applicable, under the registration statement on Form S-8 that we have filed.
Once we register the offer and sale of shares for the holders of registration rights and shares to be issued under our equity
incentive plans, they can be freely sold in the public market upon issuance or resale (as applicable).
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible
into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any
such issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public
reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together
with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations.
Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our common stock. In addition, any future testing by us conducted in connection with
Section 404 of the Sarbanes‑Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require
prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement.
We are required, pursuant to Section 404 of the Sarbanes‑Oxley Act, to furnish a report by management on, among other
things, the effectiveness of our internal control over financial reporting as early as our annual report on Form 10-K for the fiscal
year ending December 31, 2017. However, for as long as we are an “emerging growth company” under the JOBS Act, our
independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over
financial reporting pursuant to Section 404. We could be an emerging growth company for up to five years following the date of
our IPO. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s
assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and
require us to incur the expense of remediation.
The holders of the convertible preferred stock will be entitled to be paid a liquidation preference, which under some
circumstances will include a substantial premium.
In the event of a liquidation (as defined in the certificate of designations governing our convertible preferred stock),
certain bankruptcy events, a material breach by us of the exchange agreement or a failure to make any payment due on our or our
subsidiaries’ indebtedness after giving effect to any applicable cure period, the holders of the convertible preferred stock will be
entitled to payment of a liquidation preference. The liquidation preference for each share of convertible preferred stock will equal
the greater of (i) (A) (I) the original purchase price per share of convertible preferred stock plus dividend arrearages thereon in
cash plus (II) any dividends accrued and unpaid thereon from the last dividend payment date to the date of the final distribution to
such holder plus (B) in the majority of the events identified in the previous sentence, a premium equal to 20.2% of the amount
described in clause (i)(A) of this sentence at such time or (ii) an amount per share of convertible preferred stock equal to the
amount which would have been payable or distributable if each share of convertible preferred stock been converted into shares of
our common stock immediately before the liquidation event.
Until the holders of the convertible preferred stock have been paid their liquidation preference in full, no payment will be
made to any holder of common stock. If our assets, or the proceeds from their sale, distributable among the holders of the
convertible preferred stock are not sufficient to pay the liquidation preference in full and the liquidating payments on any parity
securities, then those assets or proceeds will be distributed among the holders of the convertible preferred stock and those parity
securities on a pro rata basis. In that case, there would be no assets or proceeds remaining to be distributed to holders of our
common stock, which would have a material adverse effect on the trading price of our common stock.
The holders of the convertible preferred stock are entitled to have their shares of convertible preferred stock redeemed at a
substantial premium in certain events
Our convertible preferred stock is redeemable if we or our significant subsidiaries are the subject of certain bankruptcy
events, upon the occurrence of a material breach by us of the exchange agreement and upon the failure to make payments of
amounts due on our or any of our subsidiaries’ indebtedness after giving effect to any applicable cure period. Upon the occurrence
of any of these events, the holders of our convertible preferred stock shall, in their sole discretion, be entitled to receive an amount
equal to the original purchase price per share of convertible preferred stock plus dividend arrearages thereon plus any dividends
accrued and unpaid thereon from the last dividend payment date to, but excluding, the date of such redemption plus the premium
described under “The holders of the convertible preferred stock will be entitled to be paid a liquidation preference, which under
some circumstances will include a substantial premium.” If we were to become obligated to redeem all or a substantial portion of
the outstanding convertible preferred stock, that could have a material adverse effect on the trading price of our common stock.
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Shares of our convertible preferred stock are convertible into shares of our common stock and, upon conversion, will dilute
your percentage of ownership.
Concurrently with the closing of our IPO, we issued 30,000 shares of our convertible preferred stock pursuant to an
exchange agreement with holders of our Senior Convertible Term Loan. Holders of the convertible preferred stock shall be entitled
to receive a cumulative dividend at an annual rate of 5% of the sum of the original purchase price per share of convertible
preferred stock plus any dividend arrearages. In addition, holders of the convertible preferred stock shall be entitled to receive
dividends paid or payable on our common stock with respect to the number of shares of our common stock into which each share
of convertible preferred stock is then convertible at the then applicable conversion price. Shares of our convertible preferred stock
are convertible at any time at the option of the holder into shares of our common stock at a conversion price equal to their original
purchase price plus any accrued but unpaid dividends. At December 31, 2017, 3,351,717 shares of our common stock are issuable
upon conversion of our convertible preferred stock. This issuance of common stock upon the conversion will dilute the percentage
ownership of holders of our common stock by approximately 4.3% as of December 31, 2017. The dilutive effect of the conversion
of these securities may adversely affect our ability to obtain additional equity financing.
Holders of the convertible preferred stock may exert substantial influence over us and may exercise their control in a manner
adverse to your interests.
So long as shares of our convertible preferred stock remain outstanding, without the consent of at least a majority of the
then outstanding shares of the convertible preferred stock, we may not (i) authorize or approve the issuance of any convertible
preferred stock, senior securities or parity securities (or, in each case, any security convertible into, or convertible or exchangeable
therefor or linked thereto) or authorize or create or increase the authorized amount of any convertible preferred stock, senior
securities or parity securities (or, in each case, any security convertible into, or convertible or exchangeable therefor or linked
thereto); (ii) authorize or approve the purchase or redemption of any parity securities or junior securities; (iii) amend, alter or
repeal any of the provisions of the certificate of designations, our certificate of incorporation or our by‑laws in a manner that would
adversely affect the powers, designations, preferences and rights of the convertible preferred stock; (iv) contract, create, incur,
assume or suffer to exist any indebtedness or guarantee any such indebtedness with an aggregate value of more than $5,000,000
(subject to certain exceptions); or (v) agree to take any of the above actions. The holders of convertible preferred stock will have
one vote for each share of common stock into which such holders’ shares could then be converted at the time, and with respect to
such vote, will have voting rights and powers equal to the voting rights and powers of the holders of our common stock.
The certificate of designations governing the convertible preferred stock also provides that no amendment or waiver of
any provision of the certificate of designations or our charter or bylaws shall, without the prior written consent of all holders of the
convertible preferred stock who are known to us to hold, together with their affiliates, more than 5% of the convertible preferred
stock then outstanding (i) reduce any amounts payable or that may become payable to holders of the convertible preferred stock;
(ii) postpone the payment date of any amount payable to holders of the convertible preferred stock or waive or excuse any
payment; (iii) modify or waive the conversion rights of the convertible preferred stock in a manner that would adversely affect any
holder of the convertible preferred stock; or (iv) change any of the voting‑related provisions or any other provision of the
certificate of designations specifying the number or percentage of holders of the convertible preferred stock which are required to
waive, amend or modify any rights under the certificate of designations or make any determination or grant any consent under that
document.
In addition, for so long as affiliates of GoldenTree Asset Management LP collectively own at least 7.5% of our common
stock (calculated on an “as if” converted basis and taking into account the exercise of all other options, warrants and other
equity‑linked securities held by such GoldenTree affiliated entities), GoldenTree Asset Management LP will have the right, at its
option, to designate (i) one director to our board of directors and, upon such designation, the board of directors shall recommend to
the stockholders to vote for the election of GoldenTree Asset Management LP’s designee at any meeting of stockholders convened
to elect our directors and use commercially reasonable efforts to cause that designee to be elected at that meeting or (ii) one
observer to our board of directors. As a result of these contractual rights, holders of our convertible preferred stock may exert
substantial influence over our company and may exercise their control in a manner that is adverse to the interests of other holders
of our common stock. As of the date of this Annual Report, GoldenTree has not designated a director or observer to our board of
directors.
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We will require additional capital in the future, which may not be available to us. Issuances of our equity securities to provide
this capital may dilute your ownership in us.
We will need to raise additional funds through public or private debt or equity financings in order to:
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take advantage of expansion opportunities;
acquire complementary products, product candidates or technologies;
develop new products or technologies; and/or
respond to competitive pressures.
Any additional capital raised through the issuance of our equity securities may dilute your percentage ownership interest
in us. Furthermore, any additional financing we may need may not be available on terms favorable to us or at all. The
unavailability of needed financing could adversely affect our ability to execute our business strategy. See “—Risks Related to Our
Financial Position—Our 2015 Credit Agreement matures on June 17, 2018. We may not be able to comply with the covenants
under the 2015 Credit Agreement or refinance our debt under this facility before the maturity date, in which event our ability to
continue our operations would be materially and adversely impacted” for more information.
Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant
influence over matters subject to stockholder approval.
Our executive officers, directors and holders of 5% or more of our capital stock, together with their respective affiliates,
beneficially owned 63.0% of our capital stock as of March 2, 2018, of which 3.6% is beneficially owned by our executive officers.
Accordingly, our executive officers, directors and principal stockholders are able to determine the composition of the board of
directors, retain the voting power to approve all matters requiring stockholder approval, including mergers and other business
combinations, and continue to have significant influence over our operations. This concentration of ownership could have the
effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain
control of us that you may believe are in your best interests as one of our stockholders. This in turn could have a material adverse
effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management.
Anti‑takeover provisions in our charter documents and under Delaware law could make an acquisition of us difficult, limit
attempts by our stockholders to replace or remove our current management and adversely affect our stock price.
Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or
potential change in our control or change in our management, including transactions in which stockholders might otherwise receive
a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these
provisions could adversely affect the price of our stock. Among other things, our certificate of incorporation and bylaws:
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permit the board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and
privileges as they may designate;
provide that the authorized number of directors may be changed only by resolution of the board of directors;
provide that all vacancies, including newly‑created directorships, may, except as otherwise required by law, be filled
by the affirmative vote of a majority of directors then in office, even if less than a quorum; and
require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be taken by written consent.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any stockholder owning in excess of 15.0% of our outstanding stock for a period of three years following the
date on which the stockholder obtained such 15.0% equity interest in us.
We will continue to incur significant costs by being a public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private
company, including costs associated with public company reporting requirements. We also anticipate that we will incur costs
associated with corporate governance requirements, including requirements of the SEC and the New York Stock Exchange
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(NYSE). We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some
activities more time‑consuming and costly. We also expect that these rules and regulations may continue to make it more difficult
and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and
monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.
When we cease to be an “emerging growth company” and when our independent registered public accounting firm is
required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404
will correspondingly increase. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a
timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over
financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management
resources.
We are an “emerging growth company,” as defined in the JOBS Act, and as a result of the reduced disclosure and governance
requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved. We cannot predict if investors will find our common stock less attractive because we rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our
common stock and our stock price may be more volatile. We will take advantage of these reporting exemptions until we are no
longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the
fiscal year in which we have total annual gross revenues of $1.0 billion or more, (ii) the last day of our fiscal year following the
fifth anniversary of the date of the completion of our IPO, (iii) the date on which we have issued more than $1.0 billion in
nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under
the rules of the SEC.
Our management has broad discretion in using cash and cash equivalents and our other capital resources.
We expect to continue to use our cash and cash equivalents and our other capital resources to fund the clinical
development of our pipeline and for general corporate purposes. Our management has broad discretion in the application of our
cash and cash equivalents and our other capital resources and could spend the funds in ways that do not improve our results of
operations or enhance the value of our equity. The failure by our management to apply these funds effectively could result in
financial losses that could have a material adverse effect on our business, diminish available cash flows available to service our
debt, cause the value of our equity to decline and delay the development of our product candidates. Pending their use, we may
invest cash and cash equivalents and our other capital resources in a manner that does not produce income or that loses value.
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if
any, will be your sole source of gain.
We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future
earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt
agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our equity securities will likely be
your sole source of gain for the foreseeable future.
Future sales and issuances of equity securities, convertible securities or other securities could result in additional dilution of
the percentage ownership of holders of our common stock.
We expect that significant additional capital will be needed in the future to continue our planned operations. To raise
capital, we may sell equity securities, convertible securities or other securities in one or more transactions at prices and in a manner
we determine from time to time. If we sell equity securities, convertible securities or other securities in more than one transaction,
investors in such future offerings may be materially diluted by subsequent sales. Such sales would also likely result in material
dilution to our existing equity holders, and new investors could gain rights, preferences and privileges senior to those of holders of
our existing equity securities.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We have three primary operating locations which are occupied under long‑term leasing arrangements. In October 2010,
Kadmon Corporation, LLC entered into a corporate headquarters and laboratory lease in New York, New York, expiring in
February 2021 and opened a secured letter of credit with a third party financial institution in lieu of a security deposit for
$2.0 million. Since inception, there have been six amendments to this lease agreement, which have altered office and laboratory
capacity and extended the lease term through October 2025. We have the ability to extend portions of the lease on the same terms
and conditions as the current lease, except that the base rent will be adjusted to the fair market rental rate for the building based on
the rental rate for comparable space in the building at the time of extension.
We are party to an operating lease in Warrendale, Pennsylvania (our specialty-focused commercial operation), which
expires on September 30, 2019, with a five‑year renewal option. Rental payments under the renewal period will be at market rates
determined from the average rentals of similar tenants in the same industrial park.
In August 2015, we entered into an office lease agreement in Cambridge, Massachusetts (our clinical office) effective
January 2016 and expiring in April 2023. We opened a secured letter of credit with a third party financial institution in lieu of a
security deposit for $91,000.
For additional information, see Contractual Obligations and Commitments in Part II, Item 7 of this Annual Report on
Form 10-K.
Item 3. Legal Proceedings
Please refer to Note 17, “Contingencies,” of the notes to our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for a discussion related to our legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock has been listed on the NYSE under the symbol “KDMN” since our initial public offering, or IPO, of
our common stock on July 27, 2016. Prior to that time, there was no public market for our common stock. The following table sets
forth for the indicated periods the high and low intra-day sales prices per share for our common stock on the NYSE:
2016
Third quarter (Beginning July 27, 2016)
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
Holders of Record
High
Low
$
11.73 $
7.82
5.50
4.20
4.12
4.06
7.01
4.13
3.10
2.25
2.05
3.17
On March 2, 2018, there were approximately 266 stockholders of record of our common stock and the closing price of our
common stock was $3.63 per share as reported by the NYSE. Since many of our shares of common stock are held by brokers and
other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record
holders.
Dividend Policy
We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business and
repayment of debt. We have never declared nor paid any dividends on our common stock and do not anticipate paying cash
dividends to holders of our common stock in the foreseeable future. In addition, the 2015 Credit Agreement, as well as any future
borrowings, will restrict our ability to pay dividends. See “Risk Factors—Because we do not anticipate paying any cash dividends
on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.” Any determination to
pay dividends on our common stock in the future will be at the discretion of our board of directors and will depend upon, among
other factors, our results of operations, financial condition, capital requirements and covenants in our existing financing
arrangements and any future financing arrangements. Holders of the convertible preferred stock are entitled to receive a cumulative
dividend at an annual rate of 5% of the original purchase price per share of convertible preferred stock, when and as declared by
our board of directors and to the extent of funds legally available for the payment of dividends. Holders of the convertible
preferred stock are also entitled to participate in all dividends declared and paid to holders of our common stock on an “as if”
converted basis.
Purchases of Equity Securities by the Issuer of Affiliated Purchasers
None.
Sales of Unregistered Securities
Recent Sales of Unregistered Equity Securities
In March 2017, we raised approximately $22.7 million in gross proceeds from the issuance of 6,767,855 shares of our
common stock, at a price of $3.36 per share, and warrants to purchase 2,707,138 million shares of our common stock at an initial
exercise price of $4.50 per share and a term of 13 months from the date of issuance. In connection with the offering, we have
agreed to file a registration statement to register the shares of common stock underlying the common stock and warrants for resale.
Under the agreement, the registration statement must be filed within 30 days of the closing of the financing and declared effective
within the timeline provided in the agreement. If the applicable deadlines are not met, monthly liquidated damages of 2.0% of the
subscription amount (with an 8.0% cap) will be due to the purchaser.
In August 2016, we issued 208,334 shares of our common stock to settle an aggregate liability of $2.5 million with two
former employees. The sales of these securities were deemed to be exempt from registration under Section 4(a)(2) of the Securities
Act.
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In June 2016, we raised $5.5 million in gross proceeds, with no transaction costs, through the issuance of 478,266 Class E
redeemable convertible units. Dr. Harlan W. Waksal, our President and Chief Executive Officer, certain entities affiliated with
GoldenTree Asset Management LP, Bart M. Schwartz, Esq., the Chairman of our Board of Directors, and D. Dixon Boardman, a
member of our Board of Directors subscribed for 86,957, 43,479, 21,740 and 21,740 Class E redeemable convertible units,
respectively. See Note 4, “Stockholders’ Equity (Deficit) - Class E Redeemable Convertible Units” of the notes to our audited
consolidated financial statements for more information about the Class E redeemable convertible units.
Use of Proceeds from IPO of Common Stock
On August 1, 2016, we consummated our IPO, in which we sold 6,250,000 shares of common stock at a price of $12.00
per share. We received net proceeds from the IPO of approximately $66.0 million, after deducting underwriting discounts,
commissions and offering expenses. None of these expenses consisted of payments made by us to directors, officers or persons
owning 10% or more of our common stock or to their associates, or to our affiliates.
The offer and sale of the shares in our IPO were registered pursuant to our Registration Statement on Form S-1 (File
No. 333-211949), which was declared effective by the SEC on July 26, 2016. Citigroup and Jefferies acted as joint book-running
managers; JMP Securities acted as lead manager; and H.C. Wainwright & Co., acted as manager for the offering. The offering
commenced on July 26, 2016 and did not terminate until the sale of all the shares offered.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed
with the SEC on July 27, 2016, pursuant to Rule 424. We invested the funds received in cash and cash equivalents in accordance
with our investment policy.
Stock Performance Graph
The following graph illustrates a comparison from July 27, 2016, which is the date our common stock first began trading
on the NYSE, through December 31, 2017, of the total cumulative stockholder return on our common stock, the Standard & Poor's
500 Stock Index (S&P 500 Index) and the NYSE MKT ARCA Biotechnology Index. The graph assumes that $100 was invested at
the market close on July 27, 2016 in the common stock of Kadmon Holdings, Inc., the S&P 500 Index and the NYSE MKT ARCA
Biotechnology Index and data for the S&P 500 Index and the NYSE MKT ARCA Biotechnology Index assumes reinvestments of
dividends. The stockholder return shown in the graph below is not necessarily indicative of future performance, and we do not
make or endorse any predictions as to future stockholder returns. This graph shall not be deemed “soliciting material” or be
deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall
not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the
date hereof and irrespective of any general incorporation language in any such filing.
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Item 6. Selected Financial Data.
The following selected financial data are derived from the consolidated financial statements. The data presented below
should be read in conjunction with our consolidated financial statements, the notes to the consolidated financial statements, and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual
Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015, and
the consolidated balance sheet data at December 31, 2017 and 2016, are derived from, and qualified by reference to, our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our historical results for any prior
period are not necessarily indicative of results to be expected in any future period.
Statement of Operations Data:
Total revenue
Cost of sales
Write-down of inventory
Gross profit
Research and development
Selling, general and administrative
Impairment of intangible asset
Gain on settlement of payable
Total operating expenses
Loss from operations
Total other expense
Net loss
Deemed dividend on convertible preferred stock
Net loss attributable to common stockholders
Basic and diluted net loss per share of common stock
Weighted average basic and diluted shares of common stock outstanding
Year Ended December 31,
2017
2016
2015
(in thousands, except per share data)
$
12,264 $
1,332
1,654
9,278
40,777
37,057
—
—
77,834
(68,556)
11,339
(79,774)
1,918
(81,692)
26,055 $
3,485
385
22,185
35,840
105,880
—
(4,131)
137,589
(115,404)
93,009
(208,755)
21,733
(230,488)
$
(1.42) $
(9.74) $
57,405,331
23,674,512
35,719
3,731
2,274
29,714
33,558
104,740
31,269
—
169,567
(139,853)
7,232
(147,082)
—
(147,082)
(18.10)
8,127,781
Balance Sheet Data:
Cash and cash equivalents
Other current assets
Other noncurrent assets
Total assets
Current liabilities
Other long term liabilities
Secured term debt – net of current portion and discount
Total liabilities
Total stockholders’ equity (deficit)
73
December 31,
2017
2016
(in thousands)
$
67,517 $
2,496
13,539
83,552
56,644
25,150
—
81,794
1,758
36,093
4,194
22,269
62,556
24,746
34,325
28,677
87,748
(25,192)
Table of Contents
Item 7. 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 financial statements and related notes appearing in this Annual Report on Form 10-K. Some of the information contained in
this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and
strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. As a
result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our
actual results could differ materially from the results described in, or implied by, the forward‑looking statements contained in the
following discussion and analysis.
Overview
We are a fully integrated biopharmaceutical company engaged in the discovery, development and commercialization of
small molecules and biologics to address significant unmet medical needs. We are developing product candidates within
inflammatory and fibrotic diseases, as well as, genetic diseases. Our team, which has a proven track record of successful drug
development and commercialization, identifies and develops novel candidates from our small molecule and biologics platforms as
well as develops our in-licensed product candidates. By retaining global commercial rights to our lead product candidates, we
believe that we have the ability to progress these candidates ourselves while maintaining flexibility for commercial and licensing
arrangements. We expect to continue to progress our clinical candidates and have clinical trial data to report throughout 2018.
Our operations to date have been focused on developing first‑in‑class innovative therapies for indications with significant
unmet medical needs while leveraging our commercial infrastructure. We have never been profitable and had an accumulated
deficit of $237.4 million at December 31, 2017. Our net losses were $79.8 million, $208.8 million and $147.1 million for the years
ended December 31, 2017, 2016 and 2015, respectively. Although our commercial business generates revenue, we expect to incur
significant losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek
regulatory approvals for, our additional product candidates, hire additional personnel and initiate commercialization of any
products that receive regulatory approval. We anticipate that our expenses will increase substantially if, or as, we:
·
·
·
·
·
·
·
·
·
·
·
invest significantly to further develop our most advanced product candidates, including KD025, tesevatinib and
KD034;
initiate additional clinical trials and preclinical studies for our other product candidates;
seek regulatory approval for our product candidates that successfully complete clinical trials;
continue to invest in our ROCK inhibitors and other research platforms;
seek to identify additional product candidates;
scale up our sales, marketing and distribution infrastructure and product sourcing capabilities;
acquire or in‑license other product candidates and technologies;
scale up our operational, financial and management information systems and personnel, including personnel to
support our product development;
make milestone or other payments under any in‑license agreements;
maintain, expand and protect our intellectual property portfolio; or
operate as a public company.
On July 26, 2016, prior to the closing of our IPO we completed a corporate conversion transaction whereby we converted
from a Delaware limited liability company into a Delaware corporation and changed our name to Kadmon Holdings, Inc., which
we refer to herein as the “Corporate Conversion.” As required by the Second Amended and Restated Limited Liability Company
Agreement of Kadmon Holdings, LLC, the Corporate Conversion was approved by our board of directors. In connection with the
Corporate Conversion, holders of our outstanding units received one share of common stock for every 6.5 membership units held
immediately prior to the Corporate Conversion, and options and warrants to purchase units became options and warrants to
purchase one share of common stock for each unit underlying such options or warrants immediately prior to the Corporate
Conversion, at the same aggregate exercise price in effect prior to the Corporate Conversion.
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Components of Statement of Operations
Revenue
Our revenue is substantially derived from sales of our portfolio of products, including our ribavirin portfolio of products
and to a lesser extent sales of tetrabenazine and valganciclovir. No meaningful revenue has been generated from sales of our other
products. Revenue also includes the recognition of upfront licensing fees and milestone payments received primarily under our
license agreement with AbbVie.
Cost of Sales
Cost of sales consists of product costs, including ingredient costs and costs of contract manufacturers for production, and
shipping and handling of the products. Also included are costs related to quality release testing and stability testing of the products.
Other costs included in cost of sales are packaging costs, warehousing costs and certain allocated costs related to management,
facilities and other expenses associated with supply chain logistics.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates,
which include:
·
·
·
·
·
·
license fees related to our license and collaboration agreements;
research and development‑based employee‑related expenses, including salaries, benefits, travel and other
compensation expenses;
expenses incurred under our agreements with contract research organizations that conduct nonclinical and preclinical
studies, and clinical sites and consultants that conduct our clinical trials;
costs associated with regulatory filings;
costs of laboratory supplies and the acquisition, development and manufacture of preclinical and clinical study
materials and study drugs; and/or
allocated facility-related expenses.
Our research and development expenses may vary substantially from period to period based on the timing of our research
and development activities, including due to timing of initiation of clinical trials and enrollment of patients in clinical trials. We do
not allocate personnel‑related costs, including stock‑based compensation, costs associated with broad technology platform
improvements and other indirect costs to specific product candidates. We do not allocate these costs to specific product candidates
because they are deployed across multiple overlapping projects under development, making it difficult to specifically and
accurately allocate such costs to a particular product candidate.
The successful development of our product candidates is highly uncertain and subject to numerous risks including, but not
limited to:
·
·
·
·
·
·
the scope, rate of progress and expense of our research and development activities;
clinical trial results;
the scope, terms and timing of regulatory approvals;
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
the cost, timing and our ability to acquire sufficient clinical and commercial supplies for any product candidates and
products that we may develop; and/or
the risks disclosed in the section entitled “Risk Factors” in this Annual Report on Form 10-K.
A change in the outcome of any of these variables could mean a significant change in the expenses and timing associated
with the development of any product candidate.
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Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and related costs for non‑research personnel,
including stock‑based compensation and travel expenses for our employees in executive, operational, finance, legal, commercial,
regulatory, pharmacovigilance and human resource functions. Other selling, general and administrative expenses include
facility‑related costs, commercial royalty expense and director compensation, accounting and legal services, consulting costs and
programs and marketing costs to support the commercial business.
Other income (expense)
Other income (expense) is comprised of interest income earned on cash and cash equivalents and restricted cash and
interest expense on our outstanding indebtedness, including paid‑in‑kind interest on our convertible debt and non‑cash interest
related to the write‑off and amortization of debt discount debt premium and deferred financing costs associated with our
indebtedness. Our loss on equity method investment in MeiraGTx, as well as, gains and losses arising from changes in fair value of
our financial instruments are recognized in other income (expense) in the consolidated statements of operations. Such financial
instruments include a success fee and warrant liabilities for which the exercise price was contingent on our per share price in a
qualified public offering. The change in fair value is based upon the fair value of the underlying security at the end of each
reporting period, as calculated using the Black‑Scholes option pricing model, in the case of certain warrant liabilities and the
success fee, and a binomial model, in the case of certain warrant liabilities.
In addition, we operate in currencies other than the U.S. dollar to fund research and development and commercial
activities performed by various third‑party vendors. The translation of these currencies into U.S. dollars results in foreign currency
gains or losses, depending on the change in value of these currencies against the U.S. dollar. These gains and losses are included in
other income (expense).
Income taxes
Prior to the Corporate Conversion, we were a limited liability company but taxed as a C corporation for federal and state
tax purposes. On July 26, 2016, we converted from a limited liability company to a Delaware corporation pursuant to a statutory
conversion. At December 31, 2017 and 2016, we had a deferred tax liability of $0.9 million and $1.4 million, respectively, and a
full valuation allowance for our deferred tax assets. We experienced ownership changes under Internal Revenue Code Section 382
in 2010, 2011 and 2016, which limits our ability to utilize net operating loss carry-forwards. We did not reduce the gross deferred
tax assets related to the net operating loss carry-forwards, however, because the limitations do not hinder our ability to potentially
utilize all of the net operating loss carry-forwards
As of December 31, 2017, we have unused federal and state net operating loss carry-forwards of $419.2 million and
$362.0 million, respectively, that may be applied against future taxable income. These carry-forwards expire at various dates
through December 31, 2037. We recorded a valuation allowance to fully offset the gross deferred tax asset, because it is more
likely than not that we will not realize future benefits associated with these deferred tax assets at December 31, 2017 and 2016.
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Critical Accounting Policies and Significant Judgments and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that
affect the reporting amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial
statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to intangible assets and
goodwill, derivative liabilities, unit‑based compensation and accrued expenses. We base our estimates on historical experience,
known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting
policies are more fully described in Note 3, “Summary of Significant Accounting Policies” of the notes to our audited consolidated
financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Share‑based compensation expense
Prior to our IPO, we were a privately held company with no active public market for our Class A units. Therefore, our
management had estimated the fair value of our Class A units at various dates considering our most recently available third‑party
valuations of Class A units and management’s assessment of additional objective and highly subjective factors that it believed were
relevant. The consummation of our IPO on August 1, 2016 established a public trading market for shares of our common stock;
therefore it is no longer necessary for management to estimate the fair value of our equity in connection with our accounting for
granted stock options. In the absence of a public trading market for shares of our common stock, we applied the fair value
recognition provisions of FASB ASC Topic 718, “Compensation—Stock Compensation.” ASC 718 requires all unit‑based
payments to employees and directors, including unit option grants and modifications to existing unit options, to be recognized in
the statements of operations based on their fair values. We recognize compensation expense over the period during which the
recipient renders the required services using the straight‑line, single option method.
In the fourth quarter of 2016, we adopted ASU 2016‑09, “Compensation—Stock Compensation.” ASU 2016-09 requires
that certain amendments relevant to us be applied using a modified-retrospective transition method by means of a cumulative-
effect adjustment to accumulated deficit as of the beginning of the period in which the guidance is adopted. As a result of adopting
ASU 2016-09 during the three months ended December 31, 2016, we adjusted accumulated deficit for amendments related to an
entity-wide accounting policy election to recognize share-based award forfeitures only as they occur rather than estimate a
forfeiture rate. We recorded a $2.0 million charge to accumulated deficit as of January 1, 2016 and an associated credit to
additional paid-in capital for previously unrecognized stock compensation expense as a result of applying this policy election.
Upon the election, we also recorded $0.8 million in additional share-based compensation expense related to the nine months ended
September 30, 2016 in the quarter ended December 31, 2016.
ASU 2016-09 also requires the recognition of the income tax effects of awards in the consolidated statement of operations
when the awards vest or are settled, thus eliminating addition paid-in capital pools. We elected to adopt the amendments related to
the presentation of excess tax benefits on the condensed consolidated statement of cash flows using a prospective transition
method.
As there had been no public market for our Class A units prior to our IPO, the estimated fair value of our Class A units
had been determined contemporaneously by our board of directors utilizing independent third‑party valuations prepared in
accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of
Privately‑Held Company Equity Securities Issued as Compensation, also known as the Practice Aid for financial reporting
purposes. We performed contemporaneous valuations of our Class A units concurrently with the achievement of significant
milestones or with major financing events as of October 31, 2014 ($39.00) and September 30, 2015 ($32.50). In conducting these
valuation analyses, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted,
including:
·
·
·
·
recent equity financings and the related valuations;
industry information such as market size and growth;
market capitalization of comparable companies and the estimated value of transactions such companies have engaged
in; and/or
macroeconomic conditions.
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On July 13, 2016, the compensation committee of our board of directors approved an option award for Dr. Harlan W.
Waksal, increasing the number of options (giving effect to the Corporate Conversion) subject to his original option grant. The
number of shares subject to this option award was equal to the difference between the 769,231 options originally granted to Dr.
Harlan W. Waksal and 5% of our outstanding common equity determined on a fully diluted basis on the IPO date, which amounted
to 1,630,536 options. The effective date of the new option award was the IPO date of July 26, 2016. The exercise price per share of
common stock subject to the new incremental options awarded was equal to the price per share of common stock at the IPO date of
$12.00. The option award is subject to the same vesting schedule applicable to the original option grant such that all options
awarded will vest on August 4, 2017. In consideration for the new option award, Dr. Harlan W. Waksal has committed to perform
an additional year of service through August 4, 2018 in connection with receipt of the additional option shares. In the event Dr.
Harlan W. Waksal voluntarily terminates his employment prior to completion of this additional year of service, Dr. Harlan W.
Waksal shall forfeit 25% of the additional options, or 25% of the aggregate additional option gain associated with the additional
option shares in the event the options are exercised, as applicable. This modification resulted in a $12.4 million charge, of which
the incremental value of the previously vested portion of the awards totaling $8.3 million was expensed during the third quarter of
2016 and the remaining amount of the unvested portion totaling $4.1 million will be recognized over the remaining service period
through August 4, 2018.
The assumptions relating to the valuation of our options granted for the years ended December 31, 2017, 2016 and 2015
are shown below.
Weighted average fair value of grants
Expected volatility
Risk-free interest rate
Expected life
Expected dividend yield
December 31, 2017
$2.44
74.48% - 74.92%
1.87% - 2.22%
5.5 - 6.0 years
0%
Year Ended
December 31, 2016
$7.12
74.98% - 79.35%
1.15% - 2.20%
5.0 - 6.0 years
0%
December 31, 2015
$20.67
77.23% - 93.85%
1.54% - 1.93%
5.2 - 6.0 years
0%
The following table summarizes by grant date the number of shares subject to options granted since January 1, 2015, the
per share exercise price of the options, the fair value of common stock underlying the options on date of grant and the per share
estimated fair value of the options:
Grant Date
January 5, 2015
January 12, 2015
August 1, 2015
December 31, 2015
December 31, 2015
July 26, 2016
December 15, 2016
February 9, 2017
June 29, 2017
December 8, 2017
_________________________
(1)
Number of Shares
Subject to
Options Granted
Per Share
Exercise Price
of Options
Fair Value of
Common Stock
per Share on
Date of
Option Grant
Per Share
Estimated
Fair Value
of Options
8,693 $
193 $
17,437 $
769,231 $
359,379 $
1,630,536 $
3,227,924 $
10,000 $
275,000 $
2,568,000 $
39.00 (1)
39.00
39.00
39.00 (2)
32.50 (3)
12.00
4.66
3.82
4.12
3.64
$
$
$
$
$
$
$
$
$
$
39.00 $
39.00 $
39.00 $
39.00 $
32.50 $
12.00 $
4.66 $
3.82 $
4.12 $
3.64 $
28.99
29.64
28.08
19.83
21.91
7.60
3.06
2.48
2.63
2.42
At the time of the option grants on January 5, 2015, management determined that the fair value of our Class A
membership units of $39.00 per unit calculated in the valuation as of October 31, 2014 reasonably reflected the per unit
fair value of Class A membership units as of the grant date.
(2)
(3)
In December 2014, our board of directors approved an option grant to the Chief Executive Officer when the fair value of
our Class A membership units was $39.00 per unit calculated in the valuation as of October 31, 2014. The option grant
was not issued until December 31, 2015, however, management determined that the exercise price should be the fair value
of our Class A membership units when the grant was approved by our board of directors in December 2014 of $39.00 per
unit.
At the time of the option grants on December 31, 2015, management determined that the fair value of our Class A
membership units of $32.50 per unit calculated in the valuation as of September 30, 2015 reasonably reflected the per unit
fair value of Class A membership units as of the grant date.
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In January 2015, the compensation committee of our board of directors approved the amendments of all outstanding
option awards under the 2011 Equity Incentive Plan with an exercise price above $39.00 per unit to reduce the exercise price of
such options to $39.00 per unit, the estimated fair value of our Class A membership units as of October 31, 2014. The vesting
schedule of such awards was not amended. The amendment to the option awards resulted in a modification charge of $1.1 million,
of which $0.7 million was expensed immediately during the first quarter of 2015 and the remaining amount is being recognized
over the vesting periods of each award, which range from one to two years.
On July 13, 2016, the compensation committee of our board of directors approved the amendment of all outstanding
option awards issued under our 2011 Equity Incentive Plan whereby, effective upon pricing of our IPO, the exercise price (on a
post-Corporate Conversion, post-split basis) was adjusted to equal the price per share of our common stock in the IPO. Options to
purchase an aggregate of approximately 1.6 million shares of our Class A units were modified. The vesting schedule of such
awards was not modified. The modification resulted in a $4.0 million charge, of which the incremental value of the previously
vested portion of the awards totaling $1.8 million was expensed immediately during the third quarter of 2016 and the remaining
$2.2 million will be recognized over the remaining vesting periods of each award. These vesting periods range from one to three
years.
A total of 9,750 units were granted under the LTIP at December 31, 2017 and 2016. The compensation expense for these
awards was recognized upon consummation of our IPO on August 1, 2016 and was recorded as additional paid in capital. No
compensation expense had been recorded prior to this date. We utilized a Monte-Carlo simulation to determine the fair value of the
awards granted under the LTIP of $22.6 million, which was recorded during the third quarter of 2016 as these awards are not
forfeitable. The LTIP is payable upon the fair market value of our common stock exceeding 333% of the $6.00 grant price ($20.00)
per share prior to December 7, 2024. The holders of the LTIP have no right to demand a particular form of payment, and we
reserve the right to make payment in the form of cash or common stock.
We granted 1,040,000 stock appreciation rights to three executive employees on December 8, 2017. No stock appreciation
rights were granted under the 2016 Equity Plan prior to 2017. The weighted-average fair value of the stock appreciation rights
granted to the three executive officers was $2.42 and was estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions: risk-free interest rate of 2.22%, expected term of 6 years, expected volatility of 74.92%,
share price of $3.64, strike price of $3.64 and a dividend rate of 0%.
Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards’ requisite
service period. At December 31, 2017, there was $2.5 million of total unrecognized compensation cost related to stock
appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years.
No stock appreciation rights were exercised during the year ended December 31, 2017.
Recent Accounting Pronouncements
See Note 3 “Summary of Significant Accounting Policies,” of the notes to our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for a summary of recently issued and adopted accounting
pronouncements.
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Results of Operations
Revenues
Net sales
License and other revenue
Total revenue
Cost of sales
Write-down of inventory
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Impairment of intangible asset
Gain on settlement of payable
$
Total operating expenses
Loss from operations
Other expense
Income tax expense (benefit)
Net loss
Deemed dividend on convertible preferred stock and Class E redeemable
convertible units
Net loss attributable to common stockholders
$
$
Comparison of the years ended December 31, 2017 and 2016
Revenues
Years Ended December 31,
2017
2016
2015
(in thousands)
5,257 $
7,007
12,264
1,332
1,654
9,278
40,777
37,057
—
—
77,834
(68,556)
11,339
(121)
(79,774) $
18,514 $
7,541
26,055
3,485
385
22,185
35,840
105,880
—
(4,131)
137,589
(115,404)
93,009
342
(208,755) $
29,299
6,420
35,719
3,731
2,274
29,714
33,558
104,740
31,269
—
169,567
(139,853)
7,232
(3)
(147,082)
1,918
(81,692) $
21,733
(230,488) $
—
(147,082)
Total revenue decreased by 53.3%, or approximately $13.9 million, from $26.1 million in the year ended December 31,
2016 to $12.3 million for the year ended December 31, 2017. The decrease in total revenue was primarily attributable to the
decline in sales of our ribavirin portfolio products. Total revenue includes a $2.0 million milestone payment earned pursuant to a
license agreement entered into with Jinghua to develop products using human monoclonal antibodies for each of the years ended
December 31, 2017 and 2016. We recognized previously deferred revenue from our license and collaboration agreements
amounting to $4.4 million for each of the years ended December 31, 2017 and 2016. Service revenue from our affiliate MeiraGTx
Limited (MeiraGTx) was $0.6 million and $1.0 million during the years ended December 31, 2017 and 2016, respectively.
International product sales represented approximately 26.9% and 8.6% of total product sales for the years ended
December 31, 2017 and 2016, respectively, the majority of which were sales in the Netherlands and Ireland.
Sales from our ribavirin portfolio continued to decline in 2017, from $17.0 million for the year ended December 31, 2016
to $4.2 million for the year ended December 31, 2017 as the treatment landscape for chronic HCV infection has rapidly evolved,
with multiple ribavirin‑free treatment regimens, including novel direct‑acting antivirals, having entered the market and becoming
the new standard of care. As a result, we expect sales of our ribavirin portfolio of products to contribute insignificantly to revenue
in 2018 and beyond.
We recognized revenue of $1.0 million and $0.6 million from sales of tetrabenazine during the years ended December 31,
2017 and 2016, respectively. We recognized revenue of $0.2 million and $0.9 million from sales of valganciclovir during the years
ended December 31, 2017 and 2016, respectively. No meaningful revenue was generated from sales of our other products for the
years ended December 31, 2017, 2016 and 2015.
Cost of sales
Cost of sales was $1.3 million and $3.5 million for the years ended December 31, 2017 and 2016, respectively, which
relates primarily to the sales volume of our ribavirin portfolio of products.
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Write‑down of inventory
We recognized $1.7 million and $0.4 million of inventory write-downs during the years ended December 31, 2017 and
2016, respectively, of our Ribasphere inventory based on our expectation that such inventory will not be sold prior to reaching its
product expiration date.
Research and development expenses
Research and development expenses increased by 14.0%, or approximately $4.9 million, to $40.8 million, including $2.7
million of non-cash items, for the year ended December 31, 2017 from $35.8 million, including $3.0 million of non-cash items, for
the year ended December 31, 2016. The increase in research and development expense was primarily related to direct external
costs of developing our product candidates across multiple projects. For the years ended December 31, 2017 and 2016, we
recognized $7.6 million and $4.8 million, respectively, in development expenses for tesevatinib; $5.5 million and $2.2 million,
respectively, for KD025; $1.0 million and $1.6 million, respectively, for KD034; $6.8 million and $1.4 million, respectively, for
other product candidates; and $19.8 million and $25.8 million, respectively, was related to unallocated internal and external costs
of developing our product candidates across multiple projects.
In June 2016, research and development expenses, and selling, general and administrative expenses were revised to
conform to the current presentation with regard to our method of allocating a portion of facility-related expenses to research and
development expenses to more accurately reflect the effort spent on research and development. We reclassified $2.2 million from
selling, general and administrative expense to research and development expense for the year ended December 31, 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by 65.0%, or approximately $68.9 million, to $37.1 million,
including $11.5 million of non-cash items, for the year ended December 31, 2017 from $105.9 million, including $69.1 million of
non-cash items, for the year ended December 31, 2016. The decrease in selling, general and administrative expenses is primarily
related to a decrease in share-based compensation of $34.6 million, of which $22.0 million is related to the LTIP, $1.8 million is
related to the repricing of employee options, $8.3 million is related to an option grant to our Chief Executive Officer and $2.5
million is related to lower share-based compensation for employee options, as well as, a decrease of $3.0 million in severance
expense primarily related to the separation agreement with Dr. Samuel D. Waksal, salary and salary-related expenses of $5.6
million related to a reduction in headcount, legal expense of $4.1 million primarily related to legal settlements entered into during
2016, amortization of intangible assets of $15.2 million due to the intangible asset being fully amortized at December 31, 2016,
royalty expense of $1.0 million and consulting fees of $3.0 million resulting from the expiration of an advisory agreement entered
into in April 2015.
Gain on settlement of payable
Gain on settlement of payable is primarily related to a gain of $3.9 million resulting from the mutual termination
agreement entered into with Valeant during the first quarter of 2016.
Other expense
The following table provides components of other expense:
Interest expense
Interest expense - beneficial conversion feature
Interest paid-in-kind
Write-off of deferred financing costs and debt discount
Amortization of deferred financing costs and debt discount
Loss on extinguishment of debt
Change in fair value of financial instruments
Loss on equity method investment
Other income
Other expense
81
Years Ended December 31,
2017
2016
(in thousands)
3,720 $
—
—
—
2,242
—
(2,096)
7,599
(126)
11,339 $
3,782
45,915
14,695
3,820
4,422
11,176
(4,380)
13,625
(46)
93,009
$
$
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For the year ended December 31, 2017, other expense consisted primarily of interest expense and other costs related to
our debt of $6.0 million and a loss on equity method investment in MeiraGTx of $7.6 million, partially offset by a change in the
fair value of financial instruments of $2.1 million.
For the year ended December 31, 2016, other expense consisted primarily of interest expense and other costs related to
our debt of $72.6 million, a loss on extinguishment of debt of $11.2 million related to the exchange agreements dated as of June 8,
2016 and a loss on equity method investment in MeiraGTx of $13.6 million, partially offset by a change in the fair value of
financial instruments of $4.4 million.
Income taxes
Historically we were a limited liability company taxed as a C corporation for federal and state tax purposes. On July 26,
2016, we effected the Corporate Conversion whereby we converted from a Delaware limited liability company to a Delaware
corporation pursuant to a statutory conversion. We recorded an income tax benefit of $0.1 million for the year ended December 31,
2017 related to a $0.4 million adjustment to the deferred tax liability, net of $0.3 million of income tax expense related to a $2.0
million milestone payment received from Jinghua. We recorded income tax expense of $0.3 million for the year ended
December 31, 2016, related to a $2.0 million milestone payment received from Jinghua.
Deemed Dividend
We calculated a deemed dividend on the Class E redeemable convertible units of $13.4 million in August 2016, which
equaled a 15% discount to the price per share of our common stock of $12.00 in the IPO upon conversion to common stock at our
IPO due to a beneficial conversion feature. The Class E redeemable convertible units converted into common stock at our IPO
resulting in no Class E redeemable convertible units outstanding at both December 31, 2017 and 2016.
At our IPO, we issued 30,000 shares of convertible preferred stock which accrues dividends at a rate of 5% and converts
into shares of our common stock at a 20% discount to the price per share of our common stock of $12.00 in the IPO. We calculated
a deemed dividend on the convertible preferred stock of $7.5 million in August 2016, which equals the 20% discount to the price
per share of our common stock in the IPO of $12.00, a beneficial conversion feature. We also accrued dividends on the convertible
preferred stock of $1.5 million and $0.6 million for the years ended December 31, 2017 and 2016, respectively. Approximately
$1.4 million of accrued dividends that were payable on June 30, 2017 was added to the stated liquidation preference amount of the
5% convertible preferred stock, which totaled $31.4 million at December 31, 2017.
Comparison of the years ended December 31, 2016 and 2015
Revenues
Total revenue decreased by 26.9%, or approximately $9.6 million, to $26.1 million for the year ended December 31,
2016 from $35.7 million for the year ended December 31, 2015. The decrease was mostly attributable to the decline in sales of our
ribavirin portfolio products. The decrease in total revenue for the year ended December 31, 2016 was partially offset by a $2.0
million milestone payment earned pursuant to a license agreement entered into with Jinghua to develop products using human
monoclonal antibodies. We recognized previously deferred revenue from our license and collaboration agreements amounting to
$4.4 million for each of the years ended December 31, 2016 and 2015, respectively. Service revenue from our affiliate MeiraGTx
Limited (MeiraGTx) was $1.0 million for each of the years ended December 31, 2016 and 2015.
International product sales represented approximately 8.6% and 10.0% of total product sales for the years ended
December 31, 2016 and 2015, respectively, the majority of which were sales in Netherlands and Germany.
Sales from our ribavirin portfolio continued to decline in 2016, from $29.3 million for the year ended December 31, 2015
to $17.0 million for the year ended December 31, 2016. We recognized revenue of $0.6 million from sales of tetrabenazine during
the year ended December 31, 2016. No revenue was generated from sales of tetrabenazine in 2015. We recognized revenue of $0.9
million from sales of valganciclovir during the year ended December 31, 2016. No revenue was generated from sales of
valganciclovir in 2015. No meaningful revenue was generated from sales of our other products for the years ended December 31,
2016 and 2015.
Cost of sales
Cost of sales decreased by 5.4%, or approximately $0.2 million, to $3.5 million for the year ended December 31, 2016
from $3.7 million for the year ended December 31, 2015. The decrease was a direct result of lower sales of our ribavirin portfolio
of products.
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Write‑down of inventory
We recognized $0.4 million and $2.3 million of inventory write‑downs during the years ended December 31, 2016 and
2015, respectively, of our Ribasphere inventory based on our expectation that such inventory will not be sold prior to reaching its
product expiration date.
Research and development expenses
Research and development expenses increased by 6.6%, or approximately $2.2 million, to $35.8 million, including $3.0
million of non-cash items, for the year ended December 31, 2016 from $33.6 million, including $2.2 million of non-cash items, for
the year ended December 31, 2015. The increase in research and development expense was primarily related to unallocated
internal and external costs of developing our product candidates across multiple projects. For the years ended December 31, 2016
and 2015, we recognized $4.8 million and $4.6 million, respectively, in development expenses for tesevatinib; $2.2 million and
$3.0 million, respectively, for KD025; $1.6 million and $1.0 million, respectively, for KD034; $1.4 million and $2.5 million,
respectively, for other product candidates; and $25.8 million and $22.5 million, respectively, was related to unallocated internal
and external costs of developing our product candidates across multiple projects.
In June 2016, research and development expenses, and selling, general and administrative expenses were revised to
conform to the current presentation with regard to our method of allocating a portion of facility-related expenses to research and
development expenses to more accurately reflect the effort spent on research and development. We reclassified $2.2 million
and $3.9 million from selling, general and administrative expense to research and development expense for the years ended
December 31, 2016 and 2015, respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by 1.1%, or approximately $1.2 million, to $105.9 million,
including $69.1 million of non-cash items, for the year ended December 31, 2016 from $104.7 million, including $61.8 million of
non-cash items, for the year ended December 31, 2015. The increase in selling, general and administrative expenses is primarily
related to an increase in share-based compensation of $36.9 million, of which $22.0 million is related to the LTIP, $3.6 million is
related to the repricing of employee options, $9.3 million is related to an option grant to our Chief Executive Officer, and $3.0
million is related to an increase in severance expense primarily related to the separation agreement with Dr. Samuel D. Waksal.
This increase was partially offset by a decrease in salary and salary-related expenses of $3.7 million related to a reduction in
headcount, legal expense of $17.6 million related to legal settlements entered into during 2015, amortization of intangible assets of
$12.2 million due to a change to proportional performance method of amortization starting October 1, 2015, royalty expense of
$1.5 million and consulting fees of $3.0 million resulting from the expiration of an advisory agreement entered into in April 2015.
Impairment loss on intangible asset
In September 2015, we reviewed the estimated useful life of the Ribasphere product rights and determined that the actual
life of the Ribasphere product rights intangible asset was shorter than the estimated useful life used for amortization purposes in
our financial statements due to hepatitis C market conditions. As a result, effective September 30, 2015, we changed the estimate
of the useful life of our Ribasphere product rights intangible asset to 1.25 years to better reflect the estimated period during which
the asset will generate cash flows. We also determined that the estimated fair value of the Ribasphere product rights was impaired
and recorded an impairment loss of $31.3 million in September 2015.
Gain on settlement of payable
Gain on settlement of payable is primarily related to a gain of $3.9 million resulting from the mutual termination
agreement entered into with Valeant during the first quarter of 2016.
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Other expense
The following table provides components of other expense:
Interest expense
Interest expense - beneficial conversion feature
Interest paid-in-kind
Write-off of deferred financing costs and debt discount
Amortization of deferred financing costs and debt discount
Loss on extinguishment of debt
Change in fair value of financial instruments
Gain on deconsolidation of subsidiary
Loss on equity method investment
Other income
Other expense
Years Ended December 31,
2016
2015
(in thousands)
3,782 $
45,915
14,695
3,820
4,422
11,176
(4,380)
—
13,625
(46)
93,009 $
7,817
—
11,434
2,752
5,157
2,934
(1,494)
(24,000)
2,776
(144)
7,232
$
$
For the year ended December 31, 2016, other expense consisted primarily of interest expense and other costs related to
our debt of $72.6 million, a loss on extinguishment of debt of $11.2 million related to the exchange agreements dated as of June 8,
2016, loss on equity method investment in MeiraGTx of $13.6 million and a change in the fair value of financial instruments of
$4.4 million.
For the year ended December 31, 2015, other expense consisted primarily of interest expense and other costs related to
our debt of $27.2 million, a loss on extinguishment of debt of $2.9 million related to an amendment to our Senior Convertible
Term Loan and a loss on equity method investment in MeiraGTx of $2.8 million, partially offset by a $24.0 million gain
recognized upon the deconsolidation of MeiraGTx and a change in the fair value of financial instruments of $1.5 million.
Income taxes
Historically we were a limited liability company taxed as a C corporation for federal and state tax purposes. On July 26,
2016, we effected the Corporate Conversion whereby we converted from a Delaware limited liability company to a Delaware
corporation pursuant to a statutory conversion. For the year ended December 31, 2016, we recorded income tax expense of $0.3
million related to the $2.0 million milestone payment received from Jinghua. No income tax expense was recorded for the year
ended December 31, 2015.
Deemed Dividend
We calculated a deemed dividend on the Class E redeemable convertible units of $13.4 million in August 2016, which
equaled a 15% discount to the price per share of our common stock of $12.00 in the IPO upon conversion to common stock at our
IPO due to a beneficial conversion feature. The Class E redeemable convertible units converted into common stock at our
IPO resulting in no Class E redeemable convertible units outstanding at December 31, 2016.
At our IPO, we issued 30,000 shares of convertible preferred stock which accrues dividends at a rate of 5% and converts
into shares of our common stock at a 20% discount to the price per share of our common stock of $12.00 in the IPO. We calculated
a deemed dividend on the convertible preferred stock of $7.5 million in August 2016, which equals the 20% discount to the price
per share of our common stock in the IPO of $12.00, a beneficial conversion feature. We also accrued dividends on the convertible
preferred stock of $0.6 million for the year ended December 31, 2016.
Non-GAAP Financial Measures
To supplement our financial results determined in accordance with GAAP, we have also disclosed in the tables below
non-GAAP adjusted earnings and non-GAAP adjusted earnings per share for the years ended December 31, 2017, 2016 and 2015.
These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.
These non-GAAP financial measures exclude beneficial conversion features and deemed dividends recorded in connection with
our IPO and Corporate Conversion (comprehensively Adjustment Items). In addition, from time to time in the future there may be
other items that we may exclude for the purposes of our non-GAAP financial measures; likewise, we may in the future cease to
exclude items that we have historically excluded for the purpose of our non-GAAP financial measures. We believe that these non-
GAAP financial measures provide meaningful supplemental information regarding our operating
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results because they exclude amounts that management and the board of directors do not consider part of core operating results or
that are non-recurring when assessing the performance of the organization. We believe that inclusion of these non-GAAP financial
measures provides consistency and comparability with past reports of financial results and provides consistency in calculations by
outside analysts reviewing our results. Accordingly, we believe these non-GAAP financial measures are useful to investors in
allowing for greater transparency of supplemental information used by management.
We believe that non-GAAP financial measures are helpful in understanding our past financial performance and potential
future results, but there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial
measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be
completely comparable to similarly titled measures of other companies due to potential differences in the exact method of
calculation between companies. Adjustment items that are excluded from our non-GAAP financial measures can have a material
impact on net earnings. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation
from, or as a substitute for, net loss and its components, earnings per share, or other measures of performance prepared in
accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to
GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial
measure. Investors are encouraged to review the reconciliations of the non-GAAP financial measures to their most comparable
GAAP financial measures that are included elsewhere in this Annual Report on Form 10‑K.
Reconciliation of GAAP net loss to non-GAAP adjusted earnings are as follows (in thousands, except per share amounts):
Reported GAAP net loss attributable to common stockholders
Interest expense - beneficial conversion feature (1)
Deemed dividends (2)
Non-GAAP adjusted net loss attributable to common stockholders
Reported GAAP basic and diluted net loss per share of common stock
Impact of Adjustment Items
Non-GAAP adjusted basic and diluted net loss per share of common stock
Weighted average basic and diluted shares of common stock outstanding
Year Ended December 31,
2017
2016
(unaudited)
(81,692) $
—
—
(81,692) $
(230,488) $
45,915
20,931
(163,642) $
(1.42) $
—
(1.42) $
(9.74) $
2.82
(6.92) $
57,405,331
23,674,512
$
$
$
$
2015
(147,082)
—
—
(147,082)
(18.10)
—
(18.10)
8,127,781
(1)
(2)
To exclude the beneficial conversion feature of our debt upon conversion into shares of our common stock on August 1,
2016. This adjustment also includes the beneficial conversion feature of certain outstanding warrants which became
exercisable into shares of our common stock on August 1, 2016 (see Note 8, “Financial Instruments,” of the notes to our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
To exclude the beneficial conversion feature of our Series E redeemable convertible units upon conversion into shares of
our common stock on August 1, 2016 and our convertible preferred stock which converts into shares of our common stock
at a 20% discount to the IPO price of $12.00 per share (see Note 4, “Stockholders’ Equity (Deficit),” of the notes to our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
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Liquidity and Capital Resources
Overview
Since inception, we have incurred operating losses and anticipate that we will continue to incur operating losses for the
next several years. We expect that our research and development and selling, general and administrative expenses will continue to
increase as we develop our product candidates. As a result, we will need additional capital to fund our operations, which we may
raise through a combination of equity offerings, debt financings, other third‑party funding, marketing and distribution
arrangements and other collaborations, strategic alliances and licensing arrangements. As set forth in the 2015 Credit Agreement,
which matures on June 17, 2018, we are required to comply with certain financial covenants and to satisfy a clinical development
milestone by December 31, 2017. The clinical development milestone was deemed satisfied in a letter agreement entered into on
December 22, 2017 with a majority of lenders under our 2015 Credit Agreement. The 2015 Credit Agreement also required us to
raise $17.0 million of capital by December 31, 2017 (the amount remaining under a covenant to raise $40.0 million following
previous rounds of financing), which was satisfied in September 2017. At December 31, 2017, we had $67.5 million in cash and
cash equivalents and $2.1 million in restricted cash pursuant to leases for our facilities located in New York, New York, and
Cambridge, Massachusetts. Our existing cash is expected to continue to enable us to advance our planned Phase 2 clinical studies
for KD025 and tesevatinib and advance certain of our other pipeline product candidates.
Going Concern
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate our
continuation as a going concern. We have not established a source of revenues sufficient to cover our operating costs, and as such,
have been dependent on funding operations through the issuance of debt and sale of equity securities. We expect to incur further
losses over the next several years as we develop our business. Further, at December 31, 2017, we had working capital of $13.4
million. Our accumulated deficit amounted to $237.4 million and $155.7 million at December 31, 2017 and 2016, respectively. Net
cash used in operating activities was $64.1 million, $53.0 million and $61.0 million for the years ended December 31, 2017, 2016
and 2015.
We anticipate that we will need to raise additional capital to fund our continued operations. We may not be successful in
our efforts to raise additional funds or achieve profitable operations. Amounts raised will be used for further development of our
product candidates, to provide financing for marketing and promotion, to secure additional property and equipment, and for other
working capital purposes. Even if we are able to raise additional funds through the sale of our equity securities, or loans from
financial institutions, our cash needs could be greater than anticipated in which case we could be forced to raise additional capital.
In September 2017, we raised $80.4 million in gross proceeds, $75.1 million net of $5.3 million in underwriting fees,
commissions and other offering costs and expenses, from the issuance of 26,775,000 shares of common stock and warrants to
purchase 10,710,000 shares of common stock at an initial exercise price of $3.35 per share for a term of 5 years from the date of
issuance at a combined price of $3.001 per share and accompanying warrant. Gross proceeds of $66.8 million closed in September
2017 and the remaining $13.6 million of gross proceeds closed in October 2017. In March 2017, we raised $22.7 million in gross
proceeds, $20.9 million net of placement agent fees and other offering costs and expenses, from the issuance of 6,767,855 shares
of our common stock, at a price of $3.36 per share, and warrants to purchase 2,707,138 shares of our common stock at an initial
exercise price of $4.50 per share and a term of 13 months from the date of issuance. In connection with the offering, we had agreed
to file a registration statement to register the shares of common stock and the shares of common stock underlying the warrants for
resale. Under the agreement, the registration statement had to be filed within 30 days of the closing of the financing and declared
effective within the timeline provided in the agreement. If the applicable deadlines were not met, monthly liquidated damages of
2.0% of the subscription amount (with an 8.0% cap) were due to the purchaser. The registration statement was filed on April 10,
2017 and declared effective on April 21, 2017.
At the present time, we have no commitments for any additional financing, and there can be no assurance that, if needed,
additional capital will be available to us on commercially acceptable terms or at all. If we cannot obtain the needed capital, we may
not be able to become profitable and may have to curtail or cease our operations. These and other factors raise substantial doubt
about our ability to continue as a going concern. The Independent Registered Public Accounting Firm’s Report issued in
connection with our audited consolidated financial statements for the year ended December 31, 2017 stated that there is
“substantial doubt about our ability to continue as a going concern.” The accompanying financial statements do not include any
adjustments or classifications that may result from the possible inability of us to continue as a going concern.
Sources of Liquidity
Since our inception through December 31, 2017, we have raised net proceeds from the issuance of equity and debt.
At December 31, 2017, we had $34.6 million of outstanding loans under the 2015 Credit Agreement. The Senior Convertible
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Term Loan and Second‑Lien Convert were mandatorily converted into shares of our common stock at a conversion price equal to
80% of the IPO price per share of common stock in our IPO, or $9.60 per share.
Pursuant to the Third Amendment, principal payments owed under the 2015 Credit Agreement, in the amount of $380,000
per month, were deferred until January 31, 2018. Additionally, the parties amended a future capital raising covenant by extending
the time period by which we were required to raise the remaining $17.0 million of capital by six months, from June 30, 2017 to
December 31, 2017, which was achieved in September 2017. The warrants issued under the 2015 Credit Agreement were amended
so that the exercise price was reduced from $10.20 per warrant to $4.50 per warrant and the cashless exercise feature of the warrant
was removed in its entirety requiring the holder to pay cash to exercise the warrant. All other material terms of the 2015 Credit
Agreement, including the maturity date, remain the same. As of the date hereof, we are not in default under the terms of the 2015
Credit Agreement. See Note 7, “Debt” of the notes to our audited consolidated financial statements included in this Annual Report
on Form 10-K for more information.
The following table sets forth the primary sources and uses of cash and cash equivalents for each period set forth below:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Operating Activities
2017
Year Ended
December 31,
2016
(in thousands)
2015
$
$
(64,098) $
(479)
96,001
31,424 $
(52,950) $
(539)
68,084
14,595 $
(60,977)
(161)
61,645
507
The net cash used in operating activities was $64.1 million for the year ended December 31, 2017, and consisted primarily
of a net loss of $79.8 million adjusted for $23.2 million in non‑cash items, including depreciation and amortization of fixed assets
of $1.8 million, write-down of inventory of $1.7 million, amortization of deferred financing costs, debt discount, and debt
premium of $2.2 million, loss on equity method investment of $7.6 million and share‑based compensation expense of
$12.4 million, as well as, a net decrease in operating assets and liabilities of $7.5 million. The net loss, adjusted for non‑cash items,
was primarily driven by selling, general and administrative expenses of $25.6 million, research and development expense related to
the advancement of our clinical product candidates of $38.1 million and interest paid on our debt of $3.7 million, partially offset by
the net sales less cost of sales primarily from our ribavirin portfolio of products of $3.9 million and milestone revenue from our
license agreement with Jinghua amounting to $2.0 million.
The net cash used in operating activities was $53.0 million for the year ended December 31, 2016, and consisted primarily
of a net loss of $208.8 million adjusted for $157.2 million in non‑cash items, including the amortization of intangible assets of
$15.2 million, depreciation and amortization of fixed assets of $2.3 million, amortization and write-off of deferred financing costs
and debt discount of $8.2 million, loss on extinguishment of debt of $11.2 million, fair value of units issued to third parties to settle
obligations of $7.4 million, gain on settlement of payables of $4.1 million, paid‑in‑kind interest expense of $14.7 million, loss on
equity method investment of $13.6 million, beneficial conversion feature expense on convertible debt and warrants of $45.9
million and share‑based compensation expense of $47.2 million, as well as a net decrease in operating assets and liabilities of
$1.8 million. The net loss, adjusted for non‑cash items, was primarily driven by selling, general and administrative expenses of
$36.8 million, research and development expense related to the advancement of our clinical product candidates of $32.8 million
and interest paid on our debt of $3.7 million partially offset by the net sales less cost of sales primarily from our ribavirin portfolio
of products of $15.0 million and milestone revenue from our license agreement with Jinghua amounting to $2.0 million.
The net cash used in operating activities was $61.0 million for the year ended December 31, 2015, and consisted primarily
of a net loss of $147.1 million adjusted for $96.3 million in non‑cash items, including the amortization and impairment of
intangible assets of $58.7 million, depreciation of $2.3 million, amortization and write-off of deferred financing costs and debt
discount of $7.9 million, gain on deconsolidation of subsidiary of $24.0 million, fair value of units issued to third parties to settle
obligations of $13.6 million, accrued legal settlement of $10.4 million, loss on extinguishment of debt of $2.9 million, paid‑in‑kind
interest expense of $11.4 million and share‑based compensation expense of $10.3 million, as well as a net decrease in operating
assets and liabilities of $10.5 million. The net loss, adjusted for non‑cash items, was primarily driven by selling, general and
administrative expenses of $42.9 million, research and development expense related to the advancement of our clinical product
candidates of $31.4 million and interest paid on our debt of $8.0 million partially offset by the net sales less cost of sales of our
ribavirin portfolio of products of $25.6 million.
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Investing Activities
Net cash used in investing activities was $0.5 million for both the years ended December 31, 2017 and 2016 consisting of
costs related to leasehold improvements at our clinical office in Cambridge, Massachusetts and the purchase of property and
equipment, primarily related to in‑house software purchased to support our internal clinical data management group. Net cash used
in investing activities was $0.2 million for the year ended December 31, 2015 consisting of costs related to the purchase of
property and equipment, primarily related to in‑house software purchased to support our internal clinical data management group.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017 was $96.0 million, consisting primarily
of proceeds from the issuance of common stock and warrants to purchase common stock in our public offering of $75.1 million,
net of underwriting fees, commissions and other offering costs and expenses and proceeds from the issuance of common stock and
warrants to purchase common stock in our private placement of $20.9 million, net of placement agent fees and other offering costs
and expenses.
Net cash provided by financing activities for the year ended December 31, 2016 was $68.1 million, consisting primarily
of proceeds from the issuance of common stock in our IPO of $69.8 million, net of underwriting discounts and commissions, and
net proceeds from the issuance of Class E redeemable convertible units of $5.5 million, partially offset by payment of offerings
costs of $3.3 million and repayment of the related party loan of $3.0 million.
Net cash provided by financing activities for the year ended December 31, 2015 was $61.6 million, consisting of proceeds
from the issuance of secured term debt of $35.0 million, proceeds from the issuance of convertible debt of $112.5 million, net
proceeds from the issuance of Class A membership units of $15.0 million and net proceeds from the issuance of Class E
redeemable convertible units of $10.8 million, partially offset by the repayment of senior secured term debt of $107.2 million and
payment of financing costs of $4.1 million.
Future Funding Requirements
We expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as
we continue research and development, continue and initiate clinical trials and seek regulatory approvals for our product
candidates. In anticipation of regulatory approval for any of our product candidates, we expect to incur significant
pre‑commercialization expenses related to product sales, marketing, distribution and manufacturing.
The expected use of our cash and cash equivalents at December 31, 2017 represents our intentions based upon our current
plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and
timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our
development, the status of, and results from, clinical trials, the potential need to conduct additional clinical trials to obtain approval
of our product candidates for all intended indications, as well as any additional collaborations that we may enter into with third
parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the
allocation of our existing cash and cash equivalents. In addition, we anticipate the need to raise additional funds from the issuance
of additional equity, and our management will retain broad discretion over the allocation of those funds as well.
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2017:
Secured term debt
Interest expense(1)
Operating leases(2)
Total(3)
_________________________
Payments due by period (in thousands)
Total
34,620 $
1,653
33,463
69,736 $
$
$
Less than
1 year
34,620 $
1,653
4,579
40,852 $
1 - 3 years
3 - 5 years
— $
—
8,566
8,566 $
— $
—
8,434
8,434 $
More than
5 years
—
—
11,884
11,884
(1)
(2)
(3)
Interest expense reflects our obligation to make cash interest payments in connection with our 2015 Credit Agreement at a
rate of 10.375%.
Operating lease obligations primarily reflect our obligation to make payments in connection with leases for our corporate
headquarters and commercial headquarters distribution center.
This table does not include: (a) milestone payments totaling $400.4 million which may become payable to third parties
under license agreements as the timing and likelihood of such payments are not known with certainty; (b) any royalty
payments to third parties as the amounts, timing and likelihood of such payments are not known with certainty; and
(c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period
presented above.
Off‑balance Sheet Arrangements
During the periods presented we did not have, and we do not currently have, any off‑balance sheet arrangements, as
defined under the SEC rules.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk and changes in interest rates. As of December 31, 2017, we had cash and cash equivalents
of $67.5 million, consisting of cash and money market accounts. Due to the short‑term duration of our investment portfolio, an
immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.
As of December 31, 2017, we had total debt payable of $33.7 million, which is variable-rate debt. Based on our
variable‑rate debt outstanding as of December 31, 2017, a 100 basis point change versus the market interest rates available on
December 31, 2017 would result in an additional $0.2 million of interest expense through maturity of our variable-rate debt in June
2018.
Customer Concentrations
Sales to AbbVie accounted for approximately 21%, 27% and 11% of our aggregate net sales for the years ended
December 31, 2017, 2016 and 2015, respectively. Sales to Richmond Pharmaceuticals, Inc. accounted for approximately 8%, 14%
and 20% of our aggregate net sales for the years ended December 31, 2017, 2016 and 2015, respectively. Net accounts receivable
from these customers totaled $0.1 million at each of the years ended December 31, 2017 and 2016.
Supplier Concentrations
We may be exposed to supplier concentration risk. Due to requirements of the FDA and other factors, we are generally
unable to make immediate changes to our supplier arrangements. Manufacturing services related to each of our pharmaceutical
products are primarily provided by a single source. Our raw materials are also provided by a single source for each product.
Management attempts to mitigate this risk through long‑term contracts and inventory safety stock.
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Item 8. Financial Statements and Supplementary Data
Our financial statements, together with the report of our independent registered public accounting firm, appear beginning
on page 116 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our
management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required
disclosure.
At December 31, 2017, our management, with the participation of our principal executive officer and principal financial
officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended). Our management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer
and principal financial officer have concluded based upon the evaluation described above that, at December 31, 2017, our
disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed by, or
under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that:
·
·
·
Pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the transactions and
dispositions of the assets of our company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurances regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material adverse effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2017 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO 2013. Based on our evaluation under the criteria set forth in
Internal Control - Integrated Framework issued by the COSO, our management concluded our internal control over financial
reporting was effective as of December 31, 2017.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting
firm due to an exemption established by the JOBS Act for "emerging growth companies.”
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Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
PART III
The following table sets forth the name, age as of March 2, 2018 and position of the individuals who currently serve as
the directors and executive officers of Kadmon Holdings, Inc. The following also includes certain information regarding our
directors’ and officers’ individual experience, qualifications, attributes and skills and brief statements of those aspects of our
directors’ backgrounds that led us to conclude that they are qualified to serve as directors. Each executive officer shall serve until
his or her successor is elected and qualified.
Name
Executive Officers
Harlan W. Waksal, M.D.
Konstantin Poukalov
Steven N. Gordon, Esq.
John Ryan, M.D., Ph.D.
Directors
Bart M. Schwartz, Esq. (3)(4)
Eugene Bauer, M.D. (1)(2)(4)
D. Dixon Boardman (1)(2)(3)(4)
Alexandria Forbes, Ph.D.
Tasos G. Konidaris (1)
Steven Meehan (1)
Thomas E. Shenk, Ph.D. (4)
Susan Wiviott, J.D. (2)(3)(4)
Age
64
34
50
74
71
75
72
53
51
53
71
60
Position
President, Chief Executive Officer and Director
Executive Vice President, Chief Financial Officer
Executive Vice President, General Counsel, Chief Administrative,
Compliance and Legal Officer
Executive Vice President, Chief Medical Officer
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Member of the nominating and corporate governance committee
(4) Member of the regulatory and compliance committee
Executive Officers
Harlan W. Waksal, M.D. Dr. Waksal has been our President and Chief Executive Officer since August 2014 and was
elected to our board of directors in 2013. Prior to joining Kadmon as an employee, Dr. Waksal served as President and Sole
Proprietor of Waksal Consulting LLC from 2003 to 2014. From 2011 to 2014, Dr. Waksal served as Executive Vice President,
Business and Scientific Affairs at Acasti Pharma, Inc., a publicly traded biopharmaceutical company, and as a consultant to
Neptune Technologies & Bioressources, Inc., a publicly traded life sciences company and the parent company of Acasti.
Dr. Waksal co‑founded ImClone Systems (ImClone) in 1987, a publicly traded biopharmaceutical company acquired by Eli Lilly
and Company in 2008. Dr. Waksal served in senior roles at ImClone, including: President (1987 to 1994); Executive Vice President
and Chief Operating Officer (1994 to 2002); and President, Chief Executive Officer and Chief Operating Officer (2002 to 2003).
Dr. Waksal also served as a Director of ImClone from 1987 to 2005. Dr. Waksal served on the boards of Oberlin College and
Sevion Therapeutics through March 2016 and the boards of Acasti and Neptune through February 2016 and July 2015,
respectively. Dr. Waksal received his B.A. from Oberlin College and his M.D. from Tufts University School of Medicine. He
completed his training in internal medicine at New England Medical Center and in pathology at Kings County Hospital Center in
Brooklyn.
Konstantin Poukalov. Mr. Poukalov has been our Executive Vice President, Chief Financial Officer since 2014. From
2012 to 2014, Mr. Poukalov served as our Vice President, Strategic Operations. Prior to joining Kadmon, Mr. Poukalov was a
member of the healthcare investment banking group at Jefferies LLC from 2009 to 2012, focusing on companies across the
life‑sciences and biotechnology sectors. Prior to Jefferies, Mr. Poukalov was a member of UBS Investment Bank, focusing on the
healthcare industry, from 2006 to 2009. Mr. Poukalov serves on the advisory board of Pencils of Promise, a non-profit organization
that aims to increase access to quality education in the developing world. Mr. Poukalov received his bachelor’s degree in electrical
engineering from Stony Brook University.
Steven N. Gordon, Esq. Mr. Gordon, a co‑founder of our company, has been our Executive Vice President, General
Counsel, Chief Administrative, Compliance and Legal Officer since 2009. Prior to joining Kadmon, Mr. Gordon worked as a
prosecutor for the City of New York from 1992 to 1996. From 1997 to 2008, Mr. Gordon practiced law at several law firms and
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was the principal of his own law firm. Mr. Gordon received his B.A. from Bar Ilan University and his J.D. from Touro College
Jacob D. Fuchsberg Law Center.
John Ryan, M.D., Ph.D. Dr. Ryan has been our Executive Vice President, Chief Medical Officer since 2011. Prior to
joining Kadmon, Dr. Ryan served as Senior Vice President and Chief Medical Officer of Cerulean Pharma, Inc., a publicly traded
pharmaceutical company, from 2009 to 2011. Prior to joining Cerulean, Dr. Ryan was Chief Medical Officer at Aveo
Pharmaceuticals, Inc., a publicly traded company, from 2006 to 2009. Prior to joining Aveo, Dr. Ryan served as Senior Vice
President of Translational Research at Wyeth, a publicly‑traded specialty‑pharmaceutical company (formerly Genetics Institute),
where he served as head of the Department of Experimental Medicine, from 1995 to 2006. Dr. Ryan also served as an Executive
Director of Clinical Research at Merck Research Laboratories from 1989 to 1995 and he previously served on the scientific
advisory boards of ArQule, Inc. and Expression Analysis, Inc. Dr. Ryan received his B.S. and his Ph.D. from Yale University.
Dr. Ryan received his M.D. from the University of California, San Diego.
Non‑Employee Directors
Bart M. Schwartz, Esq. Mr. Schwartz has served as Chairman of our board of directors since 2015. Since 2010,
Mr. Schwartz has served as Chairman and Chief Executive Officer of SolutionPoint International, Inc., the parent company of
Guidepost Solutions, LLC, a global investigation, security consulting, compliance and monitoring firm where he also serves as
Chairman. Mr. Schwartz serves on the board of HMS Holdings Corp., a publicly traded company where he is Chair of its
Compliance Committee and a member of its Audit Committee. He also serves on the boards of the Police Athletic League and the
Stuyvesant High School Alumni Association. Mr. Schwartz is Founder and former Chief Executive Officer of Decision Strategies,
an investigative, compliance and security firm. In October 2015, Mr. Schwartz was appointed independent monitor by the U.S.
Department of Justice to oversee General Motors’ compliance with its deferred prosecution agreement from its recall of defective
ignition switches. Mr. Schwartz served under U.S. Attorney Rudolph Giuliani as the Chief of the Criminal Division in the Southern
District of New York. Mr. Schwartz has had numerous additional court and other appointments to monitor the conduct of
corporations and has received assignments from or with the approval of the SEC, the U.S. Commodity Futures Trading
Commission, the U.S. Attorney’s Office for the Southern District of New York, the Manhattan District Attorney’s Office, the
Attorney General of California, the Attorney General of New York, the New York Organized Crime Task Force, the New York
City School Construction Authority and the New York State Department of Environmental Conservation. Mr. Schwartz received
his B.S. from the University of Pittsburgh and his J.D. from New York University School of Law.
We believe Mr. Schwartz’s extensive legal and compliance experience provides him with the qualifications and skills to
serve on our board of directors.
Eugene Bauer, M.D. Dr. Bauer has served as a member of our board of directors since 2010. In 2010, Dr. Bauer
co‑founded Dermira, a publicly traded specialty biopharmaceutical company, where he serves as Director and Chief Medical
Officer. Prior to founding Dermira, Dr. Bauer served as Director, President and Chief Medical Officer of Pelpin, Inc., a publicly
traded specialty pharmaceutical company, from 2008 to 2009. Dr. Bauer served as Chief Executive Officer of Neosil, Inc., a
specialty pharmaceutical company, from 2006 to 2008, and he co‑founded and served as a member of the board of directors at
Connetics, a publicly traded specialty pharmaceutical company, from 1990 to 2006. Prior to initiating his career in industry,
Dr. Bauer served as Dean of Stanford University School of Medicine and as Chair of the Department of Dermatology at Stanford
University School of Medicine from 1995 to 2001. Dr. Bauer is the Professor Emeritus at Stanford University School of Medicine,
a position he has held since 2002. Dr. Bauer was a U.S. National Institutes of Health (NIH)‑funded investigator for 25 years and
has served on review groups and Councils for the NIH. Dr. Bauer currently serves as a board member for Aevi Genomics
Medicine, Inc. and First Wave Technologies. He is member of numerous honorific societies, including the National Academy of
Medicine. Dr. Bauer received his B.S. from Northwestern University and his M.D. from Northwestern University Medical School.
We believe Dr. Bauer’s background of service on the boards of directors of numerous public pharmaceutical companies
and his vast industry experience provides him with the qualifications and skills to serve on our board of directors.
D. Dixon Boardman. Mr. Boardman has served as a member of our board of directors since 2010. Mr. Boardman
founded Optima Fund Management LLC, an alternative investment firm, in 1988 and currently serves as its Chief Executive
Officer. Mr. Boardman is a member of the President’s Council of Memorial Sloan Kettering Cancer Center, where he has also
served as Chairman of the Special Projects Committee. He is also a member of the Executive Committee of New York
Presbyterian‑Weill Cornell Council. Mr. Boardman is a Director of Florida Crystals Corporation and an Advisory Board Director
of J.C. Bamford Excavators (UK). Mr. Boardman attended McGill University.
We believe Mr. Boardman’s financial and business expertise provides him with the qualifications and skills to serve on
our board of directors.
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Alexandria Forbes, Ph.D. Dr. Forbes has served as a member of our board of directors since 2010. Dr. Forbes has been
President and Chief Executive Officer of MeiraGTx, an affiliate of Kadmon, since 2015. Prior to joining MeiraGTx, Dr. Forbes
served as Senior Vice President of Strategic Operations and Chief Commercial Officer at Kadmon from 2013 to 2015. Dr. Forbes
spent 13 years as a healthcare investor at hedge funds Sivik/Argus Partners and Meadowvale Asset Management. Prior to entering
the hedge fund industry, Dr. Forbes was a Human Frontiers/Howard Hughes postdoctoral fellow at the Skirball Institute of
Biomolecular Medicine at NYU Langone Medical Center. Prior to this, Dr. Forbes was a research fellow at Duke University and
also at Carnegie Institute at Johns Hopkins University. Dr. Forbes received her M.A. from Cambridge University and her Ph.D.
from Oxford University.
We believe Dr. Forbes’ business and financial expertise as well as her scientific background provides her with the
qualifications and skills to serve on our board of directors.
Tasos G. Konidaris. Mr. Konidaris was appointed to our board of directors in February 2017. Mr. Konidaris has served as
Executive Vice President and Chief Financial Officer of Alcresta Therapeutics, Inc. since March 2016 and as a senior advisor of
Athyrium Capital Management, L.P. since September 2015. Prior to that, he was Senior Vice President and Chief Financial Officer
of Ikaria, Inc., a biotherapeutics company, from October 2011 to May 2015. Prior to joining Ikaria, since 2007, Mr. Konidaris
served as Senior Vice President and Chief Financial Officer at Dun & Bradstreet (D&B) Corporation, a leading commercial
information services company. He was Principal Accounting Officer and led the Global Finance Operations of D&B beginning in
2005. From 2003 to 2005, Mr. Konidaris served as Group Vice President of the Global Pharmaceutical and Global Diversified
Products Groups at Schering-Plough Corporation, a pharmaceutical company. Earlier in his career, Mr. Konidaris held senior
financial and operational positions of increasing responsibility at the Pharmacia Corporation, Rhone-Poulenc Rorer, Novartis
Corporation and Bristol-Myers Squibb Company. Mr. Konidaris currently serves on the boards of Zep, Inc. and Alcresta
Therapeutics. Mr. Konidaris served on the board of Pernix Therapeutics Holdings, Inc. from April 2014 to November 2017 and
was a director of Delcath Systems Inc. from July 2012 until December 2014. Mr. Konidaris holds an MBA from Drexel University,
and a B.S. from Gwynedd Mercy College.
We believe Mr. Konidaris’ expertise and financial experience provides him with the qualifications and skills to serve on
our board of directors.
Steven Meehan. Mr. Meehan was appointed to our board of directors in 2017. Mr. Meehan brings to the Board over 25
years of investment banking experience. Mr. Meehan was a Partner in the Healthcare Group of Moelis & Company from 2011
through 2016, leading the effort in Life Sciences and Advanced Diagnostics. Additionally, Mr. Meehan was previously the Head of
Life Sciences within the Global Healthcare Group in the New York office of UBS Investment Bank (UBS). Mr. Meehan was also
part of the team that formed the Healthcare Group at UBS in 1999. During Mr. Meehan’s tenure at UBS, he was Chief Executive
Officer of UBS Russia and CIS across all businesses including securities, banking and wealth management. Mr. Meehan was also a
member of the UBS Group EMEA Management Committee. During his investment banking career, Mr. Meehan also held senior
roles in M&A, leveraged finance and capital markets at Salomon Smith Barney, NatWest Securities and Drexel Burnham Lambert.
Mr. Meehan holds a B.S. in Business Administration/Finance from the University of Massachusetts at Lowell.
We believe Mr. Meehan’s expertise and financial experience provides him with the qualifications and skills to serve on
our board of directors.
Thomas E. Shenk, Ph.D. Dr. Shenk has served as a member of our board of directors since 2014 and he has served as a
member of Kadmon’s Scientific Advisory Board since December 2013. Dr. Shenk has been the James A. Elkins Jr. Professor of
Life Sciences in the Department of Molecular Biology at Princeton University since 1984. Dr. Shenk is a fellow of the American
Academy of Arts and Sciences and a member of the U.S. National Academy of Sciences and the National Academy of Medicine.
Dr. Shenk serves as the Chairman of the Board of MeiraGTx, an affiliate of Kadmon. He is a past president of the American
Society for Virology and the American Society for Microbiology and served on the board of Merck and Company from 2001 to
2012. Dr. Shenk currently serves as a board member of the Hepatitis B Foundation. Dr. Shenk received his B.S. from the
University of Detroit and his Ph.D. from Rutgers University.
We believe Dr. Shenk’s expertise and experience serving as a director in the pharmaceutical sector and his academic
background provides him with the qualifications and skills to serve on our board of directors.
Susan Wiviott, J.D. Ms. Wiviott has served as a member of our board of directors since 2010. Ms. Wiviott has served as
the Chief Executive Officer of The Bridge, a non‑profit behavioral health treatment and housing agency in New York, since 2014.
Prior to joining The Bridge, Ms. Wiviott served as Chief Program Officer at Palladia Inc., a not‑for‑profit housing and substance
abuse treatment provider, from 2012 through 2014. From 1999 through 2012, Ms. Wiviott served as Deputy Executive Vice
President of the Jewish Board of Family and Children’s Services. Ms. Wiviott began her career as an associate at Sidley
Austin LLP. Ms. Wiviott received her B.A. from the University of Wisconsin and her J.D. from Harvard Law School.
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We believe Ms. Wiviott’s executive and legal experience provides her with the qualifications and skills to serve on our
board of directors.
How our Board is Organized
Composition of the Board of Directors
Our board of directors currently is authorized to have nine members, with members serving until his or her successor is
elected, or until such director’s earlier death, resignation or removal.
For so long as affiliates of GoldenTree Asset Management LP collectively owned at least 7.5% of our common stock
(calculated on an “as if” converted basis and taking into account the exercise of all other options, warrants and other equity‑linked
securities held by such GoldenTree affiliated entities), GoldenTree Asset Management LP had the right, at its option, to designate
(i) one director to our board of directors and, upon such designation, the board of directors shall recommend to the stockholders to
vote for the election of GoldenTree Asset Management LP’s designee at any meeting of stockholders convened to elect our
directors or (ii) one observer to our board of directors. As of the date of this Annual Report, GoldenTree owned less than 7.5% of
our common stock and had not designated a director or observer to our board of directors.
Director Independence
Prior to the consummation of our IPO, our board of directors undertook a review of the independence of our directors and
considered whether any director has a material relationship with us that could compromise that director’s ability to exercise
independent judgment in carrying out that director’s responsibilities. Our board of directors has determined that each of its
members, other than Drs. Harlan W. Waksal, Thomas E. Shenk and Alexandria Forbes, is an “independent director” as defined
under the NYSE listing standards.
Board Committees
Audit Committee
The audit committee of our board of directors oversees the quality and integrity of our financial statements and other
financial information, accounting and financial reporting processes, internal controls and procedures for financial reporting and
internal audit function. It meets to review our annual audited financial statements and quarterly financial statements with
management and the independent auditor, including a review of the Company’s disclosures under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” It also oversees the audit and other services provided by our
independent auditors and is directly responsible for the appointment, independence, qualifications, compensation and oversight of
the independent auditor. In addition, our audit committee is responsible for reviewing our compliance with legal and regulatory
requirements, and it assists the board of directors in an initial review of recommendations to the board of directors regarding
proposed business transactions.
The current members of our audit committee are Mr. Konidaris, Mr. D. Dixon Boardman, Dr. Eugene Bauer and Mr.
Steven Meehan, with Mr. Konidaris serving as the committee’s chairman. Our board of directors has determined that Mr. Konidaris
is an “audit committee financial expert” as defined by SEC rules and regulations. The composition of our audit committee meets
the requirements for independence under the rules and regulations of the SEC and the listing standards of the NYSE. A copy of the
audit committee’s written charter is publicly available on our website at www.kadmon.com.
Compensation Committee
The compensation committee of our board of directors reviews and determines the compensation of all of our executive
officers and establishes our compensation policies and programs. Specific responsibilities of our compensation committee will
include, among other things, evaluating the performance of our chief executive officer and determining our chief executive
officer’s compensation. It also determines the compensation of our other executive officers. In addition, our compensation
committee administers all equity compensation plans and has the authority to grant equity awards subject to the terms and
conditions of such equity compensation plans. Our compensation committee also reviews and approves various other
compensation policies and matters. Our compensation committee also reviews and discusses with management the compensation
discussion and analysis that we may be required from time to time to include in SEC filings, and it will prepare a compensation
committee report on executive compensation as may be required from time to time to be included in our annual proxy statements
or annual reports on Form 10‑K filed with the SEC.
The current members of our compensation committee are Mr. D. Dixon Boardman, Dr. Eugene Bauer and Ms. Susan
Wiviott with Mr. Boardman serving as the committee’s chairman. The composition of our compensation committee meets the
requirements for independence under the rules and regulations of the SEC and the listing standards of the NYSE. A copy of the
compensation committee’s written charter is publicly available on our website at www.kadmon.com.
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Nominating and Corporate Governance Committee
The nominating and corporate governance committee of our board of directors oversees the nomination of directors,
including, among other things, identifying, evaluating and making recommendations of nominees to our board of directors, and
evaluates the performance of our board of directors and individual members of our board of directors. When identifying nominees,
the nominating and corporate governance committee considers, among other things, a nominee’s character and integrity, level of
education and business experience, financial literacy and commitment to represent long‑term interests of our equity holders. Our
nominating and corporate governance committee is also responsible for reviewing developments in corporate governance
practices, evaluating the adequacy of our corporate governance practices and making recommendations to our board of directors
concerning corporate governance matters.
The current members of our nominating and corporate governance committee are Mr. D. Dixon Boardman, Mr. Bart M.
Schwartz and Ms. Susan Wiviott with Mr. Schwartz serving as the committee’s chairman. The composition of our nominating and
corporate governance committee meets the requirements for independence under the rules and regulations of the SEC and the
listing standards of the NYSE. A copy of the nominating and corporate governance committee’s written charter is publicly
available on our website at www.kadmon.com.
Regulatory and Compliance Committee
The current members of our regulatory and compliance committee are Dr. Eugene Bauer, Mr. D. Dixon Boardman,
Mr. Bart M. Schwartz, Dr. Thomas E. Shenk and Ms. Susan Wiviott with Mr. Schwartz serving as the committee’s chairman.
The regulatory and compliance committee is responsible for, among other matters:
·
·
·
·
·
·
reviewing and overseeing our compliance program and the compliance program(s) with respect to companies we
acquire and which we exercise a controlling interest;
reviewing the status of our compliance with relevant laws, regulations and internal procedures;
reviewing and evaluating internal reports and external data based on criteria developed by the regulatory and
compliance committee;
discussing, in consultation with the compensation committee, an evaluation of whether compensation practices are
aligned with our compliance obligations;
making written recommendations about whether an employee’s compensation should be reduced or extinguished if
there is a government or regulatory action that has caused significant financial or reputational damage to our
company due to the employee’s involvement in the conduct at issue; and
reporting to the board of directors on the state of our compliance functions, relevant compliances issues, potential
patterns of non‑compliance identified within our company, significant disciplinary actions against any compliance or
internal audit personnel, and any other issues that may reflect any systemic or widespread problems in compliance or
regulatory matters exposing our company to substantial compliance risk.
A copy of the regulatory and compliance committee’s written charter is publicly available on our website at
www.kadmon.com.
Risk Oversight
One of the key functions of our board of directors is informed oversight of our business risk management process. The
board of directors does not have a standing business risk management committee, but rather administers this oversight function
directly through the board of directors as a whole, as well as through various standing committees of our board of directors that
address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and
assessing strategic risk exposure and our audit committee has the responsibility to consider and discuss our major financial risk
exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to
govern the process by which risk assessment and management is undertaken. The nominating and corporate governance committee
monitors compliance with legal and regulatory requirements and the effectiveness of our corporate governance practices, including
whether they are successful in preventing illegal or improper liability‑creating conduct. Our nominating and corporate governance
committee is also responsible for overseeing our risk management efforts generally, including the allocation of risk management
functions among our board of directors and its committees. Our compensation committee assesses and monitors whether any of our
compensation policies and programs has the potential to encourage excessive risk‑taking. Our audit committee periodically
reviews the general process for the oversight of risk management by our board of directors.
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Risk Considerations in Our Compensation Program
We conducted an assessment of our compensation policies and practices for our employees and concluded that these
policies and practices are not reasonably likely to have a material adverse effect on us.
Code of Ethics and Code of Conduct
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions, and third-party consultants. We have posted a current copy of the code on our website,
www.kadmon.com. In addition, we intend to post on our website all disclosures that are required by law or the NYSE listing
standards concerning any amendments to, or waivers from, any provision of the code. The reference to our website does not
constitute incorporation by reference of the information contained at or available through our website.
Item 11. Executive Compensation
DIRECTOR COMPENSATION
The following table sets forth a summary of the compensation we paid to each non-employee member of our board of
directors for the year ended December 31, 2017. Other than as set forth in the table and described more fully below, we did not pay
any compensation to, make any equity awards or non-equity awards to, or pay any other compensation to any of the other non-
employee member of our board of directors in 2017. Dr. Harlan W. Waksal is a member of our board of directors who also serves
as our President and Chief Executive Officer and therefore does not receive any additional compensation for his service as a
director. Dr. Harlan W. Waksal’s compensation as an executive officer is described under “Executive Compensation.”
Name
Bart M. Schwartz, Esq.
Eugene Bauer, M.D.
D. Dixon Boardman
Alexandria Forbes, Ph.D.
Tasos G. Konidaris
Steven Meehan
Thomas E. Shenk, Ph.D.
Susan Wiviott, J.D.
Fees earned or paid in
cash (1)
Option awards (2)
Total
$
83,000 $
57,500
66,500
37,500
44,750
54,000
40,000
53,750
131,266 $
65,633
131,266
65,633
131,266
65,633
65,633
65,633
214,266
123,133
197,766
103,133
176,016
119,633
105,633
119,383
_________________________
(1)
The amounts reported in this column represent the aggregate dollar amount of all fees earned or paid in cash to each non-
employee director in 2017 for their service as a director, including any annual retainer fees, committee and/or chair fees.
(2)
The amounts reported in this column represent the grant date fair value of stock option awards during 2017 calculated in
accordance with the provisions of ASC Topic 718. The valuation assumptions used in determining such amounts are
described in Note 13, “Share-based Compensation,” of the notes to our audited consolidated financial statements
appearing in this Annual Report on Form 10-K.
At December 31, 2017, our non-employee directors as of such date held the following outstanding options (in
the aggregate):
Name
Bart M. Schwartz, Esq.
Eugene Bauer, M.D.
D. Dixon Boardman
Alexandria Forbes, Ph.D.
Tasos G. Konidaris
Steven Meehan
Thomas E. Shenk, Ph.D.
Susan Wiviott, J.D.
97
Shares Subject
to Outstanding
Options
76,668
41,925
73,079
48,079
50,000
25,000
37,308
41,925
Table of Contents
For the year beginning January 1, 2017, we provided our non‑employee directors with compensation for their services on
our board of directors as follows:
·
·
·
·
·
·
each non‑employee director (other than the chairperson of our board or its audit committee) receives an annual, or
pro rata portion thereof (for those directors who serve a portion of the year), option grant to purchase 25,000 shares
of common stock with an exercise price equal to the closing price of our common stock on the date of grant;
each non‑employee director who serves as a chairperson of our board of directors or its audit committee receives an
annual option grant to purchase 50,000 shares of our common stock with an exercise price equal to the closing price
of our common stock on the date of grant;
each non‑employee director receives $5,000 for each board meeting personally attended and $2,500 for each board
meeting attended telephonically;
each non‑employee director who serves as a chairperson of our board receives an additional $2,500 for each board
meeting personally attended and $1,250 for each board meeting attended telephonically;
each non‑employee director who serves as member of a committee of our board of directors receives $2,500 for each
committee meeting personally attended and $1,250 for each committee meeting attended telephonically; and
each non‑employee director who serves as chairperson of a committee of our board of directors receives an additional
$1,000 for each committee meeting personally attended and $500 for each committee meeting attended
telephonically.
The stock options granted to our non‑employee directors have, or will have, an exercise price equal to the fair market
value of our common stock on the date of grant and expire 10 years after the date of grant. The annual stock options granted to our
non‑employee directors will, subject to the director’s continued service on our board, vest one year from the grant date. Stock
options granted to our non‑employee directors will also vest in full upon the occurrence of a change in control of us.
Each member of our board of directors also will continue to be entitled to be reimbursed for reasonable travel and other
expenses incurred in connection with attending meetings of the board of directors and any committee of the board of directors on
which he or she serves.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee is or has been a current or former officer or employee of Kadmon
Holdings, Inc. or had any related person transaction involving Kadmon Holdings, Inc. None of our executive officers serve as a
director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity.
The following section provides compensation information pursuant to the scaled disclosure rules applicable to “emerging
EXECUTIVE COMPENSATION
growth companies” under the rules of the SEC.
Named Executive Officers
This section discusses the material components of the executive compensation program for our named executive officers
who are named in the “2017 Summary Compensation Table” below. Our named executive officers for the year ended
December 31, 2017, which consisted of our principal executive officer and two other most highly‑compensated executives, are:
·
·
·
Harlan W. Waksal, M.D.;
Konstantin Poukalov; and
Steven N. Gordon, Esq.
This discussion may contain forward‑looking statements that are based on our current plans, considerations, expectations
and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially
from the currently planned programs summarized in this discussion. See “Forward‑Looking Statements.”
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Summary Compensation Table
The following table sets forth certain information with respect to the compensation paid to the named executive officers
for the years ended December 31, 2017 and 2016.
Salary
($)
500,000
500,000
400,000
400,000
Bonus
($)(1)
500,000
500,000
200,000
200,000
Option
Awards
($)(2)
1,584,124
12,399,395
495,795
1,084,536
400,000
400,000
200,000
200,000
435,332
774,669
All Other
Compensation
($)(3)
23,575
22,723
34,662
22,819
33,917
32,699
Year
2017
2016
2017
2016
2017
2016
Total ($)
2,607,699
13,422,118
1,130,457
1,707,355
1,069,249
1,407,368
Name and Principal Position
Harlan W. Waksal, M.D.,
President and Chief Executive Officer
Konstantin Poukalov,
Executive Vice President,
Chief Financial Officer
Steven N. Gordon, Esq.,
Executive Vice President,
General Counsel, Chief Administrative,
Compliance and Legal Officer
_________________________
(1)
Bonus includes contractual guaranteed bonus.
(2)
(3)
This column reflects the aggregate fair value of share‑based compensation awarded during the year computed in
accordance with the provisions of ASC Topic 718. See Note 13, “Share-based Compensation,” of the notes to our audited
consolidated financial statements appearing in this Annual Report on Form 10-K regarding assumptions underlying the
valuation of equity awards.
Includes premiums we paid with respect to each of our named executive officers for health benefits and for life and
disability insurance.
Narrative Disclosure to Summary Compensation Table
Employment Agreements
We entered into employment agreements with Dr. Harlan W. Waksal, under which he serves as our President and Chief
Executive Officer, Mr. Poukalov, under which he serves as our Executive Vice President, Chief Financial Officer and Mr. Gordon
under which he serves as our Executive Vice President, General Counsel, Chief Administrative, Compliance and Legal Officer.
Under these agreements, Dr. Harlan W. Waksal and Messrs. Poukalov and Gordon are entitled to certain annual compensation
amounts and are eligible to receive certain severance benefits in specified circumstances.
Pursuant to Dr. Harlan W. Waksal’s employment agreement, he is entitled to a base salary of $500,000 and is guaranteed
to receive an annual bonus of $500,000, plus an additional merit‑based bonus amount as shall be determined by the compensation
committee of our board of directors, in its discretion. Pursuant to the terms of their respective employment agreements,
Messrs. Poukalov and Gordon are each entitled to a base salary of $400,000 and are guaranteed to receive an annual bonus of
$200,000, plus an additional merit‑based bonus amount as shall be determined by the compensation committee of our board of
directors, in its discretion.
We expect that base salaries for the named executive officers will be reviewed periodically by our board of directors
and/or our compensation committee, with adjustments expected to be made generally in accordance with the applicable
employment agreements, as well as financial and other business factors affecting our company, and to maintain a competitive
compensation package for our executive officers.
Potential Payments upon Termination
In the event that we terminate Dr. Harlan W. Waksal or Messrs. Poukalov or Gordon without cause or if any of the
aforementioned resign for good reason, they will be entitled to receive, upon execution and effectiveness of a release of claims,
(i) continued payment of their then‑current base salary and guaranteed annual bonus for a period of 12 months following
termination (or, if sooner, until the executive becomes employed by another entity or individual (and not self‑employed)) and (ii) a
direct payment by us of the medical, vision and dental coverage premiums due to maintain any COBRA coverage for which he is
eligible and has appropriately elected through the earlier of (A) 12 months following termination and (B) the date they become
employed by another entity or individual (and not self‑employed).
In the event that we terminate Dr. Harlan W. Waksal or Messrs. Poukalov or Gordon with cause or they resign without
good reason, then they will not be entitled to receive severance benefits.
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Table of Contents
Annual Performance‑Based Compensation and Bonuses
In 2017, Dr. Harlan W. Waksal and Messrs. Poukalov and Gordon earned a guaranteed bonus of $500,000, $200,000 and
$200,000, respectively.
Long-Term Incentive Awards
In 2014 and 2015, Dr. Harlan W. Waksal, Messrs. Poukalov and Gordon received in aggregate 750, 1,000 and 1,300
equity appreciation rights units (EARs), respectively, under our 2014 Long‑Term Incentive Plan (the “2014 LTIP”) with a base
price of $6.00 per unit, expiring 10 years from the grant date. Each EAR unit award entitles the holder to receive a payment having
an aggregate value equal to the product of (i) the excess of (A) the highest fair market value during the period beginning on the
applicable vesting date and ending on the date of settlement of one EAR unit over (B) the base price, and (ii) the number of EAR
units granted. The number of EAR units granted to each recipient was adjusted in connection with the IPO to a number of units
which equal a certain percentage of our common equity securities determined on a fully diluted basis, assuming exercise of all
derivative securities including any convertible debt instruments. Based on the IPO price of $12.00 per share, the number of shares
underlying EAR units held by Dr. Waksal and Messrs. Poukalov and Gordon are 267,543, 356,724 and 463,741 shares,
respectively, and such awards may be settled in stock or cash.
The EAR units vest upon the earliest of any of the following events: (a) the expiration date of December 16, 2024, subject
to continuing service through December 16, 2024 (or a termination due to death or disability within one year prior to such date),
(b) the date of a Change in Control prior to December 16, 2024, or (c) if and when the fair market value of each EAR unit exceeds
333.0% of the $6.00 grant price ($20.00) per share prior to December 16, 2024.
Stock Option Awards
Each of our named executive officers hold stock options granted prior to the IPO under our 2011 Equity Incentive Plan
(the “2011 Plan”), with an exercise price of $12.00. Dr. Harlan W. Waksal’s initial award was granted in connection with his hiring
in December 2014, and vested in three substantially equal installments on December 31, 2015, August 4, 2016 and August 4, 2017.
Messrs. Poukalov and Gordon were granted stock options in December 2015 with a strike price of $12.00, which vest in three
ratable installments on each anniversary of the grant date through December 31, 2018. In connection with the IPO in July 2016, the
2011 Plan was merged with and into the 2016 Equity Incentive Plan (the “2016 Equity Plan”) and no new awards were granted
under the 2011 Plan.
In connection with the IPO, Dr. Harlan W. Waksal received an award under the 2016 Equity Plan with a strike price of
$12.00 in light of dilution to his grant at hiring in order to increase the number of shares subject to his original option grant at his
time of hire. In consideration for this new stock option award, Dr. Harlan W. Waksal committed to perform an additional year of
service, through August 7, 2018. Following the IPO, Messrs. Poukalov and Gordon were granted stock options in December 2016
under the 2016 Equity Plan with a strike price of $4.66, which vest in three ratable installments on each anniversary of the grant
date through December 31, 2019. Any unvested stock options will vest upon a termination of their service. Upon a change in
control, the compensation committee retains the discretion to accelerate the vesting of outstanding awards.
Stock Appreciation Rights
The compensation committee of our board of directors granted 655,000, 205,000 and 180,000 stock appreciation rights
(“SARs”) under our 2016 Equity Plan to Dr. Harlan W. Waksal and Messrs. Poukalov and Gordon, respectively, on December 8,
2017. Each SAR entitles the holder to receive an amount in cash or common stock equal to the difference between the fair market
value of our common stock on the exercise date and the strike price of $3.64. Each SAR grant vests in three ratable installments on
each anniversary of the grant date through December 8, 2020. Any unvested SARs will be forfeited upon a termination of their
service (other than death or disability). In the event of a change in control, any unvested SARs will immediately vest and become
exercisable.
Outstanding Equity Awards at December 31, 2017
Although we do not have a formal policy with respect to the grant of equity incentive awards to our named executive
officers, or any formal equity ownership guidelines applicable to them, we believe that equity grants provide our executives with a
strong link to our long‑term performance, create an ownership culture and help to align the interests of our executives and our
stockholders. In addition, we believe that equity grants with a time‑based vesting feature promote executive retention because this
feature incentivizes our executives to remain in our employment during the vesting period. Accordingly, our board of directors will
periodically review the equity incentive compensation of our named executive officers and, from time to time, may grant equity
incentive awards to them in the form of stock options, stock appreciation rights or other equity awards.
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The following table sets forth information concerning outstanding equity awards at December 31, 2017 for each of our
named executive officers.
Name
Harlan W. Waksal, M.D.
Konstantin Poukalov
Steven N. Gordon, Esq.
Option/SAR Awards
Stock Awards(1)
Number of
Securities
Underlying
Unexercised
Options/SARs
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options/SARs
Unexercisable
(#)
Option/SAR
Exercise
Price
($/share)
Option/SAR
Expiration
Date
Number of
shares or
units of stock
that have
not vested
(#)
Market value
of shares or
units of stock
that have
not vested
($)
385
769,231
1,426,719
—
—
9,232
—
41,029
116,690
12,308
12,308
—
10,258
83,350
—
$
—
—
203,817 (2)
267,543 (3)
655,000 (6)
—
356,724 (3)
20,510 (4)
233,310 (5)
205,000 (6)
—
—
463,741 (3)
5,127 (4)
250,000 (5)
180,000 (6)
12.00 12/19/2023
12.00 12/31/2024
12.00 12/31/2024
6.00 12/31/2024
3.64
12/8/2027
12.00 12/19/2023
6.00 12/31/2024
12.00 12/31/2025
4.66 12/15/2026
3.64
12/8/2027
12.00
6/25/2022
12.00 12/19/2023
6.00 12/31/2024
12.00 12/31/2025
4.66 12/15/2026
3.64
12/8/2027
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
_________________________
(1)
Based on closing price of our common stock on December 29, 2017 ($3.62 per share).
(2)
(3)
(4)
(5)
(6)
Represents stock options granted under the 2016 Equity Plan that fully vest on August 4, 2018.
Represents EAR units granted under the 2014 LTIP that vest on the earlier of October 31, 2024 or a change in control.
Represents stock options granted under the 2011 Plan that vest in three substantially equal tranches on December 31,
2016, 2017 and 2018.
Represents stock options granted under the 2016 Equity Plan that vest in three substantially equal tranches on
December 15, 2017, 2018 and 2019.
Represents SARs granted under the 2016 Equity Plan that vest in three substantially equal tranches on December 8, 2018,
2019 and 2020.
Equity and Retirement Plans
In this section we describe our 2016 Equity Plan, our 2016 Employee Stock Purchase Plan and our 401(k) Retirement
Plan. Prior to our IPO, we granted awards to eligible participants under the 2011 Equity Plan and 2014 LTIP. Following the closing
of our IPO, we will grant awards to eligible participants under the 2016 Equity Plan.
2016 Equity Incentive Plan
Our 2016 Equity Plan was approved by our board of directors and holders of our membership units in July 2016 and was
subsequently amended and restated on December 5, 2017. It is intended to make available incentives that will assist us to attract,
retain and motivate employees, including officers, consultants and directors. We may provide these incentives through the grant of
stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash‑based
or stock‑based awards.
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A total of 6,720,000 shares of our common stock were initially authorized and reserved for issuance under the 2016
Equity Plan. This reserve automatically increased to 8,523,146 on January 1, 2017 and will automatically increase each subsequent
anniversary through January 1, 2025, by an amount equal to the smaller of (a) 4% of the number of shares of common stock issued
and outstanding on the immediately preceding December 31, or (b) an amount determined by the board. This reserve will be
increased to include any shares issuable upon exercise of options granted under the 2011 Equity Incentive Plan that expire or
terminate without having been exercised in full.
Appropriate adjustments will be made in the number of authorized shares and other numerical limits in the 2016 Equity
Plan and in outstanding awards to prevent dilution or enlargement of participants’ rights in the event of a stock split or other
change in our capital structure. Shares subject to awards which expire or are cancelled or forfeited will again become available for
issuance under the 2016 Equity Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to
satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights or options
exercised by means of a net exercise or by tender of previously owned shares will be deducted from the shares available under the
2016 Equity Plan.
The 2016 Equity Plan will be generally administered by the compensation committee of our board of directors. Subject to
the provisions of the 2016 Equity Plan, the compensation committee will determine in its discretion the persons to whom and the
times at which awards are granted, the sizes of such awards and all of their terms and conditions. However, the compensation
committee may delegate to one or more of our officers the authority to grant awards to persons who are not officers or directors,
subject to certain limitations contained in the 2016 Equity Plan and award guidelines established by the committee. The
compensation committee will have the authority to construe and interpret the terms of the 2016 Equity Plan and awards granted
under it. The 2016 Equity Plan provides, subject to certain limitations, for indemnification by us of any director, officer or
employee against all reasonable expenses, including attorneys’ fees, incurred in connection with any legal action arising from such
person’s action or failure to act in administering the 2016 Equity Plan.
Awards may be granted under the 2016 Equity Plan to our employees, including officers, directors or consultants or those
of any present or future parent or subsidiary corporation or other affiliated entity. All awards will be evidenced by a written
agreement between us and the holder of the award and may include any of the following:
·
·
·
·
·
Stock options. We may grant nonstatutory stock options or incentive stock options (as described in Section 422 of the
Internal Revenue Code), each of which gives its holder the right, during a specified term (not exceeding 10 years) and
subject to any specified vesting or other conditions, to purchase a number of shares of our common stock at an
exercise price per share determined by the administrator, which may not be less than the fair market value of a share
of our common stock on the date of grant.
Stock appreciation rights. A stock appreciation right gives its holder the right, during a specified term (not exceeding
10 years) and subject to any specified vesting or other conditions, to receive the appreciation in the fair market value
of our common stock between the date of grant of the award and the date of its exercise. We may pay the appreciation
in shares of our common stock or in cash.
Restricted stock. The administrator may grant restricted stock awards either as a bonus or as a purchase right at such
price as the administrator determines. Shares of restricted stock remain subject to forfeiture until vested, based on
such terms and conditions as the administrator specifies. Holders of restricted stock will have the right to vote the
shares and to receive any dividends paid, except that the dividends may be subject to the same vesting conditions as
the related shares.
Restricted stock units. Restricted stock units represent rights to receive shares of our common stock (or their value in
cash) at a future date without payment of a purchase price, subject to vesting or other conditions specified by the
administrator. Holders of restricted stock units have no voting rights or rights to receive cash dividends unless and
until shares of common stock are issued in settlement of such awards. However, the administrator may grant
restricted stock units that entitle their holders to dividend equivalent rights.
Performance shares and performance units. Performance shares and performance units are awards that will result in
a payment to their holder only if specified performance goals are achieved during a specified performance period.
Performance share awards are rights whose value is based on the fair market value of shares of our common stock,
while performance unit awards are rights denominated in dollars. The administrator establishes the applicable
performance goals based on one or more measures of business performance enumerated in the 2016 Equity Plan,
such as revenue, gross margin, net income or total stockholder return. To the extent earned, performance share and
unit awards may be settled in cash or in shares of our common stock. Holders of performance shares or performance
units have no voting rights or rights to receive cash dividends unless and until shares of common stock are issued in
settlement of such awards. However, the administrator may grant performance shares that entitle their holders to
dividend equivalent rights.
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·
Cash‑based awards and other stock‑based awards. The administrator may grant cash‑based awards that specify a
monetary payment or range of payments or other stock‑based awards that specify a number or range of shares or units
that, in either case, are subject to vesting or other conditions specified by the administrator. Settlement of these
awards may be in cash or shares of our common stock, as determined by the administrator. Their holder will have no
voting rights or right to receive cash dividends unless and until shares of our common stock are issued pursuant to the
award. The administrator may grant dividend equivalent rights with respect to other stock‑based awards.
Under the 2016 Equity Plan, if a change in control occurs and (i) an award is not appropriately assumed or continued nor
an equivalent award substituted (including if the award is substituted for shares of common stock of the acquiror that are not
publicly traded on a national securities exchange) by the acquiror or (ii) at the time of or within 24 months following a change in
control, the participant incurs a termination without cause or, if provided in the participant’s employment agreement or award
agreement, for good reason, each award will immediately vest and become exercisable. The compensation committee may provide
for the acceleration of vesting of any or all outstanding awards upon such terms and to such extent as it determines, except that the
vesting of all awards held by members of the board of directors who are not employees will automatically be accelerated in full.
The 2016 Equity Plan also authorizes the compensation committee, in its discretion and without the consent of any participant, to
cancel each or any outstanding award denominated in shares upon a change in control in exchange for a payment to the participant
with respect to each share subject to the cancelled award of an amount equal to the excess of the consideration to be paid per share
of common stock in the change in control transaction over the exercise price per share, if any, under the award.
The 2016 Equity Plan will continue in effect until it is terminated by the administrator, provided, however, that all awards
will be granted, if at all, within 10 years of its effective date. The administrator may amend, suspend or terminate the 2016 Equity
Plan at any time, provided that without stockholder approval, the plan cannot be amended to increase the number of shares
authorized, change the class of persons eligible to receive incentive stock options, or effect any other change that would require
stockholder approval under any applicable law or listing rule.
2016 Employee Stock Purchase Plan
Our board of directors has adopted and our stockholders have approved our 2016 Employee Stock Purchase Plan, or the
2016 ESPP.
A total of 1,125,000 shares of our common stock were initially available for sale under our 2016 ESPP and automatically
increased to 1,801,180 on January 1, 2017. Our 2016 ESPP provides for annual increases in the number of shares available for
issuance under the 2016 ESPP each subsequent anniversary through 2025, equal to the smallest of:
·
·
·
750,000 shares;
1.5% of the outstanding shares of our common stock on the immediately preceding December 31; or
such other amount as may be determined by our board of directors.
Appropriate adjustments will be made in the number of authorized shares and in outstanding purchase rights to prevent
dilution or enlargement of participants’ rights in the event of a stock split or other change in our capital structure. Shares subject to
purchase rights which expire or are cancelled will again become available for issuance under the 2016 ESPP.
The compensation committee of our board of directors will administer the 2016 ESPP and have full authority to interpret
the terms of the 2016 ESPP. The 2016 ESPP provides, subject to certain limitations, for indemnification by us of any director,
officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection with any legal action arising
from such person’s action or failure to act in administering the 2016 ESPP.
All of our employees, including our named executive officers, and employees of any of our subsidiaries designated by the
compensation committee are eligible to participate if they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year, subject to any local law requirements applicable to
participants in jurisdictions outside the United States. However, an employee may not be granted rights to purchase stock under our
2016 ESPP if such employee:
·
·
immediately after the grant would own stock or options to purchase stock possessing 5.0% or more of the total
combined voting power or value of all classes of our capital stock; or
holds rights to purchase stock under all of our employee stock purchase plans that would accrue at a rate that exceeds
$25,000 worth of our stock for each calendar year in which the right to be granted would be outstanding at any time.
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Our 2016 ESPP is intended to qualify under Section 423 of the Internal Revenue Code (Code) but also permits us to
include our non‑U.S. employees in offerings not intended to qualify under Section 423 of the Code. The 2016 ESPP will typically
be implemented through consecutive six‑month offering periods. The offering periods generally start on the first trading day of
April and October of each year. The administrator may, in its discretion, modify the terms of future offering periods, including
establishing offering periods of up to 27 months and providing for multiple purchase dates. The administrator may vary certain
terms and conditions of separate offerings for employees of our non‑U.S. subsidiaries where required by local law or desirable to
obtain intended tax or accounting treatment.
Our 2016 ESPP permits participants to purchase common stock through payroll deductions of up to 10.0% of their
eligible compensation, which includes a participant’s regular and recurring straight time gross earnings and payments for overtime
and shift premiums, but exclusive of payments for incentive compensation, bonuses and other similar compensation.
Amounts deducted and accumulated from participant compensation, or otherwise funded in any participating non‑U.S.
jurisdiction in which payroll deductions are not permitted, are used to purchase shares of our common stock at the end of each
offering period. The purchase price of the shares will be 85.0% of the lower of the fair market value of our common stock on the
first trading day of the offering period or on the last day of the offering period. Participants may end their participation at any time
during an offering period and will be paid their accrued payroll deductions that have not yet been used to purchase shares of
common stock. Participation ends automatically upon termination of employment with us.
Each participant in any offering will have an option to purchase for each full month contained in the offering period a
number of shares determined by dividing $2,083 by the fair market value of a share of our common stock on the first day of the
offering period or 200 shares, if less, and except as limited in order to comply with Section 423 of the Code. Prior to the beginning
of any offering period, the administrator may alter the maximum number of shares that may be purchased by any participant during
the offering period or specify a maximum aggregate number of shares that may be purchased by all participants in the offering
period. If insufficient shares remain available under the plan to permit all participants to purchase the number of shares to which
they would otherwise be entitled, the administrator will make a pro rata allocation of the available shares. Any amounts withheld
from participants’ compensation in excess of the amounts used to purchase shares will be refunded, without interest.
A participant may not transfer rights granted under the 2016 ESPP other than by will, the laws of descent and distribution
or as otherwise provided under the 2016 ESPP.
In the event of a change in control, an acquiring or successor corporation may assume our rights and obligations under
outstanding purchase rights or substitute substantially equivalent purchase rights. If the acquiring or successor corporation does not
assume or substitute for outstanding purchase rights, then the purchase date of the offering periods then in progress will be
accelerated to a date prior to the change in control.
Our 2016 ESPP will remain in effect until terminated by the administrator. The compensation committee has the authority
to amend, suspend or terminate our 2016 ESPP at any time.
401(k) Retirement Plan
We maintain a 401(k) retirement plan that is intended to be a tax‑qualified defined contribution plan under Section 401(k)
of the Code. In general, all of our employees are eligible to participate, beginning on the first day of the third month following
commencement of their employment. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may
elect to reduce their current compensation by up to the statutorily prescribed limit, generally equal to $18,000 in 2017, and have
the amount of the reduction contributed to the 401(k) plan. Participants who are at least 50 years old also can make “catch‑up”
contributions, which in 2017 may be up to an additional $6,000 above the statutory limit. We have an obligation to match
non‑highly compensated employee contributions of up to 6% of deferrals and also have the option to make discretionary matching
contributions and profit sharing contributions to the plan annually, as determined by our board of directors. We provided employer
matching contributions for Dr. Harlan W. Waksal of $15,900 for the year ended December 31, 2015, which were disbursed during
2016. No other employer matching contributions were made to our named executive officers for the years ended December 31,
2017, 2016 and 2015.
Rule 10b5‑1 Sales Plans
Our directors and executive officers may adopt written plans, known as Rule 10b5‑1 plans, in which they will contract
with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5‑1 plan, a broker executes trades
pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The
director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or
sell additional shares outside of a Rule 10b5‑1 plan when they are not in possession of material, nonpublic information.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of March 2, 2018 regarding the beneficial ownership of our common stock,
by:
·
·
·
·
each person or group who beneficially owns more than 5.0% of our outstanding shares of common stock;
each of our executive officers;
each of our directors; and
all of our executive officers and directors as a group.
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Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of
the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to
vote or direct the voting of securities, or to dispose or direct the disposition of securities or has the right to acquire such powers
within 60 days. For purposes of calculating each person’s percentage ownership, common stock issuable pursuant to options
exercisable within 60 days are included as outstanding and beneficially owned for that person or group, but are not deemed
outstanding for the purposes of computing the percentage ownership of any other person. Except as disclosed in the footnotes to
this table and subject to applicable community property laws, we believe that each beneficial owner identified in the table
possesses sole voting and investment power over all common stock shown as beneficially owned by the beneficial owner.
Percentage ownership of our common stock in the table is based on 78,643,954 shares of our common stock issued and
outstanding on December 31, 2017. This table is based upon information supplied by officers, directors and principal stockholders
and Schedules 13D and Schedules 13G, if any, filed with the SEC. Unless otherwise indicated, the address of each of the
individuals and entities named below is c/o Kadmon Holdings, Inc., 450 East 29th Street, New York, New York 10016.
Name of beneficial owner
5.0% Stockholders
Third Point Ventures LLC(2)
R. A. Capital Management LLC(3)
Perceptive Advisors LLC(4)
Puissance Capital Management LP(5)
Acuta Capital Partners LLC(6)
GoldenTree Entities(7)
Vivo Capital VIII LLC(8)
Executive Officers and Directors
Bart M. Schwartz, Esq.(9)
Eugene Bauer, M.D.(10)
D. Dixon Boardman(11)
Alexandria Forbes, Ph.D.(12)
Tasos Konidaris(13)
Steven Meehan(14)
Thomas E. Shenk, Ph.D.(15)
Susan Wiviott, J.D.(16)
Harlan W. Waksal, M.D.(17)
Konstantin Poukalov(18)
Steven N. Gordon, Esq.(19)
John Ryan, M.D., Ph.D.(20)
Shares of Common Stock Beneficially Owned (1)
Common
Stock
Securities
Exercisable
Within
60 Days
Number of
Securities
Beneficially
Owned
Percentage
9,407,745
595,238
10,002,983
6,269,342
2,666,666
8,936,008
5,165,746
1,190,475
6,356,221
4,500,000
1,800,000
6,300,000
4,915,000
1,333,333
6,248,333
4,473,111
219,828
4,692,939
3,333,333
1,333,333
4,666,666
12.62%
10.99%
7.96%
7.83%
7.81%
5.95%
5.83%
26,511
6,716
45,911
90,816
—
—
24,616
6,168
26,668
16,925
23,079
23,079
—
—
12,308
16,925
53,179
23,641
68,990
113,895
—
—
36,924
23,093
*
*
*
*
*
*
*
*
110,747
2,196,335
2,307,082
2.85%
4,000
233,484
—
166,951
118,224
71,028
170,951
351,708
71,028
*
*
*
All directors and executive officers as a group (12 persons)
548,969
2,671,522
3,220,491
3.96%
_________________________
*
Represents ownership of less than 1.0%.
(1)
(2)
Represents shares of common stock held and options held by such individuals that were exercisable within 60 days of
March 2, 2018. Includes shares held in the beneficial owner’s name or jointly with others, or in the name of a bank,
nominee or trustee for the beneficial owner’s account. Reported numbers do not include options that vest more than 60
days after March 2, 2018.
As reported on Form 13G/A filed with the SEC on February 9, 2018, consists of (i) 9,407,745 shares of our common
stock and (ii) warrants to purchase 595,238 shares of common stock held by Third Point LLC. Third Point LLC and
Daniel S. Loeb, in his capacity as the chief executive officer of Third Point LLC, have voting and dispositive power
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over securities held by Third Point Ventures LLC, as nominee for funds managed and/or advised by Third Point LLC. Third
Point LLC and Mr. Loeb disclaim beneficial ownership of these securities, except to the extent of any indirect pecuniary interest
therein. The address for Third Point Ventures LLC is c/o Third Point LLC, 390 Park Avenue, 19th floor, New York, NY 10022.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
As reported on Form 13G filed with the SEC on February 14, 2018, consists of (i) 6,269,342 shares of our common stock
and (ii) warrants to purchase 2,666,666 shares of common stock held by RA Capital Healthcare Fund, L.P. (“Fund”) and a
separately managed account (the “Account”). RA Capital Management, LLC (“Capital”) is the general partner of the
Fund. Mr. Kolchinsky is the manager of Capital. As the investment adviser to the Fund and the Account, Capital may be
deemed a beneficial owner of any securities owned by such entity. As the manager of Capital, Mr. Kolchinsky may be
deemed a beneficial owner of any securities beneficially owned by Capital. Capital and Mr. Kolchinsky disclaim
beneficial ownership of the securities except to the extent of their individual pecuniary interests therein. The address for
RA Capital Management, LLC is c/o RA Capital Management, LLC, 20 Park Plaza, Suite 1200, Boston, MA 02116.
As reported on Form 13G/A filed with the SEC on February 14, 2018, consists of (i) 5,165,746 shares of our common
stock and (ii) warrants to purchase 1,190,475 shares of common stock held by Perceptive Life Sciences Master Fund.
Perceptive Advisors serves as the investment manager to the Master Fund and may be deemed to beneficially own such
shares. Mr. Edelman is the managing member of Perceptive Advisors and may be deemed to beneficially own such shares.
The address for Perceptive Advisors LLC is 51 Astor Place, 10th Floor, New York, NY 10003.
As reported on Form 13F filed with the SEC on February 14, 2018, consists of (i) 4,500,000 shares of our common stock
and (ii) warrants to purchase 1,800,000 shares of common stock held by Puissance Capital Management LP. The address
for Puissance Capital Management LP is 950 Third Avenue, 25th Floor, New York, NY 10022.
As reported on Form 13G filed with the SEC on February 14, 2018, consists of (i) 4,915,000 shares of our common stock
and (ii) warrants to purchase 1,333,333 shares of common stock held by Acuta Capital Partners LLC. The address for
Acuta Capital Partners LLC is 1301 Shoreway Road, Suite 350, Belmont, CA 94002.
As reported on Schedule 13D/A filed with the SEC on January 16, 2018, consists of (i) 2,204,511 shares of common stock
held by GN3 SIP Limited (GN3), GoldenTree 2004 Trust (G2T), GTNM, LP (GTNM), GoldenTree Insurance Fund Series
Interests of the SALI Multi‑Series Fund, LP (GTIF), GoldenTree Credit Opportunities, LP (GTCO), GoldenTree Entrust
Master Fund SPC (GSPC), GoldenTree Master Fund, Ltd. (GMF), GoldenTree Master Fund II, Ltd. (GMFII), and a
separately managed account managed by the GoldenTree Asset Management LP (the “First Managed Account”) and a
second separately managed account managed by the GoldenTree Asset Management LP (the “Second Managed
Account”), (ii) warrants to purchase 219,828 shares of common stock held by GN3, G2T, GTNM, First Management
Account, GTIF and GTCO and (iii) 2,268,600 shares of common stock issuable upon the conversion of preferred stock
held by G2T, GTNM, GN3, First Managed Account and Second Managed Account. GoldenTree Asset Management LP
acts as investment manager for all of the entities described herein. GoldenTree Asset Management LLC serves as the
general partner for GoldenTree Asset Management LP. GoldenTree Asset Management LLC serves as the general partner
for GoldenTree Asset Management LP. Steven A. Tananbaum is the managing member of GoldenTree Asset
Management LLC and holds sole voting and dispositive power over the securities indirectly held by such entity. By virtue
of the relationships described in this footnote, each entity and individual named herein may be deemed to share beneficial
ownership of all shares held by the other entities named herein. Each entity and individual named herein expressly
disclaims any such beneficial ownership, except to the extent of their individual pecuniary interests therein. The address
for the GoldenTree Entities is 300 Park Avenue, 21st Floor, New York, NY 10022.
As reported on Schedule 13G filed with the SEC on October 5, 2017, consists of (i) 3,333,333 shares of common stock
and (ii) warrants to purchase 1,333,332 shares of common stock held by Vivo Capital Fund VIII, LP and Vivo Capital
Surplus Fund VIII, LP. Vivo Capital VIII, LLC is the general partner of both Vivo Capital Fund VIII, LP and Vivo Capital
Surplus Fund VIII, LP. The address for Vivo Capital VIII, LLC is 505 Hamilton Avenue, Suite 207, Palo Alto, CA, 94301.
Consists of (i) 26,511 shares of common stock and (ii) 26,668 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018.
Consists of (i) 6,716 shares of common stock and (ii) 16,925 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018.
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(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
Consists of (i) 45,911 shares of common stock and (ii) 23,079 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018.
Consists of (i) 90,816 shares of common stock , (ii) 23,079 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018 and (iii) 1,000 EAR units under the 2014 LTIP. EAR units awarded under the
2014 LTIP are excluded from the amount listed in this table as they may be paid in cash or stock at our option. See
“Executive Compensation—Equity and Other Incentive Compensation Plans” for a discussion of EAR Units awarded
under the 2014 LTIP.
Mr. Konidaris was appointed to our board of directors in February 2017 and, as of February 23, 2018, did not beneficially
own shares of our common stock.
Mr. Meehan was appointed to our board of directors in January 2017 and, as of February 23, 2018, did not beneficially
own shares of our common stock.
Consists of (i) 24,616 shares of common stock and (ii) 12,308 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018.
Consists of (i) 6,168 shares of common stock and (ii) 16,925 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018.
Consists of (i) 110,747 shares of common stock, (ii) 2,196,335 shares of common stock issuable upon the exercise of
stock options within 60 days of February 23, 2018 and (iii) 750 EAR units under the 2014 LTIP. EAR units awarded under
the 2014 LTIP are excluded from the amount listed in this table as they may be paid in cash or stock at our option. See
“Executive Compensation—Equity and Other Incentive Compensation Plans” for a discussion of EAR units awarded
under the 2014 LTIP.
Consists of (i) 4,000 shares of common stock, (ii) 166,951 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018 and (iii) 1,000 EAR units under the 2014 LTIP. EAR units awarded under the
2014 LTIP are excluded from the amount listed in this table as they may be paid in cash or stock at our option. See
“Executive Compensation—Equity and Other Incentive Compensation Plans” for a discussion of EAR units awarded
under the 2014 LTIP.
Consists of (i) 233,484 shares of common stock, (ii) 118,224 shares of common stock issuable upon the exercise of stock
options within 60 days of February 23, 2018 and (iii) 1,300 EAR units under the 2014 LTIP. EAR units awarded under the
2014 LTIP are excluded from the amount listed in this table as they may be paid in cash or stock at our option. See
“Executive Compensation—Equity and Other Incentive Compensation Plans” for a discussion of EAR units awarded
under the 2014 LTIP. Mr. Gordon disclaims beneficial ownership of the reported securities except to the extent of his
pecuniary interest therein.
Consists of (i) 71,028 shares of common stock issuable upon the exercise of stock options within 60 days of February 23,
2018 and (ii) 250 EAR units under the 2014 LTIP. EAR units awarded under the 2014 LTIP are excluded from the amount
listed in this table as they may be paid in cash or stock at our option. See “Executive Compensation—Equity and Other
Incentive Compensation Plans” for a discussion of EAR units awarded under the 2014 LTIP.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2017, with respect to all of our equity compensation
plans in effect on that date.
Plan Category
Equity Compensation Plans Approved
by Stockholders(1)(2)(3)(4)
Equity Compensation Plans Not
Approved by Stockholders
Total
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights (b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a)) (c)
26,802,527
$ 6.27
—
26,802,527
—
$ 6.27
1,151,275
—
1,151,275
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(1) Includes the 2016 Equity Incentive Plan, the 2014 Long term Incentive Plan and the 2016 Employee Stock Purchase
Plan.
(2) The 2016 Equity Incentive Plan contains an “evergreen” provision, pursuant to which the number of shares of
common stock reserved for issuance or transfer pursuant to awards under the 2016 Equity Incentive Plan shall be
increased on the first day of each year beginning in 2017 and ending in 2025, equal to the lesser of (A) four percent
(4.0%) of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately
preceding fiscal year and (B) such smaller number of shares of stock as determined by our Board.
(3) A total of 9,750 stock appreciation rights were granted under the 2014 Long Term Incentive Plan which may be
settled in cash or common stock at the election of the compensation committee and, any new awards will be issued
under the 2016 Equity Incentive Plan. If the 9,750 stock appreciation rights are settled in common stock, 3,605,665
shares of common stock would be issuable under the 2014 Long Term Incentive Plan.
(4) The 2016 Employee Stock Purchase Plan contains an “evergreen” provision, pursuant to which the maximum number
of shares of our common stock authorized for sale under the 2016 Employee Stock Purchase Plan shall be increased
on the first day of each year beginning in 2017 and ending in 2025, equal to the lesser of (i) one and one half percent
(1.5%) of the shares of common stock outstanding on the last day of the immediately preceding fiscal year; (ii)
750,000 shares; or (iii) such number of shares of common stock as determined by our Board.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We describe below transactions and series of similar transactions, during our last fiscal year, to which we were a party or
will be a party, in which:
·
·
the amounts involved exceeded or will exceed $120,000; and
any of our directors, executive officers or holders of more than 5% of our common stock, or an affiliate or immediate
family member thereof, had or will have a direct or indirect material interest.
Participation in the Private Placement
Certain of our existing institutional investors purchased an aggregate of 1,488,095 shares of our common stock in our
private placement that closed on March 13, 2017. Third Point Partners, LLC purchased 1,488,095 shares of our common stock for
$5.0 million and also received 595,238 warrants to purchase shares of our common stock with an exercise price of $4.50 and a
term of 13 months from the date of issuance. See “Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters” for more information about the shares held by these identified entities.
Related Party Agreements
At December 31, 2016, Kadmon I, LLC held approximately 12.1% of the total outstanding common stock of Kadmon
Holdings, Inc. Mr. Steven N. Gordon was the managing member of Kadmon I, LLC and is also our Executive Vice President,
General Counsel, Chief Administrative, Compliance and Legal Officer. Kadmon I, LLC has no special rights or preferences in
connection with its investment in Kadmon Holdings, Inc., and has the same rights as all other holders of Kadmon Holdings, Inc.
common stock. On January 23, 2017, Kadmon I, LLC was dissolved and liquidated. Upon dissolution and liquidation, all assets of
Kadmon I, LLC which consists solely of the shares of common stock in Kadmon Holdings, Inc., were distributed to the members
of Kadmon I, LLC.
In June 2016, we entered into an agreement with 72 KDMN whereby we agreed to extend certain rights to 72 KDMN
which survived the closing of the IPO, including board of director designation rights, see “Item 10. Directors, Executive Officers
and Corporate Governance,” and confidentiality rights, subject to standard exceptions. In addition, we agreed to provide 72
KDMN with most favored nation rights which terminated upon the closing of the IPO on August 1, 2016. Andrew B. Cohen, a
former member of our board of directors, is an affiliate of 72 KDMN. Following the dissolution of Kadmon I on January 23, 2017,
for so long as 72 KDMN owned, directly or indirectly, at least 25.0% of our common stock received by 72 KDMN upon the
dissolution and winding up of Kadmon I, then 72 KDMN had the right, at its option, to designate one director to our board of
directors and, upon such designation, the board of directors had to recommend to the stockholders to vote for the election of 72
KDMN’s designee at any meeting of stockholders convened to elect our directors. In January 2017, Mr. Cohen resigned from our
board of directors and we received notice that 72 KDMN forfeits, relinquishes and waives any and all rights it has to designate a
director to our board of directors.
Corporate Conversion
Prior to the IPO, we were a Delaware limited liability company. On July 26, 2016, in connection with the pricing of the
IPO, Kadmon Holdings, LLC filed a certificate of conversion, whereby Kadmon Holdings, LLC effected a Corporate Conversion
from a Delaware limited liability company to a Delaware corporation and changed its name to Kadmon Holdings,
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Inc. As required by the Second Amended and Restated Limited Liability Company Agreement of Kadmon Holdings, LLC, the
Corporate Conversion was approved by our board of directors. In connection with the Corporate Conversion and holders of our
outstanding voting units received 19,585,865 shares of common stock for all units held immediately prior to the Corporate
Conversion, holders of options and warrants to purchase units became options and warrants to purchase one share of common
stock for every 6.5 Class A units underlying such options or warrants immediately prior to the Corporate Conversion.
Financing Arrangements
August 2015 Secured Term Debt
In August 2015, we entered into the 2015 Credit Agreement in the amount of $35.0 million with two lenders. The interest
rate on the loan is LIBOR plus 9.375% with a 1% floor. We incurred a $0.8 million commitment fee in connection with the loan
that will be amortized to interest expense over the term of the agreement. The basic terms of the loan required monthly payments
of interest only through the first anniversary date of the loan and required us to maintain certain financial covenants requiring us to
maintain a minimum liquidity amount and minimum revenue levels beginning after June 30, 2016 through August 1, 2016, the
date we consummated our IPO. Beginning on the first anniversary date of the loan, we were required to make monthly principal
payments in the amount of $0.4 million. Any outstanding balance of the loan and accrued interest is to be repaid on June 17, 2018.
The secured term loan is collateralized by a first priority perfected security interest in all our tangible and intangible property.
In conjunction with the 2015 Credit Agreement, warrants with an aggregate purchase price of $6.3 million to acquire
Class A membership units were issued to two lenders, of which $5.4 million was recorded as a debt discount and $0.9 million was
recorded as loss on extinguishment of debt in our consolidated financial statements.
Deferred financing costs of $1.3 million were recognized in recording the 2015 Credit Agreement and will be amortized
to interest expense over the three year term of the agreement. Additionally, fees paid to one existing lender, inclusive of financial
instruments issued of $0.1 million, were charged to loss on extinguishment of debt. There was also $1.5 million of debt discount
and $0.4 million of deferred financing cost write‑offs charged to loss on extinguishment of debt in connection with this transaction.
We entered into a third waiver agreement to the 2015 Credit Agreement in September 2016 to negotiate the amendment
and restatement of certain covenants contained in the 2015 Credit Agreement. In connection with such negotiation, the lenders
under the 2015 Credit Agreement had agreed to refrain from exercising certain rights under the 2015 Credit Agreement, including
the declaration of a default and to forbear from acceleration of any repayment rights with respect to existing covenants until the
parties have consummated the amendment and restatement of such provisions. In addition, certain payments required to be made
under the 2015 Credit Agreement had been deferred while the parties negotiated the amendment. The parties executed a second
amendment to the 2015 Credit Agreement in November 2016 whereby we deferred further principal payments owed under the
2015 Credit Agreement in the amount of $0.4 million per month until August 31, 2017. Additionally, the parties amended various
clinical development milestones and added a covenant pursuant to which we were required to raise $40.0 million of additional
equity capital by the end of the second quarter of 2017. All other material terms of the 2015 Credit Agreement, including the
maturity date, remain the same.
We entered into a fourth waiver agreement to the 2015 Credit Agreement in March 2017 under which the lenders under
the 2015 Credit Agreement agreed to refrain from exercising certain rights under the 2015 Credit Agreement, including the
declaration of a default and to forbear from acceleration of any repayment rights with respect to existing covenants. The report and
opinion of our independent registered public accounting firm, BDO USA, LLP, contains an explanatory paragraph regarding our
ability to continue as a going concern, which is an event of default under the 2015 Credit Agreement.
On March 31, 2017, we entered into the Third Amendment. Pursuant to this amendment, principal payments owed under
the 2015 Credit Agreement, in the amount of $380,000 per month, were deferred until January 31, 2018. Additionally, the parties
amended the future capital raising covenant by extending the time period by which we were required to raise the remaining $17.0
million of capital by six months, from June 30, 2017 to December 31, 2017, which was satisfied in September 2017. All other
material terms of the 2015 Credit Agreement, including the maturity date, remain the same. The clinical development milestone
was deemed satisfied in a letter agreement entered into on December 22, 2017 with a majority of lenders under our 2015 Credit
Agreement. As of the date hereof, we are not in default under the terms of the 2015 Credit Agreement.
The Third Amendment also amended certain terms of the warrants to purchase an aggregate of 617,651 shares of our
common stock issued in connection with the 2015 Credit Agreement (2015 Warrants). Pursuant to the Third Amendment, the
warrants may now only be exercised for cash and the exercise price was reduced from $10.20 per share to $4.50 per share. The
redemption feature in the 2015 Warrants was also amended such that the warrant holder may only demand a redemption of the
2015 Warrants upon the occurrence of, and during the continuance of, an event of default. Prior to this amendment, the warrant
could be redeemed by the warrant holder at any time after the 51st month.
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We entered into a fifth waiver agreement to the 2015 Credit Agreement in March 2018 under which the lenders under the
2015 Credit Agreement agreed to refrain from exercising certain rights under the 2015 Credit Agreement, including the declaration
of a default and to forbear from acceleration of any repayment rights with respect to existing covenants. The report and opinion of
our independent registered public accounting firm, BDO USA, LLP, contains an explanatory paragraph regarding our ability to
continue as a going concern, which is an event of default under the 2015 Credit Agreement.
At December 31, 2017, the outstanding balance of the 2015 Credit Agreement was $34.6 million and the interest rate was
LIBOR plus 9.375% with a 1% floor. We were in compliance with all covenants under the 2015 Credit Agreement at
December 31, 2017 and 2016.
Relationship with MeiraGTx
In April 2015, we executed several agreements which transferred our ownership of Kadmon Gene Therapy, LLC to
MeiraGTx, a then wholly‑owned subsidiary of our company. As part of these agreements, we also transferred various property
rights, employees and management tied to the ongoing development of the intellectual property and contracts identified in the
agreements to MeiraGTx.
MeiraGTx subsequently ratified its shareholder agreement and accepted the pending equity subscription agreements,
which provided equity ownership to various parties. The execution of these agreements resulted in our 48.0% ownership in
MeiraGTx. The estimated fair value of our ownership interest was $24.0 million at the time of the transaction. At December 31,
2017, we maintain a 38.7% ownership in MeiraGTx (25.6% assuming conversion of Series C convertible preferred shares). At
December 31, 2017, Drs. Alexandria Forbes, Thomas E. Shenk and Mr. Steven N. Gordon, each maintain ownership interests of
6.6%, 1.9% and 0.5%, respectively (4.2%, 1.2% and 0.3%, respectively, assuming conversion of Series C convertible preferred
shares).
MeiraGTx is developing an extensive pipeline of gene therapy products for inherited and acquired disorders, with the first
three Phase 1/2 clinical trials initiating in 2016. MeiraGTx is developing therapies for xerostomia following radiation treatment for
head and neck cancer; ocular diseases, including rare inherited retinopathies, including LCA2, achromatopsias, X‑linked retinitis
pigmentosa and dry and wet AMD; and neurodegenerative diseases, including amyotrophic lateral sclerosis (ALS). MeiraGTx is
also developing a transformative gene regulation technology platform that allows delivery of any biologic using an oral small
molecule.
Relationship with NT Life
Kadmon Corporation, our wholly‑owned subsidiary, currently holds 81,591 shares of common stock of Nano Terra,
representing less than 1.0% of Nano Terra’s issued and outstanding capital stock. Kadmon Corporation entered into a joint venture
with SLx through the formation of NT Life, whereby Kadmon Corporation contributed $0.9 million at the date of formation in
exchange for a 50.0% interest in NT Life and entered into a sub‑licensing arrangement with NT Life and SLx. Pursuant to the
sub‑licensing arrangement, Kadmon Corporation was granted a worldwide, exclusive license under certain intellectual property
owned by SLx to three clinical-stage product candidates, as well as under SLx’s drug discovery platform, Pharmacomer
Technology, each of which were licensed by SLx to NT Life. One of the two clinical‑stage products is being developed by us and
is known as KD025.
Executive Compensation and Equity Awards
Please see “Executive Compensation” for information on the compensation of, and equity awards granted to, our directors
and executive officers.
On July 13, 2016, the compensation committee of the board of directors approved the amendment of all outstanding
option awards under our 2011 Equity Incentive Plan, including with respect to option awards previously granted to our executive
officers, effective upon the date of pricing of the IPO, to adjust the exercise price (on a post‑Corporate Conversion, post‑split basis)
to the initial public offering price of $12.00 per share.
Employment Agreements
Please see the section titled “Item 11, Executive Compensation—Employment Agreements” for information on
compensation and employment arrangements with our named executive officers.
Separation of Dr. Samuel D. Waksal
Dr. Samuel D. Waksal founded our company in October 2010 and, until August 2014, was the chairman of our then board
of managers and our Chief Executive Officer. In August 2014, he stepped down as our Chief Executive Officer and became our
Chief of Innovation, Science and Strategy.
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In connection with his resignation on February 8, 2016, we entered into a separation agreement with Dr. Samuel D.
Waksal terminating his employment with us and providing that he shall perform no further paid or unpaid services for us whether
as employee, consultant, contractor or any other service provider. The principal provisions of the separation agreement are
summarized below.
Severance and Other Payments
We agreed to make a series of payments (all subject to withholding taxes) to Dr. Samuel D. Waksal, some of which are
contingent, structured as follows:
·
·
·
a $3.0 million severance payment, of which $0.9 million and $1.0 million was paid during 2016 and 2017,
respectively, with the remaining $1.1 million payable during 2018 and 2019;
supplemental conditional payments of up to $6.75 million in the aggregate that are payable in 2017 ($2.25 million),
2018 ($2.25 million) and 2019 ($2.25 million) if specified benchmarks related to the valuation of our company
implied by the public offering price per share in the IPO, the net proceeds to us from the IPO and our equity market
capitalization on specified dates are achieved and subject to our having cash and cash equivalents less payables of
$50.0 million or more on the dates when we make those payments. The supplemental conditional payments that were
payable in 2017 and 2018 were not earned and will therefore not be paid;
an amount equal to 5.0% (up to a maximum of $15.0 million) of any cash received by us or guaranteed cash
payments (as defined below) received by us pursuant to the first three business development programs that we enter
into on or before February 8, 2019 to research, develop, market or commercialize our ROCK2 program or our
immuno‑oncology program. For purposes of the separation agreement, ROCK2 program is defined to mean pathways
involving ROCK2 or other pathways effecting inflammation, fibrosis, cancer or neurodegenerative diseases;
immuno‑oncology program is defined to mean antibodies or small molecules involved in inducing the immune
system to make an anti‑tumor response; and guaranteed cash payments is defined to mean payments to us of cash
contractually provided for pursuant to an agreement entered into by us with respect to a business development
program, which payments are not subject to our meeting any milestones or thresholds. If the aggregate cash and
guaranteed cash payments received by us pursuant to any business development program exceed $800.0 million
before the completion of the IPO, the equity market capitalization requirements that must be met for Dr. Samuel D.
Waksal to earn the supplemental payments of up to $6.75 million described above shall be deemed fulfilled,
regardless of our equity market capitalization at the applicable time.
EAR Unit Award
In December 2014, Dr. Samuel D. Waksal received an award of EAR units under the 2014 LTIP with a base price of $6.00
per EAR unit (see description under “Executive Compensation” for the terms of our EAR units). The number of EAR units granted
to Dr. Samuel D. Waksal was adjusted to equal 0.75% of our common stock determined on the first trading date following the date
of the IPO. Based on the adjustments, the number of shares underlying Dr. Samuel D. Waksal’s LTIP award is 1,783,618. The
separation agreement provides that:
·
·
·
·
by virtue of his separation from service, Dr. Samuel D. Waksal acknowledges that he is no longer entitled to vesting
on December 16, 2024 but is eligible to vest based on a change in control or stock price increase, as described herein
below;
the service component included in the vesting condition related to the occurrence of a change of control after an IPO
but before December 16, 2024 is now satisfied;
the service component included in the vesting condition related to the occurrence of a 333% increase in the fair
market value of each EAR unit from the $6.00 grant price per unit before December 16, 2024 is now satisfied; and
Dr. Samuel D. Waksal’s EAR units shall not be subject to forfeiture, termination or recapture for violation of the
restrictive covenants contained in the 2014 LTIP.
Lock‑up Agreement
Dr. Samuel D. Waksal entered into a 180‑day lock‑up agreement in connection with the IPO which expired on January 22,
2017. If requested by the managing underwriters in any subsequent offering at the time of which Dr. Samuel D. Waksal owns five
percent or more our common stock, he will enter into a lock‑up agreement for a period not to exceed 90 days and in the form
customarily requested by the managing underwriters for that offering (subject to mutually agreed exceptions), so long as other
equityholders enter into substantially similar lock‑up agreements. If any of our equityholders that signs a lock‑up
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agreement is released from its provisions by the managing underwriters, Dr. Samuel D. Waksal will also be released from his
lock‑up agreement.
Covenants
The separation agreement contained customary non‑solicitation, non‑competition and non‑disparagement provisions that
continue in effect until February 8, 2019. In addition, Dr. Samuel D. Waksal agreed to make himself available, at our expense, to
assist us in protecting our ownership of intellectual property and in accessing his knowledge of scientific and/or research and
development efforts undertaken during his employment with us.
Releases
The separation agreement provided for mutual releases by the parties and related persons of all claims arising out of
Dr. Samuel D. Waksal’s relationship with us as an employee, founder, investor, member, owner, member or Chairman of the
Board, Chief Executive Officer, or officer.
Indemnification Agreements
Our bylaws provide that we will indemnify our directors, officers and certain key employees to the fullest extent
permitted by the Delaware General Corporation Law (DGCL), subject to certain exceptions contained in our bylaws. In addition,
our certificate of incorporation, provides that our directors will not be liable for monetary damages for breach of fiduciary duty.
We entered into indemnification agreements with each of our executive officers and directors. The indemnification
agreements provide the executive officers and directors with contractual rights to indemnification, and expense advancement and
reimbursement, to the fullest extent permitted under the DGCL, subject to certain exceptions contained in those agreements.
Except as disclosed in ”Item 3. Legal Proceedings,” there is no pending litigation or proceeding naming any of our
directors or officers to which indemnification is being sought, and we are not aware of any pending litigation that may result in
claims for indemnification by any director or officer.
Policies and Procedures for Related Person Transactions
Our board of directors recognizes the fact that transactions with related persons present a heightened risk of conflicts of
interests and/or improper valuation (or the perception thereof). Our board of directors adopted a written policy on transactions with
related persons that is in conformity with the requirements for issuers having publicly‑held common stock that is listed on the
NYSE. Under this policy:
·
·
any related person transaction, and any material amendment or modification to a related person transaction, must be
reviewed and approved or ratified by a committee of the board of directors composed solely of independent directors
who are disinterested or by the disinterested members of the board of directors; and
any employment relationship or transaction involving an executive officer and any related compensation must be
approved by the compensation committee of the board of directors or recommended by the compensation committee
to the board of directors for its approval.
In connection with the review and approval or ratification of a related person transaction:
·
·
·
management must disclose to the committee or disinterested directors, as applicable, the name of the related person
and the basis on which the person is a related person, the material terms of the related person transaction, including
the approximate dollar value of the amount involved in the transaction, and all the material facts as to the related
person’s direct or indirect interest in, or relationship to, the related person transaction;
management must advise the committee or disinterested directors, as applicable, as to whether the related person
transaction complies with the terms of our agreements governing our material outstanding indebtedness that limit or
restrict our ability to enter into a related person transaction;
management must advise the committee or disinterested directors, as applicable, as to whether the related person
transaction will be required to be disclosed in our applicable filings under the Securities Act or the Exchange Act,
and related rules, and, to the extent required to be disclosed, management must ensure that the related person
transaction is disclosed in accordance with such Acts and related rules; and
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·
management must advise the committee or disinterested directors, as applicable, as to whether the related person
transaction constitutes a “personal loan” for purposes of Section 402 of the Sarbanes‑Oxley Act.
In addition, the related person transaction policy provides that the committee or disinterested directors, as applicable, in
connection with any approval or ratification of a related person transaction involving a non‑employee director or director nominee,
should consider whether such transaction would compromise the director or director nominee’s status as an “independent,”
“outside,” or “non‑employee” director, as applicable, under the rules and regulations of the SEC, the NYSE and the Code.
Item 14. Principal Accounting Fees and Services.
The following table provides information regarding the fees incurred to BDO USA, LLP during the years ended
December 31, 2017 and 2016.
Audit Fees(1)
Tax Fees(2)
Audit-Related Fees
All Other Fees
Total Fees
Year Ended December 31,
2017
2016
(In thousands)
515 $
86
—
—
601 $
1,062
93
—
—
1,155
$
$
(1)
(2)
Audit fees of BDO USA, LLP for the years ended December 31, 2017 and 2016 were for professional services rendered
for the audits of our financial statements, including accounting consultation and reviews of quarterly financial statements,
private placement memorandums and registration statements. Fees for 2016 include $0.4 million for services associated
with our IPO, which was completed in August 2016.
Tax fees consist principally of professional services for corporate tax compliance and tax advisory services.
Pre-Approval Policies and Procedures
The Audit Committee or a delegate of the Audit Committee pre-approves, or provides pursuant to pre-approvals policies
and procedures for the pre-approval of, all audit and non-audit services provided by its independent registered public accounting
firm. This policy is set forth in the charter of the Audit Committee and is available www.kadmon.com.
The Audit Committee approved all of the audit, audit-related, tax and other services provided by BDO USA, LLP and the
estimated costs of those services. Actual amounts billed, to the extent in excess of the estimated amounts, are periodically reviewed
and approved by the Audit Committee.
Director Independence
The Board has affirmatively determined that all of its directors, other than Drs. Harlan W. Waksal, Thomas E. Shenk and
Alexandria Forbes, are independent directors within the meaning of the applicable NYSE listing standards and relevant securities
and other laws, rules and regulations regarding the definition of “independent.” There are no family relationships between any
director and any of our executive officers.
The Board has determined that each member of the Audit Committee, the Nominating and Corporate Governance
Committee and the Compensation Committee meets the applicable NYSE listing standards and relevant securities and other laws,
rules and regulations regarding “independence” and that each member is free of any relationship that would impair his individual
exercise of independent judgment with regard to our Company.
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Item 15. Exhibits, Financial Statement Schedules.
PART IV
The financial statements listed in the Index to Financial Statements beginning on page 116 are filed as part of this Annual
Report on Form 10-K.
No financial statement schedules have been filed as part of this Annual Report on Form 10-K because they are not
applicable, not required or because the information is otherwise included in our financial statements or notes thereto.
The exhibits filed as part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately following
our financial statements. The Exhibit Index is incorporated herein by reference.
Item 16. Form 10-K Summary
None.
115
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Kadmon Holdings, Inc.
Index to Financial Statements
Report of independent registered public accounting firm
Consolidated balance sheets as of December 31, 2017 and 2016
Consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015
Consolidated statements of stockholders’ equity (deficit) for the years ended December 31, 2017, 2016 and 2015
Consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015
Notes to consolidated financial statements
Page
117
118
119
120
122
124
116
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kadmon Holdings, Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Kadmon Holdings, Inc. (the “Company”) as of December 31,
2017 and 2016, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from
operations and expects losses to continue in the future that raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2010.
New York, New York
March 6, 2018
117
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Kadmon Holdings, Inc.
Consolidated balance sheets
(in thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Accounts receivable from affiliates
Inventories, net
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Goodwill
Restricted cash
Investment, at cost
Investment, equity method
Other noncurrent assets
Total assets
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Liabilities and Stockholders’ Equity (Deficit)
Fair market value of financial instruments
Secured term debt - current
Total current liabilities
Deferred revenue
Deferred rent
Deferred tax liability
Fair market value of financial instruments - non current
Other long term liabilities
Secured term debt – net of current portion and discount
Total liabilities
Commitments and contingencies (Note 16 and 17)
Stockholders’ equity (deficit):
Convertible Preferred Stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2017 and 2016;
30,000 shares issued and outstanding at December 31, 2017 and 2016
Common Stock, $0.001 par value; 200,000,000 shares authorized at December 31, 2017 and December 31, 2016;
78,643,954 and 45,078,666 shares issued and outstanding at December 31, 2017 and December 31, 2016,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
December 31,
2017
2016
67,517 $
325
861
201
1,109
70,013
4,292
3,580
2,116
3,542
—
9
83,552 $
8,008 $
8,577
4,400
1,952
33,707
56,644
19,617
4,347
939
—
247
—
81,794
36,093
655
555
1,950
1,034
40,287
5,427
3,580
2,116
3,542
7,599
5
62,556
6,296
12,150
4,400
—
1,900
24,746
24,017
4,377
1,376
3,305
1,250
28,677
87,748
40,220
38,302
79
198,856
(237,397)
1,758
83,552 $
45
92,166
(155,705)
(25,192)
62,556
$
$
$
$
See accompanying notes to consolidated financial statements
118
Table of Contents
Kadmon Holdings, Inc.
Consolidated statements of operations
(in thousands, except share and per share amounts)
Revenues
Net sales
License and other revenue
Total revenue
Cost of sales
Write-down of inventory
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Impairment of intangible asset
Gain on settlement of payable
Total operating expenses
Loss from operations
Other expense (income):
Interest income
Interest expense
Loss on extinguishment of debt
Change in fair value of financial instruments
Gain on deconsolidation of subsidiary
Loss on equity method investment
Other expense (income)
Total other expense
Loss before income tax expense
Income tax expense (benefit)
Net loss
Deemed dividend on convertible preferred stock and Class E redeemable
convertible units
Net loss attributable to common stockholders
Basic and diluted net loss per share of common stock
Weighted average basic and diluted shares of common stock outstanding
Year Ended December 31,
2017
2016
2015
5,257 $
7,007
12,264
1,332
1,654
9,278
40,777
37,057
—
—
77,834
(68,556)
(132)
5,962
—
(2,096)
—
7,599
6
11,339
(79,895)
(121)
(79,774) $
18,514 $
7,541
26,055
3,485
385
22,185
35,840
105,880
—
(4,131)
137,589
(115,404)
(38)
72,634
11,176
(4,380)
—
13,625
(8)
93,009
(208,413)
342
(208,755) $
29,299
6,420
35,719
3,731
2,274
29,714
33,558
104,740
31,269
—
169,567
(139,853)
(10)
27,160
2,934
(1,494)
(24,000)
2,776
(134)
7,232
(147,085)
(3)
(147,082)
1,918
(81,692) $
21,733
(230,488) $
—
(147,082)
(1.42) $
(9.74) $
57,405,331
23,674,512
(18.10)
8,127,781
$
$
$
$
See accompanying notes to consolidated financial statements
119
Table of Contents
Kadmon Holdings, Inc.
Consolidated statements of stockholders’ equity (deficit)
(in thousands, except unit and share amounts)
Convertible units
Class E redeemable
convertible units
Class A Class B Class C Class D Preferred stock
Common stock
Additional
paid-in Accumulated
Stockholders' equity (deficit)
Units Units Units
Shares Amount Shares
Amount
Balance, January 1, 2015
Issuance of Class A units to settle
obligation
Issuance of Class E units to non-employee
directors
Issuance of Class E units to settle
obligation
Issuance of Class E units, net of
transaction costs of $40
Accretion of Class E units fee discount
and repayment premium
Issuance of Class A units
Unit-based compensation
Issuance of Class A units related to option
exercises
Net loss
Balance, December 31, 2015
Issuance of Class A units to settle
obligation
Issuance of Class E units to settle
obligation
Equity raised through issuance of Class E
units, net
Accretion of Class E units fee discount
and repayment premium
Share-based compensation expense
Issuance of Class A units related to option
exercises
Issuance of common stock to settle
obligation
Common stock issued in initial public
offering, net of commissions and
underwriting discounts
Initial public offering costs
Beneficial conversion feature on Class E
units
Cumulative effect of change in accounting
principle - ASU 2016-09 forfeiture
adjustment
Corporate conversion from Kadmon
Holdings, LLC to Kadmon Holdings, Inc.
Corporate conversion to common stock
Conversion of convertible debt to
common stock
Beneficial conversion feature on
convertible debt
Conversion of convertible debt to
convertible preferred stock
Beneficial conversion feature on
convertible preferred stock
Accretion of dividends on convertible
preferred stock
Reclassification of warrants to equity
Beneficial conversion feature on warrants
Net loss
Balance, December 31, 2016
Share-based compensation expense
Common stock issued for warrant
exercises
Common stock issued under ESPP plan
Units
Amount
3,438,984 $ 37,052 50,882,656
Units
—
—
63
10,435
574,392
6,606
945,441 10,833
4,302
—
—
—
—
—
—
—
—
—
1,808,334
—
—
—
—
1,250,000
—
5,011
—
4,969,252 $ 58,856 53,946,001
—
—
1,170,437 13,460
478,266 5,500
— 5,812
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,000
—
—
—
—
7,200
—
—
—
—
—
—
(6,617,955) (83,628) (53,978,201)
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
—
1 4,373,674
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1 4,373,674
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
208,334
capital
— $ 341,343 $
10,541
—
—
—
—
—
—
—
(4,302)
—
15,000
—
10,324
—
—
30
—
—
— $ 372,936 $
125
—
—
—
—
—
(5,812)
—
47,217
—
41
—
2,499
1
Total
—
—
—
(4,302)
10,324
15,000
10,541
Deficit
(496,763) $(155,420)
—
—
—
—
—
—
—
—
30
(147,082) (147,082)
(643,845) $(270,909)
—
—
—
—
(5,812)
— 47,217
—
—
2,500
125
—
—
41
— 6,250,000
—
—
—
—
6
—
—
69,744
(3,739)
13,431
— 69,750
—
(3,739)
(13,431)
—
—
—
—
—
—
—
—
—
—
—
— 19,585,865
—
(1) (4,373,674)
— 19,034,467
—
—
—
—
—
—
—
—
—
— 30,000 30,000
—
—
— 7,660
—
—
—
642
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 30,000 $38,302 45,078,666 $
—
—
—
—
11,839
—
—
10,594
—
—
—
—
—
—
—
—
—
1,990
— (720,618)
83,607
19
19 182,712
45,683
—
—
—
—
—
—
—
1,716
—
634
—
—
—
92,166 $
45 $
12,354
—
37
—
30
—
120
(1,990)
720,618
—
—
— 83,626
— 182,731
— 45,683
— 30,000
—
—
1,716
(7,660)
(642)
—
—
634
(208,755) (208,755)
(155,705) $ (25,192)
— 12,354
—
—
37
30
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Common stock issued in private placement,
net
Common stock and warrants issued in public
offering, net
Beneficial conversion feature on convertible
preferred stock
Accretion of dividends on convertible
preferred stock
Net loss
Balance, December 31, 2017
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 6,767,855
—
—
— 26,775,000
—
—
—
—
384
—
—
— 1,534
—
—
—
—
— 30,000 $40,220 78,643,954
7
19,209
27
75,060
—
—
—
—
—
—
79 $ 198,856 $
See accompanying notes to consolidated financial statements
121
— 19,216
— 75,087
—
(384)
(1,534)
—
(79,774) (79,774)
(237,397) $
1,758
Table of Contents
Kadmon Holdings, Inc.
Consolidated statements of cash flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$
Year Ended December 31,
2017
2016
2015
(79,774) $
(208,755) $
(147,082)
Depreciation and amortization of fixed assets
Amortization of intangible asset
Impairment of intangible asset
Write-down of inventory
Write-down of capitalized computer software development costs
Gain on purchase commitment
Loss on extinguishment of debt / conversion of debt
Write-off of deferred financing costs and debt discount
Amortization of deferred financing costs
Amortization of debt discount
Amortization of debt premium
Accretion of repayment premium on secured term debt
Share-based compensation
Gain on settlement of payable
Bad debt expense
Gain on deconsolidation of subsidiary
Change in fair value of financial instruments
Beneficial conversion feature expense on warrants
Beneficial conversion feature expense on convertible debt
Fair value of units issued to consultants
Fair value of shares / units issued in settlement of obligation
Accrued legal settlement
Deferred taxes
Paid-in-kind interest
Loss on equity method investment
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable, net
Inventories, net
Prepaid expenses and other assets
Accounts payable
Accrued expenses, other liabilities and deferred rent
Deferred revenue
Net cash used in operating activities
1,822
—
—
1,654
—
—
—
—
509
2,297
(564)
—
12,354
—
3
—
(2,096)
—
—
—
—
—
(437)
—
7,599
—
21
95
(134)
1,605
(4,652)
(4,400)
(64,098)
2,280
15,223
—
385
—
—
11,176
3,820
1,304
3,118
—
—
47,217
(4,131)
6
—
(4,380)
1,745
44,170
3,000
4,360
—
27
14,695
13,625
—
937
1,133
(479)
530
544
(4,500)
(52,950)
2,312
27,442
31,269
2,274
62
(243)
2,934
2,752
1,290
3,867
—
(345)
10,324
—
5
(24,000)
(1,494)
—
—
—
13,647
10,350
(3)
11,434
2,776
(89)
(1,313)
1,930
597
(4,413)
3,040
(10,300)
(60,977)
See accompanying notes to consolidated financial statements
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Table of Contents
Kadmon Holdings, Inc.
Consolidated statements of cash flows (continued)
(in thousands)
Cash flows from investing activities:
Purchases of fixed assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net
Proceeds from issuance of ESPP shares
Proceeds from warrant exercises
Proceeds from issuance of common stock in IPO, net
Payments of initial public offering costs
Payment of financing costs related to debt exchange agreements
Proceeds from issuance of secured term debt
Proceeds from issuance of convertible debt
Payment of financing costs
Principal payments on secured term debt
Proceeds from related party loans
Repayment of related party loans
Proceeds from issuance of Class A units, net
Proceeds from issuance of Class E redeemable convertible units, net
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow disclosures:
Cash paid for interest
Cash paid for taxes
Non-cash investing and financing activities:
Settlement of related party loan
Units issued in settlement of obligation
Capitalized lease obligations
Unpaid financing/offering costs
Equity method investment related to deconsolidation
Financing costs paid with convertible notes
Fair value of warrants issued to lenders
Cost method investment in affiliate
Beneficial conversion feature on convertible preferred stock
Accretion of dividends on convertible preferred stock
Beneficial conversion feature on Class E units
Conversion of Class E units into common stock
Conversion of convertible debt into common stock
Conversion of convertible debt into convertible preferred stock
Reclassification of warrants from liability to equity
Fair value of warrants issued in private placement
Fair value of modification to lender warrants
Year Ended December 31,
2017
2016
2015
(479)
(479)
(539)
(539)
(161)
(161)
95,954
30
37
—
—
—
—
—
(20)
—
—
—
—
—
—
96,001
31,424
36,093
67,517 $
—
—
—
69,750
(3,293)
(534)
—
—
—
(380)
—
(3,000)
—
5,500
41
68,084
14,595
21,498
36,093 $
3,689 $
356
3,723 $
339
—
—
208
—
—
—
—
—
384
1,534
—
—
—
—
—
1,651
908
—
11,725
230
56
—
—
—
1,242
7,660
642
13,431
83,628
176,615
30,000
1,716
—
—
—
—
—
—
(445)
—
35,000
112,500
(4,069)
(107,204)
2,000
(2,000)
15,000
10,833
30
61,645
507
20,991
21,498
8,019
153
500
9,063
20
1,958
24,000
2,260
6,300
—
—
—
—
—
—
—
—
—
—
$
$
See accompanying notes to consolidated financial statements
123
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1. Organization
Nature of Business
Kadmon Holdings, Inc. and Subsidiaries
Notes to consolidated financial statements
Kadmon Holdings, Inc. (together with its subsidiaries, “Kadmon” or “Company”) is a fully integrated biopharmaceutical
company engaged in the discovery, development and commercialization of small molecules and biologics to address disease areas
of significant unmet medical needs, with a near-term clinical focus on inflammatory and fibrotic diseases. The Company leverages
its multi‑disciplinary research and clinical development team members to identify and pursue a diverse portfolio of novel product
candidates, both through in-licensing products and employing its small molecule and biologics platforms. By retaining global
commercial rights to its lead product candidates, the Company believes that it has the ability to develop these candidates while
maintaining flexibility for commercial and licensing arrangements. The Company expects to continue to progress its clinical
candidates and have further clinical trial events throughout 2018.
Corporate Conversion, Initial Public Offering and Debt Conversion
On July 26, 2016, in connection with the pricing of the Company’s initial public offering (“IPO”), Kadmon Holdings,
LLC filed a certificate of conversion, whereby Kadmon Holdings, LLC effected a corporate conversion from a Delaware limited
liability company to a Delaware corporation and changed its name to Kadmon Holdings, Inc. As a result of the corporate
conversion, accumulated deficit was reduced to zero on the date of the corporate conversion, and the corresponding amount was
credited to additional paid-in capital. In connection with this corporate conversion, the Company filed a certificate of incorporation
and adopted bylaws, all of which were previously approved by the Company’s board of directors and stockholders. Pursuant to the
Company’s certificate of incorporation, the Company is authorized to issue up to 200,000,000 shares of common stock $0.001 par
value per share and 10,000,000 shares of preferred stock $0.001 par value per share. All references in the audited consolidated
financial statements to the number of shares and per-share amounts of common stock have been retroactively restated to reflect this
conversion.
On August 1, 2016, the Company completed its IPO whereby it sold 6,250,000 shares of common stock at $12.00 per
share. The aggregate net proceeds received by the Company from the offering were $66.0 million, net of underwriting discounts
and commissions of $5.3 million and offering expenses of $3.7 million. Upon the closing of the IPO, 45,078,666 shares of
common stock were outstanding, which includes 19,034,467 shares of common stock as a result of the conversion of the
Company’s Senior Convertible Term Loan and Second Lien Convert (Note 7). The shares began trading on the New York Stock
Exchange on July 27, 2016 under the symbol “KDMN.”
Liquidity
The Company had an accumulated deficit of $237.4 million and working capital of $13.4 million at December 31, 2017.
For the year ended December 31, 2017, the Company earned a $2.0 million milestone payment pursuant to a license agreement
entered into with Jinghua to develop products using human monoclonal antibodies. The Company also raised gross proceeds of
$22.7 million in March 2017 ($20.9 million net of placement agent fees and other offering costs and expenses) and gross proceeds
of $80.4 million in September 2017 ($75.1 million net of underwriting fees, commissions and other offering costs and expenses) of
which $66.8 million of gross proceeds closed in September 2017 and the remaining $13.6 million of gross proceeds closed in
October 2017. These raises, in total, together with its existing cash, are expected to enable the Company to advance its planned
Phase 2 clinical studies for KD025 and tesevatinib, advance certain of its other pipeline product candidates and provide for other
working capital purposes.
On March 31, 2017, the Company entered into its third amendment to the 2015 Credit Agreement (the “Third
Amendment”). Pursuant to the Third Amendment, principal payments owed under the 2015 Credit Agreement, in the amount of
$380,000 per month, were deferred until January 31, 2018. Additionally, the parties amended a future capital raising covenant by
extending the time period by which the Company was required to raise the remaining $17.0 million of capital by six months, from
June 30, 2017 to December 31, 2017, which was satisfied in September 2017. All other material terms of the 2015 Credit
Agreement, including the maturity date, remain the same. The Company maintained cash and cash equivalents of $67.5 million at
December 31, 2017.
Management’s plans include continuing to finance operations through the issuance of additional equity securities and
increasing the commercial portfolio through the development of the current pipeline or through strategic collaborations. Any
transactions which occur may contain covenants that restrict the ability of management to operate the business or may have rights,
preferences or privileges senior to the Company’s common stock and may dilute current stockholders of the Company.
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Engaging in a transaction with a third party is contingent on negotiations among the parties; therefore, there is no certainty that the
Company will enter into such an agreement should the Company so desire.
2. Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company as a going concern. The Company has not
established a source of revenues sufficient to cover its operating costs, and as such, has been dependent on funding operations
through the issuance of debt and sale of equity securities. The Company expects to incur further losses over the next several years
as it develops its business.
At December 31, 2017, the Company had working capital of only $13.4 million. The Company’s accumulated deficit
amounted to $237.4 million and $155.7 million at December 31, 2017 and 2016, respectively. Net cash used in operating activities
was $64.1 million, $53.0 million and $61.0 million for years ended December 31, 2017, 2016 and 2015. The Company must raise
additional capital to fund its continued operations and remain in compliance with its debt covenants. The Company may not be
successful in its efforts to raise additional funds or achieve profitable operations. Amounts raised will be used for further
development of the Company’s product candidates, to provide financing for marketing and promotion, to secure additional
property and equipment, and for other working capital purposes. Even if the Company is able to raise additional funds through the
sale of its equity securities, or loans from financial institutions, the Company’s cash needs could be greater than anticipated in
which case it could be forced to raise additional capital.
In September 2017, the Company raised $80.4 million in gross proceeds ($75.1 million net of $5.3 million in
underwriting fees, commissions and other offering costs and expenses) from the issuance of 26,775,000 shares of common stock
and warrants to purchase 10,710,000 shares of common stock at an initial exercise price of $3.35 per share for a term of 5 years
from the date of issuance at a combined price of $3.001 per share and accompanying warrant (“2017 Public Offering”). Gross
proceeds of $66.8 million and the issuance of 22,275,000 shares of common stock and warrants to purchase 8,910,000 shares of
common stock closed in September 2017 and the remaining $13.6 million of gross proceeds and the issuance of 4,500,000 shares
of common stock and warrants to purchase 1,800,000 shares of common stock closed in October 2017. In March 2017, the
Company raised $22.7 million in gross proceeds ($20.9 million net of $1.8 million in placement agent fees and other offering costs
and expenses) from the issuance of 6,767,855 shares of common stock, at a price of $3.36 per share, and warrants to purchase
2,707,138 shares of common stock at an initial exercise price of $4.50 per share for a term of 13 months from the date of issuance
(“2017 Private Placement”). At the present time, the Company has no commitments for any additional financing, and there can be
no assurance that, if needed, additional capital will be available to the Company on commercially acceptable terms or at all. If the
Company cannot obtain the needed capital, it may not be able to become profitable and may have to curtail or cease its operations.
These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to
continue as a going concern.
3. Summary of Significant Accounting Policies
Basis of Presentation
The Company operates in one segment considering the nature of the Company’s products and services, class of
customers, methods used to distribute the products and the regulatory environment in which the Company operates.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of
Kadmon Holdings, Inc. and its domestic and international subsidiaries, all of which are wholly owned.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements. Actual results could differ from those estimates.
Company Valuation
To estimate certain expenses and record certain transactions, it was necessary for the Company to estimate the fair value
of its membership units. Given the absence of a public trading market prior to the IPO, and in accordance with the American
Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately‑Held‑Company Equity Securities
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Issued as Compensation”, the Company exercised reasonable judgment and considered numerous objective and subjective factors
to determine its best estimate of the fair value of its membership units (Note 4).
Revenue Recognition
The Company recognizes sales when the risk of loss has been transferred to the customer. As is typical in the
pharmaceutical industry, gross product sales are subject to a variety of deductions, primarily representing rebates, chargebacks,
returns, and discounts to government agencies, wholesalers, and managed care organizations. These deductions represent
management’s best estimates of the related reserves and, as such, judgment is required when estimating the impact of these sales
deductions on gross sales for a reporting period. If estimates are not representative of the actual future settlement, results could be
materially affected. The Company’s product sales were substantially derived from the sale of its ribavirin portfolio of products
during the years ended December 31, 2017, 2016 and 2015.
The Company accounts for revenue arrangements that contain multiple deliverables in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 605‑25, “Revenue Recognition for
Arrangements with Multiple Elements”, which addresses the determination of whether an arrangement involving multiple
deliverables contains more than one unit of accounting. A delivered item within an arrangement is considered a separate unit of
accounting only if both of the following criteria are met:
·
·
the delivered item has value to the customer on a stand‑alone basis; and
the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in control of the vendor.
In accordance with FASB ASC Topic 605‑25, if both of the criteria above are not met, then separate accounting for the
individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single
unit of accounting is recognized generally over the greater of the term of the arrangement or the expected period of performance,
either on a straight‑line basis or on a modified proportional performance method.
Non‑refundable license fees are recognized as revenue when the Company has a contractual right to receive such
payment, the contract price is fixed or determinable, the collection of the receivable is reasonably assured and the Company has no
future performance obligations under the license agreement.
The Company may earn contingent payments from third parties based on the achievement of certain clinical and
commercial milestones. The Company recognizes milestone revenue as the underlying criteria is achieved in accordance with
FASB ASC Topic 605‑28, “Revenue Recognition Milestone Method”.
The Company reassesses the period of performance over which the Company recognizes deferred upfront license fees and
makes adjustments as appropriate in the period in which a change in the estimated period of performance is identified. In the event
a licensee elects to discontinue development of a specific product candidate under a single target license, but retains its right to use
the Company’s technology to develop an alternative product candidate to the same target or a target substitute, the Company would
cease amortization of any remaining portion of the upfront fee until there is substantial pre‑clinical activity on another product
candidate and its remaining period of substantial involvement can be estimated. In the event that a single target license were to be
terminated, the Company would recognize as revenue any portion of the upfront fee that had not previously been recorded as
revenue, but was classified as deferred revenue, at the date of such termination or through the remaining substantial involvement in
the wind down of the agreement.
Foreign Revenue
Foreign product sales represented approximately 26.9%, 8.6% and 10% of total product sales for the years ended
December 31, 2017, 2016 and 2015, respectively, the majority of which were to the Netherlands and Ireland.
Sales Returns Reserve
Revenue is recognized net of sales returns, which are estimated using the Company’s historical experience. The sales
returns reserve was $0.6 million and $0.4 million at December 31, 2017 and 2016, respectively. Sales returns expense was $0.6
million, $0.9 million and $0.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Actual results could
differ from original estimates resulting in future adjustments to revenue.
Reserve for Wholesaler Chargebacks and Rebates
The Company maintains a reserve for wholesaler chargebacks and rebates to properly reflect the realizable value of
accounts receivable. A chargeback represents a contractual allowance provided by the Company to its wholesalers for any
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variances between wholesale and lower retail prices of the Company’s pharmaceutical products. The Company estimates the
reserve for wholesaler chargebacks based on wholesaler inventory levels, contract prices and historical experience. Rebate reserves
represent contractual allowances based on specific customer contracts. The rebate allowance is estimated as a percentage of
specific customer sales. The reserve for wholesaler chargebacks and rebates was $0.2 million and $0.1 million at December 31,
2017 and 2016, respectively. Wholesaler chargebacks and rebates expense was $0.3 million, $0.5 million and $1.0 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
Rebates Payable
The Company issues rebates related to various government programs and buying groups. In these instances, the rebates
are paid in cash to the party managing the discount buying program. The estimated rebates earned but unpaid was $0.3 million and
$0.4 million at December 31, 2017 and 2016, respectively. Such amounts have been included in accounts payable on the
Company’s consolidated balance sheets. Rebates expense was $0.7 million, $0.8 million and $1.2 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Shipping and Handling Costs
Shipping and handling costs for raw materials and finished goods prior to their sale are classified in cost of sales. Freight
charges for shipments to customers are not billed to customers and are included in selling, general and administrative expenses
when incurred and were $0.1 million, $0.2 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Foreign Currencies
The consolidated financial statements are presented in U.S. dollars, the reporting currency of the Company. Gains or
losses on transactions denominated in a currency other than the Company’s functional currency, which arise as a result of changes
in foreign currency exchange rates, are recorded in other income on the consolidated statements of operations. The transaction
gains (loss) were ($25,000), $9,000 and $124,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Share‑based Compensation Expense
The Company recognizes share‑based compensation expense in accordance with FASB ASC Topic 718, “Stock
Compensation” (“ASC 718”), for all share‑based awards made to employees and board members based on estimated fair values.
ASC 718 requires companies to measure the cost of employee services incurred in exchange for the award of equity
instruments based on the estimated fair value of the share‑based award on the grant date. The expense is recognized over the
requisite service period.
All share‑based awards to non‑employees are accounted for in accordance with FASB ASC Topic 505‑50, “Equity Based
Payments to Non‑Employees,” where the value of unit compensation is based on the measurement date, as determined at either
a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity
instruments is complete.
The Company uses a Black‑Scholes option‑pricing model to value the Company’s option awards. Using this
option‑pricing model, the fair value of each employee and board member award is estimated on the grant date. The fair value is
expensed on a straight‑line basis over the vesting period. The option awards generally vest pro‑rata annually. The expected
volatility assumption is based on the volatility of the share price of comparable public companies. The expected life is determined
using the “simplified method” permitted by Staff Accounting Bulletin Numbers 107 and 110 (the midpoint between the term of the
agreement and the weighted average vesting term). The risk‑free interest rate is based on the implied yield on a U.S. Treasury
security at a constant maturity with a remaining term equal to the expected term of the option granted. The dividend yield is zero,
as the Company has never declared a cash dividend.
In the fourth quarter of 2016, the Company adopted ASU 2016‑09, “Compensation—Stock Compensation”. ASU 2016-
09 requires that certain other amendments relevant to the Company be applied using a modified-retrospective transition method by
means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the period in which the guidance is adopted.
As a result of adopting ASU 2016-09 during the three months ended December 31, 2016, the Company adjusted accumulated
deficit for amendments related to an entity-wide accounting policy election to recognize share-based award forfeitures only as they
occur rather than an estimate by applying a forfeiture rate. The Company recorded a $2.0 million charge to accumulated deficit as
of January 1, 2016 and an associated credit to additional paid-in capital for previously unrecognized share-based compensation
expense as a result of applying this policy election. The Company also recorded $0.8
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million in additional share-based compensation expense during the fourth quarter of 2016 as a result of applying estimated
forfeitures recorded during the nine months ended September 30, 2016.
ASU 2016-09 also requires the recognition of the income tax effects of awards in the consolidated statement of operations
when the awards vest or are settled, thus eliminating addition paid-in capital pools. The Company elected to adopt the
amendments related to the presentation of excess tax benefits on the condensed consolidated statement of cash flows using a
prospective transition method.
Modification of Awards
A change in any of the terms or conditions of the awards is accounted for as a modification of the award. Incremental
compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original
award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the
modification date. For vested awards, the Company recognizes incremental compensation cost in the period the modification
occurs. For unvested awards, if the award is probable of vesting both before and after the change, the Company recognizes the sum
of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the
modification date over the remaining requisite service period. If the fair value of the modified award is lower than the fair value of
the original award immediately before modification, the minimum compensation cost the Company recognizes is the cost of the
original award.
Research and Development
Innovation is critical to the success of the Company, and drug discovery and development are time‑consuming, expensive
and unpredictable. The Company has built a pipeline of therapeutic candidates in all stages of development. The focus is on serious
diseases where there is a great need and opportunity for innovative medicines. Product candidates and development strategies
contemplate both immediate possibilities in medicine, such as reducing toxicity or addressing certain disease resistance and
mutation, and future possibilities and medical needs. Included in research and development expense are personnel related costs,
expenditures for laboratory equipment and consumables, payments made pursuant to licensing and acquisition agreements, and the
cost of conducting clinical trials. Expenses incurred associated with conducting clinical trials include, but are not limited to, dosing
of patients with clinical drug candidates, assistance from third party consultants and other industry experts, accumulation and
interpretation of data on drug safety and efficacy, and manufacturing of active pharmaceutical ingredients and placebos for use
within the clinical trial.
The Company has entered into agreements with third parties to acquire technologies and pharmaceutical product
candidates for development (Note 12). Such agreements generally require an initial payment by the Company when the contract is
executed, and additional payments upon the achievement of certain milestones. Additionally, the Company may be obligated to
make future royalty payments in the event the Company commercializes the pharmaceutical product candidate and achieves a
certain sales volume. In accordance with FASB ASC Topic 730‑10‑55, “Research and Development”, expenditures for research
and development, including upfront licensing fees and milestone payments associated with products that have not yet been
approved by the FDA, are charged to research and development expense as incurred. Future contract milestone payments will be
recognized as expense when achievement of the milestone is determined to be probable. Once a product candidate receives
regulatory approval, subsequent license payments are recorded as an intangible asset.
Research and development expense was $40.8 million, $35.8 million and $33.6 million during the years ended
December 31, 2017, 2016 and 2015, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes
prescribed by FASB ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). Under the asset and liability method of ASC
740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in
the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.
The Company follows FASB ASC Topic 740‑10, “Accounting for Uncertainty in Income Taxes”, which prescribes a
recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained
upon examination by taxing authorities. At December 31, 2017 and 2016, the Company had no material uncertain tax
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positions to be accounted for in the financial statements. The Company recognizes interest and penalties, if any, related to
unrecognized tax benefits in interest expense.
Under ASU 2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based
payment awards) should be recognized as income tax expense or benefit in the statement of operations. The tax effects of exercised
or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize
excess tax benefits regardless of whether the benefits reduce tax payable in the current period. The Company made an early
adoption on the ASU 2016-09 effect in the fourth quarter of 2016. There was no cumulative impact as the federal and state excess
deductions would be offset by a corresponding change to the valuation allowance.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of deposits at major financial banking institutions and highly liquid investments
with an original maturity of three months or less at the date of purchase. At times, cash balances deposited at major financial
banking institutions exceed the federally insured limit. The Company regularly monitors the financial condition of the institutions
in which it has depository accounts and believes the risk of loss is minimal.
Restricted Cash
The Company has a lease agreement for the premises it occupies in New York. A secured letter of credit in lieu of a lease
deposit totaling $2.0 million is secured by restricted cash in the same amount at December 31, 2017 and 2016. The secured letter
of credit will remain in place for the life of the related lease, expiring in October 2024 (Note 16). The Company also has a lease
agreement for the premises it occupies in Massachusetts. A secured letter of credit in lieu of a lease deposit totaling $91,000 was
established during the third quarter of 2015 and is secured by restricted cash in the same amount at December 31, 2017 and 2016.
The secured letter of credit will remain in place for the life of the related lease, expiring in April 2023 (Note 16).
Allowance for Doubtful Accounts
The Company reviews the collectability of accounts receivable based on an assessment of historical experience, current
economic conditions, and other collection indicators. The Company has recorded an allowance for doubtful accounts of
$0.7 million at both December 31, 2017 and 2016. Adjustments to the allowance for doubtful accounts are recorded to selling,
general and administrative expenses, and amounted to $3,000, $6,000, and $5,000 for the years ended December 31, 2017, 2016
and 2015, respectively. When accounts are determined to be uncollectible they are written off against the reserve balance and the
reserve is reassessed. When payments are received on reserved accounts they are applied to the customer’s account and the reserve
is reassessed.
Inventories
Inventories are stated at the lower of cost or market (on a first‑in, first‑out basis) using standard costs. Standard costs
include an allocation of overhead rates, which include those costs attributable to managing the supply chain and are evaluated
regularly. Variances are expensed as incurred.
Investments
The Company follows FASB ASC Topic 323, “Investments—Equity Method and Joint Ventures” (“ASC 323”), in
accounting for its investment in a joint venture. In the event the Company’s share of the joint venture’s net losses reduces the
Company’s investment to zero, the Company will discontinue applying the equity method and will not provide for additional losses
unless the Company has guaranteed obligations of the joint venture or is otherwise committed to provide further financial support
for the joint venture. If the joint venture subsequently reports net income, the Company will resume applying the equity method
only after its share of that net income equals the share of net losses not recognized during the period the equity method was
suspended.
The Company follows FASB ASC Topic 325, “Investments—Other” (“ASC 325”), in accounting for its investment in the
stock of another company. In the event further contributions or additional shares are purchased, the Company will increase the
basis in the investment. In the event distributions are made or indications exist that the fair value of the investment has decreased
below the carrying amount, the Company will decrease the value of the investment as considered appropriate.
The Company’s total investment balance totaled $3.5 million and $11.1 million at December 31, 2017 and 2016,
respectively.
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For all non‑consolidated investments, the Company will continually assess the applicability of FASB ASC Topic 810,
“Consolidation” (“ASC 810”), to determine if the investments qualify for consolidation. At December 31, 2017 and 2016, no such
investments qualified for consolidation (Note 12).
Fixed Assets
Fixed assets are recorded at cost and depreciated over their estimated useful lives. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the lease term, using the straight‑line method. Construction‑in‑progress and
software under development are stated at cost and not depreciated. These items are transferred to fixed assets when the assets are
placed into service.
Intangible Assets
Intangible assets are stated at cost, less accumulated amortization. The Company accounts for the purchases of intangible
assets in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other”. Intangible assets are recognized based on
their acquisition cost. The assets will be tested for impairment at least once annually, if determined to have an indefinite life, or
whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable. If any of the
Company’s intangible or long‑lived assets are considered to be impaired, the amount of impairment to be recognized is the excess
of the carrying amount of the assets over its fair value. Applicable long‑lived assets, including intangible assets with definitive
lives, are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue
generation are reviewed periodically for appropriateness and are based upon management’s judgment.
Goodwill
The Company’s goodwill relates to the 2010 acquisition of Kadmon Pharmaceuticals, a Pennsylvania limited liability
company that was formed in April 2000. Goodwill is not amortized, but rather is assessed for impairment annually or upon the
occurrence of an event that indicates impairment may have occurred, in accordance with FASB ASC Topic 350 “Intangibles—
Goodwill and Other”. No impairment to goodwill was recorded during the years ended December 31, 2017, 2016 and 2015.
Impairment of Long‑Lived Assets
Long‑lived assets, such as intangible assets (other than goodwill) and fixed assets, are evaluated for impairment
periodically, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
When any such impairment exists, a charge is recorded in the statement of operations to adjust the carrying value of the related
assets.
The Company performed a trigger analysis over all other long‑lived assets at the lowest identifiable level of cash flows
and determined that an impairment existed during the year ended December 31, 2015 (Note 11) and no impairment triggers existed
during the years ended December 31, 2017 and 2016. An impairment of $31.3 million was recognized during the year ended
December 31, 2015, while no such impairment was recognized during the years ended December 31, 2017 and 2016 (Note 11).
Accounting for Leases
The Company recognizes rent expense for operating leases as of the earlier of the possession date or the lease
commencement date. Rental expense, inclusive of rent escalations, rent holidays, concessions and tenant allowances are
recognized over the lease term on a straight‑line basis. See Note 16 for a further discussion of operating leases.
The Company has entered into capital lease agreements for information technology and laboratory equipment.
Amortization expense for capital lease agreements is included in depreciation and amortization of fixed assets. As a result of these
leases, the Company capitalized $208,000, $230,000 and $20,000 as office equipment and furniture during the years ended
December 31, 2017, 2016 and 2015, respectively. The unamortized portion of capital leases totaled $270,000 and $191,000 at
December 31, 2017 and 2016, respectively.
Accounting for Contingencies
The Company follows the guidance of FASB ASC Topic 450, “Contingencies” (“ASC 450”), in accounting for
contingencies. If some amount within a range of loss is probable and appears at the time to be a better estimate than any other
amount within the range, that amount shall be expensed. If a loss is probable, and no amount within the range is a better estimate
than any other amount, the estimated minimum amount in the range shall be expensed.
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Fair Value of Financial Instruments
The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC
820”). This pronouncement defines fair value, establishes a framework for measuring fair value under GAAP and requires
expanded disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market‑based measurement, not an
entity‑specific measurement, and defines fair value as the price to sell an asset or transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to
replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect
the Company’s market assumptions. ASC 820 utilizes a fair value hierarchy that prioritizes inputs to fair value measurement
techniques into three broad levels. The following is a brief description of those three levels:
·
·
·
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability,
including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets
or liabilities in markets that are not active; and model‑derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts
due to their short term nature (Note 8).
Loan Modifications and Extinguishments
The Company follows the provisions of FASB ASC Subtopic 470‑50 “Debt Modifications and Extinguishments” (“ASC
470‑60”) and ASC Subtopic 470‑60, “Troubled Debt Restructurings by Debtors” (“ASC 470‑60”). Under ASC 470‑50, an
exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt
situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash
flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows
under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a
present value basis is less than 10 percent, the debt instruments are not considered to be substantially different, except in the
following two circumstances:
·
·
A modification or an exchange affects the terms of an embedded conversion option, from which the change in the fair
value of the embedded conversion option (calculated as the difference between the fair value of the embedded
conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying
amount of the original debt instrument immediately before the modification or exchange.
A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion
option that was substantive at the date of the modification or exchange.
Under ASC 470‑60, a restructuring of a debt constitutes a troubled debt restructuring for purposes of this Subtopic if the
creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would
not otherwise consider.
Warrants and Derivative Liabilities
The Company accounts for its derivative financial instruments in accordance with FASB ASC Topic 815, “Derivatives
and Hedging” (“ASC 815”). The Company does not have derivative financial instruments that are hedges. ASC 815 establishes
accounting and reporting standards requiring that derivative instruments, both freestanding and embedded in other contracts, be
recorded on the balance sheet as either an asset or liability measured at its fair value each reporting period. ASC 815 also requires
that changes in the fair value of derivative instruments be recognized currently in the results of operations unless specific criteria
are met. For embedded features that are not clearly and closely related to the host instrument, are not carried at fair value, and are
derivatives, the feature will be bifurcated and recorded as an asset or liability as noted above, unless the exceptions below are not
met. Freestanding instruments that do not meet these exceptions will be accounted for in the same manner.
ASC 815 provides an exception—if an embedded derivative or freestanding instrument is both indexed to the company’s
own units and classified in members’ units, it can be accounted for in members’ unit. If at least one of the criteria is
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not met, the embedded derivative or warrant is classified as an asset or liability and recorded to fair value each reporting period
through the income statement.
The Company assesses classification of our warrants, other freestanding derivatives, and embedded features at each
reporting date to determine whether a change in classification is required. The Company’s accounting for its embedded features,
the warrants and the success fee, are explained further in Note 8.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2017-09, Compensation – Stock Compensation, which clarifies the guidance about which changes to the terms and conditions of a
share-based payments award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual or
any interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The
Company does not expect the standard to have a significant impact on its consolidated financial statements as the fair value of the
Company’s modified awards is immaterial.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (“ASU 2017-04”), which
simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead of
performing Step 2 to determine the amount of an impairment charge, the fair value of a reporting unit will be compared with its
carrying amount and an impairment charge will be recognized for the value by which the carrying amount exceeds the reporting
unit’s fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company does not expect the standard to have a significant impact on its consolidated financial statements as
the Company’s goodwill balance is immaterial.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. This
ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total
amounts on the balance sheet and disclose the nature of the restrictions. The Company will adopt this standard on January 1, 2018
and it is not expected to have a significant impact on its consolidated financial statements as the Company’s restricted cash
balances are immaterial.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a
company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the
company expects to receive for those goods or services. The FASB has continued to issue accounting standards updates to clarify
and provide implementation guidance related to Revenue from Contracts with Customers, including ASU 2016-08, Revenue from
Contract with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope
Improvements and Practical Expedients. These amendments address a number of areas, including the entity’s identification of its
performance obligations in a contract, collectability, non-cash consideration, presentation of sales tax and an entity’s evaluation of
the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a
point in time. The Company has adopted the standard effective January 1, 2018 using the modified retrospective method applied to
all contracts applying the practical expedient for contract modifications, which allows a company to aggregate the impact of all
modifications entered into prior to the earliest period presented. In preparation for adoption of the standard, the Company has
implemented internal controls to enable the preparation of financial information including the assessment of the impact of the
standard. Adoption of the standard is expected to result in a decrease to deferred revenues of approximately $24.0 million along
with a cumulative adjustment to the Company's accumulated deficit of $24.0 million as of January 1, 2018.
In March 2016, the FASB issued ASU No. 2016‑06, “Derivatives and Hedging”. This ASU clarifies the requirements for
assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and
closely related to their debt hosts. This guidance is effective for annual and interim reporting periods of public entities beginning
after December 15, 2016, with early adoption permitted. An entity should apply the amendments in this ASU on a modified
retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The
Company adopted this standard on January 1, 2017, which did not impact the consolidated financial statements of the Company.
In February 2016, the FASB issued ASU No. 2016‑02, “Leases”. This ASU amends the existing accounting standards for
lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual
and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The
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Company evaluated the impact of adopting the standard on its consolidated financial statements and determined that upon adoption
it will have to record a right of use asset and offsetting liability on the Company’s balance sheet.
In July 2015, the FASB issued ASU No. 2015‑11, “Inventory (Topic 330)” which simplifies the subsequent measurement
of inventory. It replaces the current lower of cost or market test with a lower of cost or net realizable value test. The standard is
effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early
adoption is permitted. The new guidance must be applied prospectively. The Company adopted this standard on January 1, 2017,
which did not impact the consolidated financial statements of the Company.
4. Stockholders’ Equity (Deficit)
Conversion Event
The Class B, C and D units were required to automatically convert into Class A units pursuant to the Company’s Second
Amended and Restated Limited Liability Company Operating Agreement, as amended (the “Operating Agreement”) upon certain
defined conversion events including, but not limited to, dissolution of the Company or an underwritten IPO of the Company’s
equity (each, a “Conversion Event”). The Conversion Event occurred on August 1, 2016, upon consummation of the Company’s
IPO. The valuation of the Company at the Conversion Event was greater than $45.8 million, which resulted in the Class B and C
units receiving $41.7 million of the proceeds of the Conversion Event in the form of equivalent Class A units. The Class D units
converted into Class A units such that the holders thereof received $4.2 million of such proceeds. The proceeds in excess of
$45.8 million were shared ratably by the other holders of Class A units.
Class A Units
Class A units represented the Company’s common stock equivalents. At December 31, 2016, Kadmon I, LLC (“Kadmon
I”) held approximately 12.1% of the total outstanding common stock of the Company. Kadmon I was a Delaware limited liability
company that was formed in August 2009 and was an affiliate of the Company (Note 19). Kadmon I’s funds were raised through a
private offering of 80% of Kadmon I’s total membership interests, the other 20% being owned by certain other members, including
members of the Company’s board of directors and an executive officer at the time of such offering.
Once each Kadmon I investor has received aggregate distributions equal to four times the amount of their initial
investment, their collective ownership percentage in additional distributions would have decreased from 80% to 50%, and the
collective ownership percentage for the members of the Company’s board of directors, an executive officer and members in
Kadmon I, and certain other members who received units would have increased from 20% to 50%. The change in ownership
percentages would have required the Company to evaluate whether such changes would result in additional compensation expense.
Kadmon I investors had never received any distributions. Accordingly, no additional compensation expense was recognized. On
January 23, 2017, Kadmon I, LLC was dissolved and liquidated. Upon dissolution and liquidation, all assets of Kadmon I, LLC
which consists solely of the shares of common stock in Kadmon Holdings, Inc., were distributed to the members of Kadmon I,
LLC.
During the year ended December 31, 2016, the Company issued 25,000 Class A units to settle third party obligations, for
which the Company expensed $0.1 million related to these settlements during the year ended December 31, 2016 and issued 7,200
Class A units as the result of stock option exercises. The Company also recorded an expense of $3.0 million during the year ended
December 31, 2016 related to the 1,500,000 Class A units issued in an advisory agreement entered into in April 2015.
The Class A units converted into common stock at the Conversion Event resulting in no Class A units outstanding at
December 31, 2017.
Class B Unit
The Class B unit did not participate in distributions from the Company, did not have any preferences in relation to the
Class A units, was non‑voting, and was non‑redeemable. The only right afforded to the Class B unit was the right to convert into
Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). The Class B unit converted into
common stock at the Conversion Event resulting in no Class B units outstanding at December 31, 2017.
Class C Unit
The Class C unit did not participate in distributions from the Company, does not have any preferences in relation to the
Class A units, is non‑voting, and is non‑redeemable. The only right afforded to the Class C unit was the right to convert into
Class A units pursuant to the Operating Agreement (see “Conversion Event”). The Class C unit converted into common stock at
the Conversion Event resulting in no Class C units outstanding at December 31, 2017.
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Class D Units
The Class D units did not participate in distributions from the Company, did not have any preferences in relation to the
Class A units, were non‑voting, and were non‑redeemable. The only right afforded to the Class D unit was the right to convert into
Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). The Class D units converted into
common stock at the Conversion Event resulting in no Class D units outstanding at December 31, 2017.
Class E Redeemable Convertible Units
One series of Class E redeemable convertible units, the Class E Series E‑1 units (the “Class E redeemable convertible
units”), was authorized. The Company was able to issue Class E redeemable convertible units with an aggregate Class E original
issue price of up to $85 million, calculated in accordance with the terms of the Operating Agreement, of any series without being
subject to preemptive rights. The Class E redeemable convertible units had voting rights and powers equal to the Class A units on
an as‑if converted basis, had a liquidation preference for liquidating distributions and participated in distributions from the
Company on an as‑converted basis on non‑liquidating distributions. In the case of a qualified IPO, the Class E redeemable
convertible units automatically converted into Class A units at a conversion price of the lower of 85% of the value of Class A units
(or the price per share of common stock of the corporate successor to the Company) or $11.50 per unit. Prior to a qualified IPO, the
Class E redeemable convertible units could be converted at $11.50 per unit. A qualified IPO was defined as an offering of the
Company’s equity interests with gross proceeds to the Company of at least $75 million. At any time after December 31, 2017,
Class E redeemable convertible units were redeemable for cash at the option of the holders of at least 80% of all Class E
redeemable convertible units at a redemption price equal to 125% of the liquidation preference. After January 1, 2016 all Class E
redeemable convertible units began to accrue a liquidation preference (payable in connection with such liquidating distribution
from the Company) at a rate of 5% per annum, compounding annually, with such liquidation preference rate increasing by 100
basis points every six months to a maximum of 10%. Redemption was subject to the Company’s ability to make such payment
under then‑existing debt obligations.
Based on the terms of the Class E redeemable convertible units, the fair value of the Class E redeemable convertible units
issued was classified as mezzanine capital on the Company’s consolidated balance sheet. The Company accreted changes in the
redemption value of the Class E redeemable convertible units to paid‑in capital using the interest method, as the Company did not
have available retained earnings, from the date of issuance to the earliest redemption date.
During the year ended December 31, 2016, the Company raised $5.5 million in gross proceeds, with no transaction costs,
through the issuance of 478,266 Class E redeemable convertible units. Dr. Harlan W. Waksal, the Company’s President and Chief
Executive Officer, certain entities affiliated with GoldenTree Asset Management LP, Bart M. Schwartz, Esq., the Company’s
Chairman of the board of directors, and D. Dixon Boardman, a member of the Company’s board of directors subscribed for 86,957,
43,479, 21,740 and 21,740 Class E redeemable convertible units, respectively.
The Company calculated a deemed dividend on the Class E redeemable convertible units of $13.4 million in August 2016,
which equals a 15% discount to the IPO price of the Company’s common stock of $12.00 per share upon conversion to common
stock at the Conversion Event, a beneficial conversion feature. The Class E redeemable convertible units converted into common
stock at the Conversion Event resulting in no Class E redeemable convertible units outstanding at December 31, 2017.
5% Convertible Preferred Stock
Our certificate of incorporation permitted the Company’s board of directors to issue up to 10,000,000 shares of preferred
stock from time to time in one or more classes or series. Concurrently with the closing of the Company’s IPO and pursuant to the
terms of the exchange agreement entered into with the holders of the Company’s Senior Convertible Term Loan, the Company
issued to such holders 30,000 shares of 5% convertible preferred stock, designated as the convertible preferred stock. Each share of
convertible preferred stock was issued for an amount equal to $1,000 per share, which is referred to as the original purchase price.
Shares of convertible preferred stock with an aggregate original purchase price and initial liquidation preference of $30.0 million
were issued to the holders of the Senior Convertible Term Loan in exchange for an equivalent principal amount of the Senior
Convertible Term Loan pursuant to the terms of an exchange agreement dated as of June 8, 2016, between the Company and those
holders, which is referred to as the exchange agreement.
The shares of 5% convertible preferred stock are entitled to receive dividends, when and as declared by the board of
directors and to the extent of funds legally available for the payment of dividends, at an annual rate of 5% of the sum of the
original purchase price per share of 5% convertible preferred stock plus any dividend arrearages. Dividends on the 5% convertible
preferred stock shall, at the Company’s option, either be paid in cash or added to the stated liquidation preference amount for
purposes of calculating dividends at the 5% annual rate (until such time as the Company declares and pays the missed dividend in
full and in cash, at which time that dividend will no longer be part of the stated liquidation preference amount). Dividends shall be
payable annually on June 30 of each year and shall be cumulative from the most recent dividend
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payment date on which the dividend has been paid or, if no dividend has ever been paid, from the original date of issuance of the
5% convertible preferred stock and shall accumulate from day to day whether or not declared until paid.
The 5% convertible preferred stock converts into shares of the Company’s common stock at a 20% discount to the price
per share of common stock in the IPO. The Company calculated a deemed dividend on the 5% convertible preferred stock of $7.5
million in August 2016, which equals the 20% discount to the IPO price of the Company’s common stock of $12.00 per share, a
beneficial conversion feature. The 5% convertible preferred stock, inclusive of accrued and unpaid dividends, is convertible into
3,351,717 and 3,191,843 shares of common stock at December 31, 2017 and 2016, respectively. The Company accrued dividends
on the 5% convertible preferred stock of $1.5 million and $0.6 million for the years ended December 31, 2017 and 2016,
respectively. The Company also calculated a deemed dividend of $0.4 million on the $1.5 million of accrued dividends for the year
ended December 31, 2017 and $0.2 million on the $0.6 million of accrued dividends for the year ended December 31, 2016, which
equals the 20% discount to the IPO price of the Company’s common stock of $12.00 per share, a beneficial conversion feature.
Approximately $1.4 million of accrued dividends that were payable on June 30, 2017 was added to the stated liquidation
preference amount of the 5% convertible preferred stock. The stated liquidation preference amount on the 5% convertible preferred
stock totaled $31.4 million at December 31, 2017.
Common Stock
Prior to the IPO, there were no shares outstanding of the Company’s common stock, par value $0.001 per share, and no
stockholders of record. The Company’s certificate of incorporation authorizes the issuance of up to 200,000,000 shares of the
Company’s common stock. On August 1, 2016, the Company completed its IPO whereby it sold 6,250,000 shares of common
stock at $12.00 per share. The aggregate net proceeds received by the Company from the offering were $66.0 million, net of
underwriting discounts and commissions of $5.3 million and offering expenses of $3.7 million. At December 31, 2017,
78,643,954 shares of common stock were outstanding.
During the year ended December 31, 2017, the Company raised $80.4 million in gross proceeds, $75.1 million net of
$5.3 million in underwriting fees, commissions and other offering costs and expenses, from the issuance of 26,775,000 shares of
common stock and warrants to purchase 10,710,000 shares of common stock at an initial exercise price of $3.35 per share for a
term of 5 years from the date of issuance at a combined price of $3.001 per share and accompanying warrant. The Company
allocated $57.6 million to the common stock which was recorded as common stock and additional paid in capital and allocated
$22.8 million to the warrants which was recorded to additional paid in capital.
The Company also raised $22.7 million in gross proceeds, $20.9 million net of $1.8 million in placement agent fees and
other offering costs and expenses, from the issuance of 6,767,855 shares of common stock, at a price of $3.36 per share, and
warrants to purchase 2,707,138 shares of common stock at an initial exercise price of $4.50 per share for a term of 13 months from
the date of issuance. In connection with the 2017 Private Placement, the Company agreed to file a registration statement to register
the shares of common stock and the shares of common stock underlying the warrants for resale. Under the agreement, the
registration statement had to be filed within 30 days of the closing of the financing and declared effective within the timeline
provided in the agreement. If the applicable deadlines were not met, monthly liquidated damages of 2.0% of the subscription
amount (with an 8.0% cap) were due to the purchaser. The registration statement was filed on April 10, 2017 and declared effective
on April 21, 2017.
Valuation
Prior to the IPO, to estimate certain expenses and record certain transactions, it was necessary for the Company to
estimate the fair value of its membership units. Given the absence of a public trading market, and in accordance with the American
Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately‑Held‑Company Equity Securities Issued as
Compensation,” the Company exercised reasonable judgment and considered numerous objective and subjective factors to
determine its best estimate of the fair value of its membership units. Factors considered included:
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recent equity financings and the related valuations;
the estimated present value of the Company’s future cash flows;
industry information such as market size and growth;
market capitalization of comparable companies and the estimated value of transactions such companies have engaged
in; and
macroeconomic conditions.
The Company updated the valuation of Class A units as of September 30, 2015 using a methodology consistent with prior
valuations. At the time of the valuation, the Company had issued $92.0 million in second‑lien convertible debt, and it was
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deemed appropriate to place additional weighting on this consideration, as compared to prior valuations. The Company also
considered equity raised through the issuance of $15.0 million in Class A units during 2015. The Company assigned no value to
the Ribasphere products to reflect changes in market conditions that have resulted in lower sales of the Ribasphere products. As a
result of the revised inputs to the analysis, the estimated fair value of each Class A unit was decreased from $39.00 to $32.50 as of
September 30, 2015.
5. Net Loss per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common
stockholders by the weighted-average number of common stock outstanding for the period. Because the Company has reported a
net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those
periods. The following table summarizes the computation of basic and diluted net loss per share attributable to common
stockholders of the Company (in thousands, except share and per share amounts):
Numerator – basic and diluted:
Net loss attributable to common stockholders
Denominator – basic and diluted:
Weighted average common stock outstanding used to compute basic and
diluted net loss per share
Net loss per share, basic and diluted
Years Ended
December 31,
2017
2016
2015
$
(81,692) $
(230,488) $
(147,082)
57,405,331
23,674,512
$
(1.42) $
(9.74) $
8,127,781
(18.10)
The amounts in the table below were excluded from the calculation of diluted net loss per share, due to their anti-dilutive
effect:
Convertible preferred stock
Options to purchase common stock
Warrants to purchase common stock
Total shares of common stock equivalents
6. Commercial Partnership
Years Ended
December 31,
2016
3,191,843
6,437,515
1,328,452
10,957,810
2017
3,351,717
8,496,872
14,699,990
26,548,579
2015
3,191,843
1,685,248
1,328,452
6,205,543
On June 17, 2013, the Company entered into a series of agreements with a commercial partner AbbVie Inc. (“AbbVie”),
related to our ribavirin products. Pursuant to an asset purchase agreement, as amended, we sold marketing authorizations and
related assets for ribavirin in certain countries outside the United States. The Company received upfront payments totaling $64.0
million, and could receive additional contingent payments totaling $51.0 million based on the achievement of certain milestones.
The Company did not earn any such milestones during the years ended December 31, 2017, 2016 and 2015.
Of the $64.0 million upfront payment, $44.0 million was considered allocable to the domestic licensing arrangement and
was recorded as deferred revenue to be recognized over the 10 year term of the agreement. The Company will recognize the
upfront payment to revenue on a straight‑line basis over the life of the agreement. The Company recognized $4.4 million of the
upfront consideration as license revenue during each of the years ended December 31, 2017, 2016 and 2015. At December 31,
2017 and 2016, $24.0 million and $28.4 million were recorded as deferred revenue, respectively, of which $4.4 million was
short‑term.
In October 2014, the Company entered into a series of amendments with AbbVie whereby the parties agreed to eliminate
all potential future unearned and unpaid milestones and also agreed to a revised royalty structure for the sale of ribavirin products
under the domestic license agreement. The Company received upfront payments of $6.0 million in consideration of future royalties
payable resulting from the resale of certain ribavirin products by AbbVie during 2015 and 2016. At the time of receipt the balance
was recorded to deferred revenue, $3.0 million of which was recorded as short‑term as it related to prepaid royalties for 2015 and
$3.0 million of which was recorded as long‑term as it related to prepaid royalties for 2016. The Company will recognize portions
of the deferred revenue to income as ribavirin is sold by AbbVie. The Company is entitled to receive additional compensation from
AbbVie for any royalties earned in excess of the annual prepayment. If royalties earned do not exceed the annual prepayment, the
Company is required to refund the excess to AbbVie.
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Since the royalties earned from the resale of ribavirin products by AbbVie under the domestic license agreement did not
exceed the $3.0 million annual prepayment in 2015, the Company refunded approximately $2.1 million of the prepaid royalty to
AbbVie as a credit against future purchases during the year ended December 31, 2016. The Company had recorded this amount as
an accrued expense at December 31, 2015. Furthermore, the Company was required to refund approximately $2.9 million of the
prepaid royalty to AbbVie resulting from the resale of ribavirin products by AbbVie during 2016. The Company settled
approximately $2.9 million and $0.7 million of the prepaid royalty refund as of December 31, 2017 and 2016, respectively, and
therefore has no refunds of prepaid royalties due to Abbvie at December 31, 2017. The Company had recorded an accrued expense
of $2.2 million at December 31, 2016.
The Company has a continuing obligation to supply ribavirin products, maintain the marketing authorizations for certain
ribavirin products and maintain the intellectual property for Ribasphere and RibaPak through the term of the agreements ending
December 31, 2020.
7. Debt
Concurrent with the closing of the IPO on August 1, 2016, the Company’s Senior Convertible Term Loan and Second
Lien Convert converted into 19,034,467 shares of common stock.
The Company is a party to one credit agreement in the following amount (in thousands):
Secured term debt due June 17, 2018
Total debt before fees and debt discount/premium
Less: Deferred financing costs
Debt discount
Add: Debt premium
Total debt payable
Debt payable, current portion
Debt payable, long-term
Secured Term Debt
August 2015 Secured Term Debt
December 31,
2017
2016
34,620
34,620
34,620
(228)
(1,030)
345
33,707 $
33,707 $
— $
34,620
(737)
(3,306)
—
30,577
1,900
28,677
$
$
$
In August 2015, the Company entered into a secured term loan in the amount of $35.0 million with two lenders (“2015
Credit Agreement”). The interest rate on the loan is LIBOR plus 9.375% with a 1% floor. The Company incurred and paid a
$788,000 commitment fee in connection with the loan that will be amortized to interest expense over the term of the agreement.
The basic terms of the loan required monthly payments of interest only through the first anniversary date of the loan and require
the Company to maintain certain financial covenants requiring the Company to maintain a minimum liquidity amount and
minimum revenue levels beginning after June 30, 2016 through August 1, 2016, the date the Company consummated its IPO.
Beginning on the first anniversary date of the loan, the Company is required to make monthly principal payments in the amount of
$380,000. Any outstanding balance of the loan and accrued interest is to be repaid on June 17, 2018. The secured term loan is
collateralized by a first priority perfected security interest in all the tangible and intangible property of the Company.
In conjunction with the 2015 Credit Agreement, warrants to purchase $6.3 million of Class A units were issued to two
lenders, of which $5.4 million was recorded as a debt discount and $0.9 million was recorded as loss on extinguishment of debt
(Note 8). The debt discount is being amortized over the life of the outstanding term loan using the effective interest method.
Deferred financing costs of $1.3 million were recognized in recording the 2015 Credit Agreement and will be amortized
to interest expense over the three year term of the agreement. Additionally, a fee paid to one existing lender of $113,000 was
charged to loss on extinguishment of debt in accordance with ASC 470. There was also $1.5 million of debt discount and $390,000
of deferred financing cost write‑offs charged to loss on extinguishment of debt in accordance with ASC 470 in connection with this
transaction. Unamortized deferred financing costs were $0.2 million and $0.7 million at December 31, 2017 and 2016,
respectively. Approximately $0.5 million, $0.4 million and $0.4 million were charged to interest expense during the years ended
December 31, 2017, 2016 and 2015, respectively.
The Company entered into a third waiver agreement to the 2015 Credit Agreement in September 2016 to negotiate the
amendment and restatement of certain covenants of the Company contained in the 2015 Credit Agreement. In connection with
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such negotiation, the lenders under the 2015 Credit Agreement had agreed to refrain from exercising certain rights under the 2015
Credit Agreement, including the declaration of a default and to forbear from acceleration of any repayment rights with respect to
existing covenants until the parties have consummated the amendment and restatement of such provisions. In addition, certain
payments required to be made under the 2015 Credit Agreement had been deferred while the parties negotiated the amendment.
The parties executed a second amendment to the 2015 Credit Agreement in November 2016 whereby the Company deferred
further principal payments owed under the 2015 Credit Agreement in the amount of $380,000 per month until August 31, 2017.
Additionally, the parties amended various clinical development milestones and added a covenant pursuant to which the Company
was required to raise $40.0 million of additional equity capital by the end of the second quarter of 2017. All other material terms of
the 2015 Credit Agreement, including the maturity date, remain the same.
The Company entered into a fourth waiver agreement to the 2015 Credit Agreement in March 2017 under which the
lenders under the 2015 Credit Agreement agreed to refrain from exercising certain rights under the 2015 Credit Agreement,
including the declaration of a default and to forbear from acceleration of any repayment rights with respect to existing covenants.
The report and opinion of the Company’s independent registered public accounting firm, BDO USA, LLP, contained an
explanatory paragraph regarding the Company’s ability to continue as a going concern, which was an event of default under the
2015 Credit Agreement.
On March 31, 2017, the Company entered into the Third Amendment. Pursuant to this amendment, principal payments
owed under the 2015 Credit Agreement, in the amount of $380,000 per month, were deferred until January 31, 2018. Additionally,
the parties amended a future capital raising covenant by extending the time period by which the Company was required to raise the
remaining $17.0 million of capital by six months, from June 30, 2017 to December 31, 2017, which was satisfied in September
2017. All other material terms of the 2015 Credit Agreement, including the maturity date, remain the same. The clinical
development milestone was deemed satisfied in a letter agreement entered into on December 22, 2017 with a majority of lenders
under our 2015 Credit Agreement. As of the date hereof, the Company is not in default under the terms of the 2015 Credit
Agreement.
The Third Amendment also amended certain terms of the warrants to purchase an aggregate of 617,651 shares of the
Company’s common stock issued in connection with the 2015 Credit Agreement (the “2015 Warrants”). Pursuant to the Third
Amendment, the warrants may now only be exercised for cash and the exercise price was reduced from $10.20 per share to $4.50
per share. The redemption feature in the 2015 Warrants was also amended such that the warrant holder may only demand a
redemption of the 2015 Warrants upon the occurrence of, and during the continuance of, an event of default. Prior to this
amendment, the warrant could be redeemed by the warrant holder at any time after the 51st month. As amended, if these warrants
are exercised, the Company will receive approximately $2.8 million in proceeds in the aggregate.
As a result of the Third Amendment, $0.9 million was recorded as a debt premium at March 31, 2017, inclusive of the fair
value of the warrant modification utilizing a Black-Scholes calculation, and will be amortized to interest expense over the
remaining term of the agreement as the amendment was deemed to be a modification in accordance with ASC 470 (Note
8). Approximately $0.6 million was recorded to interest expense during the year ended December 31, 2017.
The Company entered into a fifth waiver agreement to the 2015 Credit Agreement in March 2018 under which the lenders
under the 2015 Credit Agreement agreed to refrain from exercising certain rights under the 2015 Credit Agreement, including the
declaration of a default and to forbear from acceleration of any repayment rights with respect to existing covenants. The report and
opinion of the Company’s independent registered public accounting firm, BDO USA, LLP, contains an explanatory paragraph
regarding the Company’s ability to continue as a going concern, which is an event of default under the 2015 Credit Agreement.
The minimum payments required on the outstanding balances of the 2015 Credit Agreement at December 31, 2017 are (in
thousands):
2018
2015 Credit Agreement
34,620
34,620
$
$
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The following table provides components of interest expense and other related financing costs (in thousands):
Interest expense and other financing costs
Interest expense - beneficial conversion feature
Interest paid-in kind
Write-off of deferred financing costs and debt discount
Amortization of deferred financing costs, debt discount and debt premium
Interest expense
$
$
8. Financial Instruments
Success Fee
Years Ended
December 31,
2016
2017
3,720 $
—
—
—
2,242
5,962 $
3,782 $
45,915
14,695
3,820
4,422
72,634 $
2015
7,817
—
11,434
2,752
5,157
27,160
In October 2011, an executive officer and member of Kadmon Holdings, LLC issued an equity instrument for which the
underlying value is based on 536,065 Class A units. The intrinsic value of the instrument is redeemable for cash upon certain
defined liquidity or distribution events (“Success Fee”).
Upon consummation of the Company’s IPO on August 1, 2016 with a price per share of $12.00 per share, the fair value of
this equity instrument had a fair value of $0, which resulted in no Success Fee owed by the Company. As a result of marking to
market this instrument, the Company recorded ($0.1) million and ($0.2) million to change in fair value of financial instruments for
the years ended December 31, 2016 and 2015, respectively.
As there were no quoted prices for identical or similar instruments prior to the IPO, the Company had utilized a
Black‑Scholes calculation to value this instrument at December 31, 2015, with the following assumptions: risk-free interest rate of
0.49%, expected term of 0.5 years, expected volatility of 79.2%, unit price of $32.50. strike price of $74.17 and a dividend rate of
0%.
Equity issued pursuant to Credit Agreements
In connection with the incurrence of the Senior Convertible Term Loan, the Company issued three tranches of warrants as
fees to the lenders that were redeemable for Class A units. The change in fair value of the warrants was ($0.2) million and ($1.3)
million for the years ended December 31, 2016 and 2015, respectively. Upon consummation of the Company’s IPO on August 1,
2016 with a price per share of common stock in the IPO of $12.00, the warrants to purchase Class A units issued to lenders in the
Senior Convertible Term Loan were exchanged for 351,992 warrants with a strike price of $10.20 per share to purchase the same
number of shares of the Company’s common stock. Since the strike price was determined at IPO, the aggregate fair value of these
warrants totaling $1.7 million was reclassified from liability to equity upon consummation of the Company’s IPO in August 2016.
At December 31, 2015 the Company utilized a binomial model to measure all three warrant tranches. Due to the
uncertainty of the strike price of the warrants, the Company performed each calculation multiple times using a weighted number of
units exercisable based on the Company’s best estimate of how many units would be issuable. The inputs used in the calculations
to measure all three warrant tranches at December 31, 2015 are as follows: risk-free interest rate of 0.49%, expected term of
0.5 years, expected volatility of 79.2%, unit price of $32.50. strike price of $61.75 and a dividend rate of 0%.
In connection with the 2015 Credit Agreement, the Company issued warrants as fees to the lenders to purchase an
aggregate of $6.3 million of the Company’s Class A units. The strike price of the warrants was 85% of the price per unit in an IPO
or, if before an IPO, 85% of the deemed per unit equity value as defined in the 2015 Credit Agreement. The warrants were
exercisable as of the earlier of an IPO or July 1, 2016. Prior to the Third Amendment, these warrants were redeemable at the option
of the holder after the 51st month from the issue date and were recorded as a non-current liability of $3.3 million at December 31,
2016. Since these warrants are now redeemable at the option of the holder upon the occurrence of, and during the continuance of,
an event of default, they are recorded as a liability of $1.2 million at December 31, 2017. Upon entry into the agreement in August
2015, the warrants issued to an existing lender was recorded to loss on extinguishment of debt of $0.9 million and the warrants
issued to the new lender was recorded as a debt discount of $5.4 million and will be amortized over the three year term (Note 7) in
accordance with ASC 470. As a result of the Third Amendment, $0.9 million was recorded as a debt premium and will be
amortized to interest expense over the remaining term of the agreement as the Third Amendment was deemed to be a modification
in accordance with ASC 470. The Company used the Black-Scholes pricing model to value the warrant liability at December 31,
2017 with the following assumptions: risk-free interest rate of 2.20%, expected term of 4.66 years, expected volatility of 74.9%
and a dividend rate of 0%.
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Upon consummation of the Company’s IPO on August 1, 2016 with a price per share of common stock in the IPO of
$12.00, the warrants to purchase Class A units issued to lenders under the 2015 Credit Agreement were exchanged for 617,651
warrants with a strike price of $10.20 per share to purchase the same number of shares of the Company’s common stock. The
decline in fair value of the warrants was $(1.1) million and $(4.3) million for the years ended December 31, 2017 and 2016, while
there was no change in fair value of financial instruments for the year ended December 31, 2015. None of these instruments have
been exercised at December 31, 2017 or December 31, 2016. At December 31, 2017, the fair value of the warrant liability was
approximately $1.2 million and is recorded as a short-term liability since the redemption feature of the warrant terminates upon the
current maturity of the 2015 credit agreement on June 17, 2018.
Other Warrants
On April 16, 2013, the Company issued warrants with an estimated fair value of $1.4 million for the purchase of 30,000
Class A units at a strike price of $21.24 as consideration for fundraising efforts performed. Upon consummation of the Company’s
IPO on August 1, 2016 and Corporate Conversion, these warrants to purchase Class A units were exchanged for 46,163 warrants to
purchase the same number of shares of the Company’s common stock at a strike price of $138.06. None of these warrants have
been exercised at December 31, 2017.
In connection with the sale of common stock in March 2017, warrants to purchase 2,707,138 shares of common stock
were issued at an exercise price of $4.50 per share. At December 31, 2017, all of these warrants were outstanding. These warrants
included a cash settlement option requiring the Company to record a liability for the fair value of the warrants at the time of
issuance and at each reporting period with any change in the fair value reported as other income or expense. The Company used
the Black-Scholes pricing model to value the warrant liability at December 31, 2017 with the following assumptions: risk-free
interest rate of 1.39%, expected term of 0.27 years, expected volatility of 71.5% and a dividend rate of 0%. At the time of issuance,
approximately $1.6 million was recorded as warrant liability. The change in the fair value of these warrants was $(0.9) million for
the year ended December 31, 2017. At December 31, 2017, the fair value of the warrant liability was approximately $0.7 million
and is recorded as a short-term liability as the warrants expire in April 2018.
In connection with the 2017 Public Offering, the Company issued warrants to purchase 10,710,000 shares of common
stock at an initial exercise price of $3.35 per share for a term of 5 years from the date of issuance. As of December 31, 2017,
warrants to purchase 10,687,200 shares of common stock were outstanding. The Company assessed the warrants under FASB ASC
480 and determined that the warrants were outside the scope of ASC 480. The Company next assessed the warrants under FASB
ASC 815. Under the related guidance, a reporting entity shall not consider a contract to be a derivative instrument if the contract is
both (1) indexed to the entity’s own stock and (2) classified in stockholders’ equity. The Company determined that the warrants
were indexed to the Company’s stock, as the agreements do not contain any exercise contingencies and the warrants’ settlement
amount equals the difference between the fair value of the Company’s common stock price and the warrant strike price. The
Company also assessed the classification in stockholders’ equity and determined the warrants met all of the criteria for
classification as equity under ASC 815. Based on this analysis, the Company determined that the warrant should be classified as
equity and recorded $22.8 million to additional paid in capital, which represents the allocation of the 2017 Public Offering
proceeds to the fair value of the warrants at issuance date.
Fair Value of Long‑term Debt
The Company had no long-term secured debt at December 31, 2017 and maintained a long‑term secured term debt
balance of $28.7 million at December 31, 2016. Since the secured debt becomes due in June 2018, it has been recorded as short-
term secured debt at December 31, 2017.The underlying agreements for these balances were negotiated with parties that included
fully independent third parties, at an interest rate which is considered to be in line with over-arching market conditions. Based on
these factors management considers the carrying value of the debt to approximate fair value at December 31, 2017.
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Fair Value Classification
The Company held certain liabilities that are required to be measured at fair value on a recurring basis. Fair value
guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These
tiers include:
· Level 1—Quoted prices in active markets for identical assets or liabilities.
· Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
· Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
The table below represents the values of the Company’s financial instruments at December 31, 2017 and December 31,
2016 (in thousands):
Description
Warrants
Total
Description
Warrants
Total
Fair Value Measurement Using:
December 31,
2016
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
3,305 $
3,305 $
3,305 $
3,305 $
—
—
December 31,
2017
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
1,952 $
1,952 $
1,952 $
1,952 $
—
—
$
$
$
$
The table below represents a rollforward of the Level 2 and Level 3 financial instruments from January 1, 2015 to
December 31, 2017 (in thousands).
Balance as of January 1, 2016
Transfer of warrants from Level 3 to Level 2
Change in fair value of financial instruments
Beneficial conversion feature recognized on warrants issued in
connection with 2015 credit agreement
Reclassification of warrants to APIC in connection with IPO
Balance as of December 31, 2016
Fair value of warrants modified in the Third Amendment
Issuance of warrants in private placement
Change in fair value of financial instruments
Balance as of December 31, 2017
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
— $
6,300
(4,107)
1,112
—
3,305 $
(908)
1,651
(2,096)
1,952 $
8,289
(6,300)
(273)
—
(1,716)
—
—
—
—
—
The Level 2 inputs used to value our financial instruments were determined using prices that can be directly observed or
corroborated in active markets. In August 2016, the warrants issued in connection with the 2015 Credit Agreement were
transferred from Level 3 to Level 2 as the Company’s securities began trading on the New York Stock Exchange. Although the fair
value of this obligation is calculated using the observable market price of Kadmon Holdings Inc. common stock, an active market
for this financial instrument does not exist and therefore the Company has classified the fair value of this liability as a Level 2
liability in the table above.
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9. Inventories
Inventories are stated at the lower of cost or market (on a first‑in, first‑out basis) using standard costs. Standard costs
include an allocation of overhead rates, which include those costs attributable to managing the supply chain and are evaluated
regularly. Variances are expensed as incurred.
The Company regularly reviews the expiration date of its inventories and maintains a reserve for inventories that are
probable to expire before shipment. Inventories recorded on the Company’s consolidated balance sheets are net of a reserve for
expirable inventory of $4.8 million and $4.9 million at December 31, 2017 and 2016, respectively. The Company expensed
Ribasphere inventory that it believes will not be sold prior to reaching its product expiration date totaling $1.7 million, $0.4 million
and $2.3 million during the years ended December 31, 2017, 2016 and 2015, respectively. If the amount and timing of future sales
differ from management’s assumptions, adjustments to the estimated inventory reserves may be required.
Inventories are comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods, net
Total inventories
10. Fixed Assets
Fixed assets consisted of the following (in thousands):
Leasehold improvements
Office equipment and furniture
Machinery and laboratory equipment
Software
Construction-in-progress
Less accumulated depreciation and amortization
Fixed assets, net
December 31,
December 31,
2017
2016
$
$
— $
80
121
201 $
1,153
—
797
1,950
Useful Lives
(Years)
December 31,
2017
December 31,
2016
4-8
3-15
3-15
1-5
$
$
10,120 $
1,488
2,765
3,162
408
17,943
(13,651)
4,292 $
10,274
2,193
3,255
3,581
44
19,347
(13,920)
5,427
Depreciation and amortization of fixed assets totaled $1.8 million, $2.3 million and $2.3 million in each of the years
ended December 31, 2017, 2016 and 2015, respectively. The construction‑in‑progress balance was related to costs of
unimplemented software still under development. Unamortized computer software costs were $0.2 million and $0.8 million at
December 31, 2017 and 2016, respectively. The amortization of computer software costs amounted to $0.6 million, $0.7 million
and $0.7 million during the years ended December 31, 2017, 2016 and 2015, respectively.
During the first quarter of 2017, the Company disposed of $2.1 million of fully depreciated assets. There was no
consideration received for the disposal of these assets and the disposal did not have a significant impact on the consolidated
financial statements of the Company.
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11. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill and other amortizable intangible assets at December 31, 2017 and 2016
are as follows (in thousands):
Ribasphere product rights
Goodwill
Ribasphere product rights
Goodwill
$
$
$
$
Balance as of
December 31,
2015
Amortization
Impairment
Balance as of
December 31,
2016
Remaining Useful
Life as of
December 31,
2016
15,223 $
3,580 $
(15,223) $
— $
— $
— $
—
3,580
—
—
Balance as of
December 31,
2016
Amortization
Impairment
Balance as of
December 31,
2017
Remaining Useful
Life as of
December 31,
2017
— $
3,580 $
— $
— $
— $
— $
—
3,580
—
—
In September 2015, the Company reviewed the estimated useful life of the Ribasphere product rights and determined that
the actual lives of the Ribasphere product rights intangible asset was shorter than the estimated useful lives used for amortization
purposes in the Company’s financial statements due to the continued growth of competitor products that do not necessitate the use
of Ribasphere as a complement in treating the hepatitis C infection. As a result, effective September 30, 2015, the Company
changed its estimate of the useful life of its Ribasphere product rights intangible asset to 1.25 years to better reflect the estimated
period during which the remaining asset will generate cash flows. The Company also determined that the carrying value of the
Ribasphere product rights exceeded its fair value and recorded an impairment loss of $31.3 million in September 2015.
In October 2015, the Company determined that the proportional performance method of amortization was more
appropriate than straight-line amortization. The amortization of the Ribasphere product rights intangible asset based on the
consumption of the economic benefit (Ribasphere gross profit), became a reliably determinable method of amortization due to the
remaining asset useful life being only 1.25 years and the ability to more accurately forecast the Ribasphere market. Accordingly,
Kadmon amortized the remaining book value of the intangible asset utilizing the proportional performance method starting
October 1, 2015 and ending December 31, 2016.
Amortization expense is included within selling, general and administrative expenses on the Company’s consolidated
statements of operations. No amortization expense related to the intangible asset was recorded in the year ended December 31,
2017, as the Ribasphere product rights intangible asset was fully amortized as of December 31, 2016. The Company recorded
amortization expense related to the intangible asset of $15.2 million and $27.4 million for the years ended December 31, 2016 and
2015, respectively. The accumulated amortization of the intangible asset was $(140.7) million and at both December 31, 2017 and
2016.
12. License Agreements
Yale University
On February 4, 2011, the Company entered into a license agreement with Yale University, whereby the Company
obtained the worldwide exclusive license and right to make, use, sell, import and export PHY906, a development stage botanical
compound, and the related technology. In April 2016, the Company entered into a mutual termination agreement with Yale
University. All rights and licenses granted under the agreement were immediately terminated and reverted to the party granting
such rights.
Symphony Evolution, Inc.
In August 2010, the Company entered into a license agreement with Symphony Evolution, Inc. (Symphony), under which
Symphony granted to the Company an exclusive, worldwide, royalty‑bearing, sublicensable license under certain Symphony
patents, copyrights and technology to develop, make, use, sell, import and export XL647 and the related technology in the field of
oncology and non‑oncology.
The Company is the licensee of granted patents in Australia, Canada, Europe, Japan and the United States. The patents
claim tesevatinib as a composition‑of‑matter, as well as use of tesevatinib to treat certain cancers. A pending U.S. application
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supports additional composition‑of‑matter claims and methods of synthesis. The last to expire U.S. patent in this family has a term
that ends in May 2026 based on a calculated Patent Term Adjustment (PTA) and without regard to any potential Patent Term
Extension (PTE), which could further extend the term by an additional five years.
The Company is the licensee of a second family of granted patents in China and Europe, as well as applications in
Canada, Eurasia, Japan, Taiwan and the United States. These patents and applications disclose the use of tesevatinib to treat PKD.
The last to expire U.S. patent in this family would have a term that ends in 2031, though this term could be extended by obtaining
a PTA and/or PTE.
The license agreement includes a series of acquisition and worldwide development milestone payments totaling up to
$218.4 million, and $14.1 million of these payments and other fees have been paid as of December 31, 2017. Additionally, the
license agreement includes commercial milestone payments totaling up to $175.0 million, none of which have been paid as of
December 31, 2017, contingent upon the achievement of various sales milestones, as well as single‑digit sales royalties. The
royalty term expires with the last to expire patent.
The agreement with Symphony will expire upon the expiration of the last to expire patent within the licensed patents. The
Company may terminate the agreement at any time upon six months written notice to Symphony. Either party may terminate the
agreement for any material breach by the other party that is not cured within a specified time period. Symphony may terminate the
agreement if the Company challenges the licensed patents. Either party may terminate the agreement upon the bankruptcy or
insolvency of the other party.
All other contingent payments will be expensed as research and development as incurred.
Valeant Pharmaceuticals North America LLC
On February 25, 2014, the Company entered into an agreement with Valeant for the co‑promotion of Syprine®, a chelation
therapy indicated in the treatment of patients with Wilson’s disease who are intolerant of penicillamine. In February 2016, the
Company entered into a mutual termination agreement with Valeant. Upon termination, neither party shall have any rights or
obligation including any and all past, present and future payments. Additionally, all rights and licenses granted under the
agreement were immediately terminated and reverted to the party granting such rights. As a result of the termination, in February
2016 the Company recorded a gain on settlement of the $3.9 million other milestone payable to Valeant in connection with the
acquisition of the drug Infergen.
Princeton University
On December 8, 2010, the Company entered into a license agreement with Princeton University (“Princeton”) whereby
the Company obtained from Princeton a worldwide exclusive license and right to make, use and sell products identified by
Princeton’s Flux technology (“Princeton License”). The Company was obligated to pay Princeton an annual license fee of $60,000,
which was recorded as a research and development expense. In addition, the Princeton License required the Company to make
payments contingent on the achievement of certain development milestones totaling $31.0 million, such as receiving certain
government approvals. Upon commercial sale, the Company was obligated to pay a low single digit royalty based on net sales
levels. No development milestones or sales were achieved as of December 31, 2017 and 2016. In February 2017, the Company
entered into a mutual termination agreement with Princeton. All rights and licenses granted under the agreement were immediately
terminated and shall revert to the party granting such rights.
MeiraGTx Limited
In April 2015, the Company executed several agreements which transferred its ownership of Kadmon Gene Therapy, LLC
to MeiraGTx Limited (“MeiraGTx”), a then wholly‑owned subsidiary of the Company. As part of these agreements, the Company
also transferred various property rights, employees and management tied to the intellectual property and contracts identified in the
agreements to MeiraGTx. At a later date, MeiraGTx ratified its shareholder agreement and accepted the pending equity
subscription agreements, which provided equity ownership to various parties. The execution of these agreements resulted in a 48%
ownership in MeiraGTx by the Company. After MeiraGTx was deconsolidated or derecognized, the retained ownership interest
was initially recognized at fair value and a gain of $24.0 million was recorded based on the fair value of this equity investment.
The Company’s investment is being accounted for under the equity method at zero cost with an estimated fair value at the time of
the transaction of $24.0 million. This value was determined based upon the implied value established by the cash raised by
MeiraGTx in exchange for equity interests by third parties.
The Company assessed the applicability of ASC 810 to the aforementioned agreements and based on the corporate
structure, voting rights and contributions of the various parties in connection with these agreements, determined that MeiraGTx is a
variable interest entity, however consolidation is not required as the Company is not the primary beneficiary based upon the voting
and managerial structure of the entity.
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MeiraGTx, a limited company organized under the laws of England and Wales, was established to focus on the
development of novel gene therapy treatments for a range of inherited and acquired disorders. MeiraGTx is developing therapies
for ocular diseases, including rare inherited blindness, as well as xerostomia following radiation treatment for head and neck
cancer. MeiraGTx is also developing an innovative gene regulation platform that has the potential to expand the way that gene
therapy can be applied, creating a new paradigm for biologic therapeutics in the biopharmaceutical industry.
The summarized financial information for MeiraGTx as of and for the years ended December 31, 2017 and 2016 is as
follows (amounts in thousands):
Balance Sheet Data:
Cash
Other current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Mezzanine equity
Total stockholders’ deficit
Statement of Operations Data:
General and administrative expense
Research and development expense
Net loss
$
$
2017
2016
8,549 $
2,926
14,379
21,402
479
51,410
(47,437)
9,879 $
22,414
(32,717)
17,477
1,613
3,461
6,041
815
33,002
(17,308)
6,027
14,038
(19,792)
As part of a transition services agreement with MeiraGTx, the Company recognized $0.6 million of service revenue to
license and other revenue during the year ended December 31, 2017, and recognized $1.0 million of service revenue to license and
other revenue during each of the years ended December 31, 2016 and 2015. During April 2016, the Company received 230,000
shares of MeiraGTx’s convertible preferred Class C shares as a settlement for $1.2 million in receivables from MeiraGTx. Under
ASC 323, the Class C shares of MeiraGTx do not qualify as common stock or in-substance common stock and the $1.2 million
was recorded as a cost method investment. The Company also received cash payments of $0.3 million and $0.2 million
during 2017 and 2016, respectively, related to service revenue earned.
The Company assessed the recoverability of both the cost method and equity method investment in MeiraGTx at
December 31, 2017 and 2016 and identified no events or changes in circumstances that may have a significant adverse impact on
the fair value of this investment. For the years ended December 31, 2017, 2016 and 2015, the Company recorded its share of
MeiraGTx’s net loss of $7.6 million, $13.6 million, and $2.8 million, respectively, inclusive of adjustments related to MeiraGTx’s
2015 financial statements that resulted in the Company recording a loss on equity method investment of $3.9 million for the year
ended December 31, 2016. The Company maintains a 25.6% ownership in MeiraGTx at December 31, 2017, inclusive of C
preferred shares issued by MeiraGTx. For accounting purposes, the Company has determined that the C preferred shares issued by
MeiraGTx are not in-substance common stock. Accordingly, the Company records 38.7% of MeiraGTx’s losses, which represents
what the Company’s percentage would be if only A ordinary shares were outstanding. The Company’s maximum exposure
associated with MeiraGTx is limited to its initial investment of $24.0 million, which has been written down to zero at December
31, 2017 based on the Company’s absorption of MeiraGTx’s net losses.
Nano Terra, Inc.
On April 8, 2011, the Company entered into a series of transactions with Nano Terra, Inc. (“Nano Terra”), pursuant to
which the Company (i) paid $2.3 million for Nano Terra’s Series B Preferred Stock, (ii) entered into a joint venture with Surface
Logix, Inc. (“Surface Logix”) (Nano Terra’s wholly‑owned subsidiary) through the formation of NT Life Sciences, LLC (“NT
Life”), whereby the Company contributed $0.9 million at the date of formation in exchange for a 50% interest in NT Life and
(iii) entered into a sub‑licensing arrangement with NT Life and Surface Logix. Pursuant to the sub‑licensing arrangement, the
Company was granted a worldwide, exclusive license under certain intellectual property owned by Surface Logix to three clinical-
stage product candidates, as well as rights to Surface Logix’s drug discovery platform, Pharmacomer™ Technology, each of which
were licensed by Surface Logix to NT Life. In December 2014, the Company received one share of Nano Terra’s Common Stock
for every 100 shares of Series B Preferred Stock held by the Company, resulting in approximately a 1% holding in Nano Terra as
of December 31, 2017 and 2016. In accordance with ASC 325, “Investments—Other”, the Company continues to account for the
investment under the cost method.
The primary product candidates are currently in early to mid‑stage clinical development for a variety of diseases and
target several novel pathways of disease by inhibiting the activity of specific enzymes.
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Nano Terra and NT Life are research and development companies, each of which independently maintains intellectual
property for the purpose of pursuing medical discoveries. The Company is a minority shareholder of Nano Terra and thereby is
unable to exercise significant influence with regard to the entity’s daily operations. The Company is represented on the board of
managers of NT Life and is a party to decisions which influence the direction of the organization.
Since inception, the Company has continuously assessed the applicability of ASC 810, based on the corporate structure,
voting rights and contributions of the various parties in connection with these agreements, and determined that Nano Terra and NT
Life are not variable interest entities and not subject to consolidation. On April 8, 2011 the Company recorded its $2.3 million
investment in Nano Terra in accordance with ASC 325, and its investment of $0.9 million in NT Life in accordance with ASC 323,
of which was $450,000 was recorded as a loss on equity investment and $450,000 was recorded as an impairment loss in 2011. In
accordance with ASC 325‑20‑35, the Company assessed the recoverability of the investment in Nano Terra as of December 31,
2017 and 2016 and identified no events or changes in circumstances that may have a significant adverse impact on the fair value of
this investment. There was no activity of the joint venture during the years ended December 31, 2017, 2016 and 2015 which
resulted in income or loss to the Company. The Company’s maximum exposure associated with Nano Terra and NT Life is limited
to cash contributions made.
Additionally, subject to certain exceptions, the Company must pay to the previous shareholders of Surface Logix from
which Nano Terra acquired Surface Logix a mid-single digit percentage royalty of net sales of the applicable licensed products and
a percentage that ranges between a low twenty percent and a low forty percent of all sublicensing revenue the Company receives in
the event the Company further assigns or sublicenses its rights under the sub-licensing arrangement to certain third parties. In
addition, the Company must pay to NT Life a ten percent royalty of any remaining net sales amount of the applicable licensed
products and all of such sublicensing revenue after taking into account the royalties and sublicensing revenue paid to the previous
shareholders of Surface Logix. No sublicensing revenue or sales were achieved as of December 31, 2017 and 2016.
Dyax Corp. (acquired by Shire Plc in January 2016)
On July 22, 2011 the Company entered into a license agreement with Dyax Corp. (“Dyax”) for the rights to use the Dyax
Antibody Libraries, Dyax Materials and Dyax Know‑How (collectively “Dyax Property”). The agreement terminated on
September 22, 2015, but the Company had a right to a commercial license of any research target within two years of expiration of
the agreement. The Company exercised its right to a commercial license of two targets in September 2017, resulting in a license
fee payable to Shire Plc of $1.5 million which was recorded to research and development expense for the year ended December 31,
2017. The agreement includes the world‑wide, non‑exclusive, royalty‑free, non‑transferable license to use the Dyax Property to be
used in the research field, without the right to sublicense. Additionally, the Company has the option to obtain a sublicense for use
in the commercial field if any research target is obtained. The Company was required to pay Dyax $0.6 million upon entering into
the agreement and $0.3 million annually to maintain the agreement. The initial payment was deferred and recorded as prepaid
expense; $0.3 million of which will be amortized over the term of the agreement, and $0.3 million of which was amortized in a
manner consistent with that of the annual payments. All subsequent annual payments will be and have been recorded as prepaid
expense and amortized over the applicable term of one year.
On September 13, 2012 the Company entered into a separate license agreement with Dyax whereby the Company
obtained from Dyax the exclusive, worldwide license to use research, develop, manufacture and commercialize DX‑2400 in
exchange for a payment of $0.5 million. All payments associated with this agreement were recorded as research and development
expense at the time the agreement was executed.
The DX‑2400 license requires the Company to make additional payments contingent on the achievement of certain
development milestones (such as receiving certain regulatory approvals and commencing certain clinical trials) and sales targets.
None of these targets have been achieved and, as such, no assets or liabilities associated with the milestones have been recorded in
the accompanying consolidated financial statements for the year ended December 31, 2017. The DX‑2400 license also includes
royalty payments commencing on the first commercial sale of any licensed product, which had not occurred as of December 31,
2017 and 2016.
Chiromics
On November 18, 2011 the Company entered into a non‑exclusive, royalty free license agreement with Chiromics LLC
(“Chiromics”) for access to two chemical compound libraries for the research, discovery and development of biological and/or
pharmaceutical products. The Company was required to pay $0.2 million upon execution of the agreement and $0.2 million
following the delivery of each of the chemical compounds included within the related library. The Company was additionally
required to make quarterly payments of $0.2 million for the eight quarters following delivery of all compounds; such payments
were expensed to research and development expense in those quarters.
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Zydus
In June 2008, the Company entered into an asset purchase agreement with Zydus Pharmaceuticals USA, Inc. (“Zydus”)
and Cadila Healthcare Limited where the Company purchased all of Zydus’ rights, title and interest to high dosages of ribavirin.
Under the terms of the agreement, the Company paid a one‑time purchase price of $1.1 million. The Company was required to pay
a royalty based on net sales of products in the low twenty percents, subject to specified reductions and offsets. In April 2013, the
Company entered into an amendment to the asset purchase agreement with Zydus which reduced the royalty payable on net sales
of products from the low twenty percents to the mid-teens percents.
In June 2008, the Company also entered into a non‑exclusive patent license agreement with Zydus, under which Zydus
granted to the Company a non‑exclusive, royalty free, fully paid up, non‑transferable license under certain Zydus patent rights
related to ribavirin. This agreement will expire upon the expiration or termination of a specific licensed patent. Either party may
terminate the agreement for any material breach by the other party that is not cured within a specified time period or upon the
bankruptcy or insolvency of the other party.
The Company recorded royalty expense of $0.1 million, $1.2 million and $2.7 million for the years ended December 31,
2017, 2016 and 2015, respectively.
Jinghua
In November 2015, the Company entered into a license agreement with Jinghua Pharmaceutical Group Co., Ltd.
(“Jinghua”). Under this agreement, the Company granted to Jinghua an exclusive, royalty‑bearing, sublicensable license under
certain of its intellectual property and know‑how to use, develop, manufacture, and commercialize certain monoclonal antibodies
in China, Hong Kong, Macau and Taiwan.
In partial consideration for the rights granted to Jinghua under the agreement, the Company received an upfront payment
of $10.0 million in the form of an equity investment in Class E redeemable convertible units of the Company. The Company is
eligible to receive from Jinghua a royalty equal to a percentage of net sales of product in the territory in the low ten percents. In
addition to such payments, the Company is eligible to receive milestone payments for the achievement of certain development
milestones, totaling up to $40.0 million. The Company earned a $2.0 million milestone payment in March 2016, which was
recorded as license and other revenue during the year ended December 31, 2016. The Company earned a $2.0 million milestone
payment in January 2017, which was received in February 2017, and was recorded as license and other revenue during the year
ended December 31, 2017.The Company is also eligible to receive a portion of sublicensing revenue from Jinghua ranging from
the low ten percents to the low thirty percents based on the development stage of a product. No such revenue was earned during
the years ended December 31, 2017, 2016 and 2015
The Company’s agreement with Jinghua will continue on a product‑by‑product and country‑by‑country basis until the
later of ten years after the first commercial sale of the product in such country or the date on which there is no longer a valid claim
covering the licensed antibody contained in the product in such country. Either party may terminate the agreement for any material
breach by the other party that is not cured within a specified time period or upon the bankruptcy or insolvency of the other party.
No patents were licensed to the Company under this agreement.
Camber Pharmaceuticals, Inc.
In February 2016, we entered into a supply and distribution agreement with Camber Pharmaceuticals, Inc. (Camber) for
the purposes of marketing, selling and distributing tetrabenazine, a medicine that is used to treat the involuntary movements
(chorea) of Huntington’s disease. The initial term of the agreement was twelve months. In May 2016, we amended our agreement
with Camber to include the marketing, selling and distributing of valganciclovir, a medicine that is used for the treatment of CMV
retinitis, a viral inflammation of the retina of the eye, in patients with acquired immunodeficiency syndrome (AIDS) and for the
prevention of CMV disease, a common viral infection complicating solid organ transplants, in kidney, heart and kidney pancreas
transplant patients. In August 2016, we amended our agreement with Camber to include the marketing, selling and distributing of
several other products that have not had meaningful sales to date. In February 2017, we entered into a third amendment to the
supply and distribution agreement with Camber extending the initial term of the agreement by an additional twelve months. The
supply and distribution agreement with Camber terminated on February 23, 2018.
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Under the agreement, as amended, we obtained commercial supplies of the Camber products at a contracted price and
distributed them through our existing sales force and commercial network. We retained 100% of the revenue generated from the
sale of the Camber products. The Company recognized revenue from the sales of tetrabenazine of $1.0 million and $0.6 million
during the years ended December 31, 2017 and 2016, respectively. No revenue was generated from sales of tetrabenazine in 2015.
The Company recognized revenue from sales of valganciclovir of $0.2 million and $0.9 million during the years ended
December 31, 2017 and 2016. No revenue was generated from sales of valganciclovir in 2015. No meaningful revenue was
generated from sales of the other Camber products for the years ended December 31, 2017, 2016 and 2015.
13. Share‑based Compensation
2011 Equity Incentive Plan—Options
The 2011 Equity Incentive Plan was adopted in July 2011. Under this plan, the Company’s board of directors was able to
grant unit‑based awards to certain employees, officers, directors, managers, consultants and advisors. The plan was amended on
November 7, 2013 to authorize the grant of a number of options to purchase Class A units equal to 7.5% of the outstanding Class A
units calculated on a fully diluted basis. The Company’s board of directors had the authority, in its discretion, to determine the
terms and conditions of any option grant, including the vesting schedule. Effective July 26, 2016, no award may be granted under
the 2011 Equity Plan. The 2011 Equity Plan was merged with and into the 2016 Equity Incentive Plan, outstanding awards were
converted into awards with respect to our common stock and any new awards will be issued under the terms of the 2016 Equity
Incentive Plan.
2016 Equity Incentive Plan
The Company’s 2016 Equity Incentive Plan (the “2016 Equity Plan”), was approved by the Company’s board of directors
and holders of the Company’s membership units in July 2016. The 2016 Equity Plan was Amended and Restated effective
December 5, 2017. It is intended to make available incentives that will assist the Company to attract, retain and motivate
employees, including officers, consultants and directors. The Company may provide these incentives through the grant of stock
options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash-based or
stock-based awards.
A total of 6,720,000 shares of the Company’s common stock was initially authorized and reserved for issuance under the
2016 Equity Plan, which was increased to 8,523,147 on January 1, 2017. At December 31, 2017 the number of additional shares
available for grant was 8,496,872. This 2016 Equity Plan provided for annual increases in the number of shares available for
issuance under the 2016 Equity Plan on January 1, 2017 and each subsequent anniversary through January 1, 2025, by an amount
equal to the smaller of (a) 4% of the number of shares of common stock issued and outstanding on the immediately preceding
December 31, or (b) an amount determined by the board of directors. This reserve was increased to include any shares issuable
upon exercise of options granted under the Company’s 2011 Equity Incentive Plan that expire or terminate without having been
exercised in full.
Appropriate adjustments will be made in the number of authorized shares and other numerical limits in the 2016 Equity
Plan and in outstanding awards to prevent dilution or enlargement of participants’ rights in the event of a stock split or other
change in the Company’s capital structure. Shares subject to awards which expire or are cancelled or forfeited will again become
available for issuance under the 2016 Equity Plan. The shares available will not be reduced by awards settled in cash or by shares
withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights
or options exercised by means of a net exercise or by tender of previously owned shares will be deducted from the shares available
under the 2016 Equity Plan.
The 2016 Equity Plan will be generally administered by the compensation committee of the Company’s board of
directors. Subject to the provisions of the 2016 Equity Plan, the compensation committee will determine, in its discretion, the
persons to whom and the times at which awards are granted, the sizes of such awards and all of their terms and conditions.
However, the compensation committee may delegate to one or more of our officers the authority to grant awards to persons who
are not officers or directors, subject to certain limitations contained in the 2016 Equity Plan and award guidelines established by
the compensation committee. The compensation committee will have the authority to construe and interpret the terms of the 2016
Equity Plan and awards granted under it. The 2016 Equity Plan provides, subject to certain limitations, for indemnification by the
Company of any director, officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection
with any legal action arising from such person's action or failure to act in administering the 2016 Equity Plan.
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Awards may be granted under the 2016 Equity Plan to the Company’s employees, including officers, directors or
consultants or those of any present or future parent or subsidiary corporation or other affiliated entity. All awards will be evidenced
by a written agreement between the Company and the holder of the award and may include any of the following:
·
·
·
·
·
·
Stock options. The Company may grant nonstatutory stock options or incentive stock options as described in
Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), each of which gives its holder the right,
during a specified term (not exceeding 10 years) and subject to any specified vesting or other conditions, to purchase
a number of shares of our common stock at an exercise price per share determined by the administrator, which may
not be less than the fair market value of a share of the Company’s common stock on the date of grant.
Stock appreciation rights. A stock appreciation right gives its holder the right, during a specified term (not exceeding
10 years) and subject to any specified vesting or other conditions, to receive the appreciation in the fair market value
of the Company’s common stock between the date of grant of the award and the date of its exercise. The Company
may pay the appreciation in shares of the Company’s common stock or in cash.
Restricted stock. The administrator may grant restricted stock awards either as a bonus or as a purchase right at such
price as the administrator determines. Shares of restricted stock remain subject to forfeiture until vested, based on
such terms and conditions as the administrator specifies. Holders of restricted stock will have the right to vote the
shares and to receive any dividends paid, except that the dividends may be subject to the same vesting conditions as
the related shares.
Restricted stock units. Restricted stock units represent rights to receive shares of the Company’s common stock (or
their value in cash) at a future date without payment of a purchase price, subject to vesting or other conditions
specified by the administrator. Holders of restricted stock units have no voting rights or rights to receive cash
dividends unless and until shares of common stock are issued in settlement of such awards. However, the
administrator may grant restricted stock units that entitle their holders to dividend equivalent rights.
Performance shares and performance units. Performance shares and performance units are awards that will result in
a payment to their holder only if specified performance goals are achieved during a specified performance period.
Performance share awards are rights whose value is based on the fair market value of shares of the Company’s
common stock, while performance unit awards are rights denominated in dollars. The administrator establishes the
applicable performance goals based on one or more measures of business performance enumerated in the 2016
Equity Plan, such as revenue, gross margin, net income or total stockholder return. To the extent earned, performance
share and unit awards may be settled in cash or in shares of our common stock. Holders of performance shares or
performance units have no voting rights or rights to receive cash dividends unless and until shares of common stock
are issued in settlement of such awards. However, the administrator may grant performance shares that entitle their
holders to dividend equivalent rights.
Cash-based awards and other stock-based awards. The administrator may grant cash-based awards that specify a
monetary payment or range of payments or other stock-based awards that specify a number or range of shares or units
that, in either case, are subject to vesting or other conditions specified by the administrator. Settlement of these
awards may be in cash or shares of our common stock, as determined by the administrator. Their holder will have no
voting rights or right to receive cash dividends unless and until shares of our common stock are issued pursuant to the
award. The administrator may grant dividend equivalent rights with respect to other stock-based awards.
The 2016 Equity Plan contains certain change of control provisions that provide for varied acceleration of vesting of
outstanding awards, assumption, continuation or substitution of outstanding awards or cash-out of outstanding awards in the event
of a change of control. Any awards which are not assumed or continued in connection with a change in control or are not exercised
or settled prior to the change in control will terminate effective as of the time of the change in control. The compensation
committee may provide for the acceleration of vesting of any or all outstanding awards upon such terms and to such extent as it
determines, except that the vesting of all awards held by members of the board of directors who are not employees will
automatically be accelerated in full. The 2016 Equity Plan also authorizes the compensation committee, in its discretion and
without the consent of any participant, to cancel each or any outstanding award denominated in shares upon a change in control in
exchange for a payment to the participant with respect to each share subject to the cancelled award of an amount equal to the
excess of the consideration to be paid per share of common stock in the change in control transaction over the exercise price per
share, if any, under the award.
The 2016 Equity Plan will continue in effect until it is terminated by the administrator, provided, however, that all awards
will be granted, if at all, within 10 years of its effective date. The administrator may amend, suspend or terminate the 2016 Equity
Plan at any time, provided that without stockholder approval, the plan cannot be amended to increase the number
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of shares authorized, change the class of persons eligible to receive incentive stock options, or effect any other change that would
require stockholder approval under any applicable law or listing rule.
Total unrecognized compensation expense related to unvested options granted under the Company’s share‑based
compensation plan was $13.3 million and $21.7 million at December 31, 2017 and 2016, respectively. That expense is expected to
be recognized over a weighted average period of 1.9 years and 1.7 years as of December 31, 2017 and 2016, respectively. The
Company recorded share‑based option compensation expense under the 2011 Equity Incentive Plan and 2016 Equity Plan of
$12.4 million, $24.6 million and $10.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In January 2015, the compensation committee of the Company’s board of directors approved the amendments of all
outstanding option awards under the 2011 Equity Incentive Plan that have an exercise price above $6.00 per unit to adjust the
exercise price per unit to $6.00 per unit (Note 4), the estimated fair value of the Company’s Class A units as of October 31, 2014.
The awarded options have the same vesting schedule as the original award. The amendment to the option awards resulted in a
modification charge of $1.1 million, of which $668,000 was expensed immediately during the first quarter of 2015 and the
remaining amount will be recognized over the vesting periods of each award. These vesting periods range from one to two years.
On July 13, 2016, the compensation committee of the Company’s board of directors approved the amendment of all
outstanding option awards issued under the Company’s 2011 Equity Incentive Plan whereby, effective upon pricing of the
Company’s IPO, the exercise price (on a post-Corporate Conversion, post-split basis) was adjusted to equal the price per share of
the Company’s common stock in the IPO. The amendment was made to the awards as the original exercise price was substantially
higher than the price of the Company’s common stock in the IPO as a result of changes in the Company’s capital structure that
occurred upon IPO. Options to purchase an aggregate of approximately 1.6 million shares of the Company’s Class A units were
modified. Following this modification, the previously granted options will have the same vesting schedule as the original award
and are modified on a one-for-one basis. The modification resulted in a $4.0 million charge, of which the incremental value of the
previously vested portion of the awards totaling $1.8 million was expensed immediately during the third quarter of 2016 and the
remaining $2.2 million will be recognized over the remaining vesting periods of each award. These vesting periods range from one
to three years.
The following table summarizes information about unit options outstanding at December 31, 2017 and 2016:
Balance, December 31, 2015
Granted
Exercised
Forfeited
Balance, December 31, 2016
Granted
Exercised
Forfeited
Balance, December 31, 2017
Options vested and exercisable, December 31, 2017
Options Outstanding
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value (in
thousands)
37.38
7.12
36.63
32.09
8.32
3.69
—
6.23
6.96
9.76
8.72 $
—
9.28 $
2,227,268
8.83 $
8.04 $
—
—
Number of
Options
1,685,248 $
4,858,460
(1,109)
(105,084)
6,437,515 $
2,853,000
—
(793,643)
8,496,872 $
3,969,407 $
The aggregate intrinsic value in the table above represents the total pre‑tax intrinsic value calculated as the difference
between the fair value of the Company’s common stock at December 31, 2017 ($3.62 per share) and December 31, 2016 ($5.35
per share) and the exercise price, multiplied by the related in‑the‑money options that would have been received by the option
holders had they exercised their options at the end of the fiscal year. This amount changes based on the fair value of the Company’s
common stock. There were no options exercised during the year ended December 31, 2017. There were 1,109 options exercised
during the year ended December 31, 2016 that were not in‑the‑money. There were 772 options exercised during 2015 that were
in‑the‑money, with an aggregate intrinsic value at time of exercise of $4,800.
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During the year ended December 31, 2016, 1,630,536 options were granted to the Company’s Chief Executive Officer
and 3,227,924 options were granted to the Company’s employees and directors. The weighted‑average fair value of the stock
option awards granted to employees, officers, directors and advisors was $2.44, $7.12 and $20.67 during the years ended
December 31, 2017, 2016 and 2015, respectively, and was estimated at the date of grant using the Black‑Scholes option‑pricing
model and the assumptions noted in the following table:
Weighted average fair value of grants
Expected volatility
Risk-free interest rate
Expected life
Expected dividend yield
December 31, 2017
$2.44
74.48% - 74.92%
1.87% - 2.22%
5.5 - 6.0 years
0%
Year Ended
December 31, 2016
$7.12
74.98% - 79.35%
1.15% - 2.20%
5.0 - 6.0 years
0%
December 31, 2015
$20.67
77.23% - 93.85%
1.54% - 1.93%
5.2 - 6.0 years
0%
In December 2015, the option agreement entered into with the Company’s Chief Executive Officer was replaced in its
entirety by an option agreement dated December 31, 2015 so that the number of units is set to 769,231 unit options valued at
$15.2 million which will be recognized as compensation expense over the vesting term. These units under this option agreement
were issued outside of the 2011 Equity Incentive Plan. The Company expensed $2.9 million, $7.2 million and $5.1 million during
the years ended December 31, 2017 and 2016 and the fourth quarter of 2015, respectively. The options vest 1/3 at the grant date,
1/3 in August 2016 and 1/3 in August 2017. While the awards vest over this term they are not exercisable until the occurrence of
the Calculation Date. The Calculation Date is defined as the earliest to occur of 1) a sale of the Company (as defined in the
Company’s second amended and restated limited liability company agreement dated as of June 27, 2014), 2) the date on which the
Company consummates an IPO and 3) the date the key employee ceases to be a service provider to the Company. The Calculation
Date was deemed to have occurred upon consummation of the Company’s IPO on July 26, 2016.
On July 13, 2016, the compensation committee of the Company’s board of directors approved an option award for Dr.
Harlan W. Waksal increasing the number of options (giving effect to the Corporate Conversion) subject to his original option grant.
The number of shares subject to this option award shall equal the difference between the 769,231 options originally granted to Dr.
Harlan W. Waksal and 5% of the Company’s outstanding common equity determined on a fully diluted basis on the IPO date,
which amounted to 1,630,536 options. The effective date of the new option award was the IPO date of July 26, 2016. The exercise
price per share of common stock subject to the new incremental options awarded was equal to the IPO price per share of common
stock at the IPO date of $12.00. The option award was subject to the same vesting schedule applicable to the original option grant
such that all options awarded will vest on August 4, 2017. In consideration for the new option award, Dr. Harlan W. Waksal has
committed to perform an additional year of service in connection with receipt of the additional option shares. In the event Dr.
Harlan W. Waksal voluntarily terminates his employment prior to completion of this additional year of service, Dr. Harlan W.
Waksal shall forfeit 25% of the additional options, or 25% of the aggregate additional option gain associated with the additional
option shares in the event the options are exercised, as applicable. This modification resulted in a $12.4 million charge, of which
the incremental value of the previously vested portion of the awards totaling $8.3 million was expensed during the third quarter of
2016 and the remaining amount of the unvested portion totaling $4.1 million will be recognized over the additional two years of
service through August 4, 2018.
Stock Appreciation Rights
The Company granted 1,040,000 stock appreciation rights to three executive employees during the year ended
December 31, 2017. No stock appreciation rights were granted under the 2016 Equity Plan prior to 2017. The weighted-average
fair value of the stock appreciation rights granted to the three executive officers was $2.42 and was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 2.22%, expected term of
6.0 years, expected volatility of 74.92%, and a dividend rate of 0%.
Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards’ requisite
service period. At December 31, 2017, there was $2.5 million of total unrecognized compensation cost related to stock
appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years.
No stock appreciation rights were exercised during the year ended December 31, 2017.
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2014 Long‑term Incentive Plan (“LTIP”)
The LTIP was adopted in May 2014 and amended in December 2014. Under the LTIP, the Company’s board of directors
may grant up to 10% of the equity value of the Company including the following types of awards:
·
·
Equity Appreciation Rights Units (“EAR units”) whereby the holder would possess the right to a payment equal to
the appreciation in value of the designated underlying equity from the grant date to the determination date. Such
value is calculated as the product of the excess of the fair market value on the determination date of one EAR unit
over the base price specified in the grant agreement and the number of EAR units specified by the award, or, when
applicable, the portion thereof which is exercised.
Performance Awards which become payable on the attainment of one or more performance goals established by the
Plan Administrator. No performance period shall end prior to an IPO or Change in Control (the “Determination
Date”).
The Company’s board of directors has the authority, at its discretion, to determine the terms and conditions of any LTIP
grant, including vesting schedule.
Certain key employees were granted a total of 1,250 EAR units and 8,500 EAR units with a base price of $6.00/unit,
expiring 10 years from the grant date (the “Award”) during 2015 and 2014, respectively. Each unit entitles the holder to a payment
amount equal to 0.001% of the fair market value of all of the outstanding equity in the Company on a fully diluted basis assuming
the exercise of all derivative securities as of the Determination Date. The number of EAR units shall be adjusted to equal a certain
percentage of the Company’s outstanding common equity securities determined on the first trading date following the
Determination Date.
The EAR units vest based on the earlier of (a) the expiration date if an IPO is consummated on or before that date or
(b) the date of a change in control that occurs after the submission date of a Form S‑1 registration statement to the SEC but prior to
the expiration date. The EAR units also vest upon achieving certain predetermined stock price targets subject to continuing service
through the date of the Form S‑1 submission. The payment amount with respect to the holder’s EAR units will be determined using
the fair market value of the common stock on the trading date immediately preceding the settlement date. Each payment under the
Award will be made in a lump sum and is considered a separate payment. The Company reserves the right to make payment in the
form of common stock following the consummation of an IPO or in connection with a change in control, subject to the terms of the
LTIP. Any settlement in the form of common stock will be limited to a maximum share allocation. The holder has no right to
demand a particular form of payment.
A total of 9,750 units were granted under the LTIP at December 31, 2017 and 2016. The compensation expense for this
award was recognized upon consummation of the Company’s IPO on August 1, 2016 and was recorded as additional paid in
capital. No compensation expense had been recorded prior to this date. The Company utilized a Monte-Carlo simulation to
determine the fair value of the awards granted under the LTIP of $22.6 million, which was recorded as share-based compensation
during the third quarter of 2016 as these awards are not forfeitable. The LTIP is payable upon the fair market value of the
Company’s common stock exceeding 333% of the $6.00 grant price ($20.00) per share prior to December 7, 2024. The holders of
the LTIP have no right to demand a particular form of payment, and the Company reserves the right to make payment in the form
of cash or common stock.
2016 Employee Stock Purchase Plan (“2016 ESPP”)
The Company’s board of directors has adopted and the Company’s stockholders have approved the 2016 ESPP. A total of
1,125,000 shares of the Company’s common stock were initially available for sale under the 2016 ESPP, which increased to
1,801,180 on January 1, 2017. The Company issued 10,594 shares of common stock under the 2016 ESPP in October 2017. No
meaningful compensation expense was recognized for the ESPP during the years ended December 31, 2017 and 2016. In addition,
the 2016 ESPP provides for annual increases in the number of shares available for issuance under the 2016 ESPP on January 1,
2017 and each subsequent anniversary through 2025, equal to the smallest of:
·
·
·
750,000 shares;
1.5% of the outstanding shares of the Company’s common stock on the immediately preceding December 31; or
such other amount as may be determined by the Company’s board of directors.
Appropriate adjustments will be made in the number of authorized shares and in outstanding purchase rights to prevent
dilution or enlargement of participants’ rights in the event of a stock split or other change in the Company’s capital structure.
Shares subject to purchase rights which expire or are cancelled will again become available for issuance under the 2016 ESPP.
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The compensation committee of the Company’s board of directors will administer the 2016 ESPP and have full authority
to interpret the terms of the 2016 ESPP. The 2016 ESPP provides, subject to certain limitations, for indemnification by the
Company of any director, officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection
with any legal action arising from such person’s action or failure to act in administering the 2016 ESPP.
All of the Company’s employees, including the Company’s named executive officers, and employees of any of the
Company’s subsidiaries designated by the compensation committee are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year, subject
to any local law requirements applicable to participants in jurisdictions outside the United States. However, an employee may not
be granted rights to purchase stock under the 2016 ESPP if such employee:
·
·
immediately after the grant would own stock or options to purchase stock possessing 5.0% or more of the total
combined voting power or value of all classes of the Company’s capital stock; or
holds rights to purchase stock under all of the Company’s employee stock purchase plans that would accrue at a rate
that exceeds $25,000 worth of the Company’s stock for each calendar year in which the right to be granted would be
outstanding at any time.
The 2016 ESPP is intended to qualify under Section 423 of the Code but also permits us to include our non-U.S.
employees in offerings not intended to qualify under Section 423. The 2016 ESPP will typically be implemented through
consecutive six-month offering periods. The offering periods generally start on the first trading day of April and October of each
year. The administrator may, in its discretion, modify the terms of future offering periods, including establishing offering periods
of up to 27 months and providing for multiple purchase dates. The administrator may vary certain terms and conditions of separate
offerings for employees of the Company’s non-U.S. subsidiaries where required by local law or desirable to obtain intended tax or
accounting treatment.
The 2016 ESPP permits participants to purchase common stock through payroll deductions of up to 10.0% of their
eligible compensation, which includes a participant’s regular and recurring straight time gross earnings and payments for overtime
and shift premiums, but exclusive of payments for incentive compensation, bonuses and other similar compensation.
Amounts deducted and accumulated from participant compensation, or otherwise funded in any participating non-U.S.
jurisdiction in which payroll deductions are not permitted, are used to purchase shares of the Company’s common stock at the end
of each offering period. The purchase price of the shares will be 85.0% of the lower of the fair market value of the Company’s
common stock on the first trading day of the offering period or on the last day of the offering period. Participants may end their
participation at any time during an offering period and will be paid their accrued payroll deductions that have not yet been used to
purchase shares of common stock. Participation ends automatically upon termination of employment with the Company.
Each participant in any offering will have an option to purchase for each full month contained in the offering period a
number of shares determined by dividing $2,083 by the fair market value of a share of the Company’s common stock on the first
day of the offering period or 200 shares, if less, and except as limited in order to comply with Section 423 of the Code. Prior to the
beginning of any offering period, the administrator may alter the maximum number of shares that may be purchased by any
participant during the offering period or specify a maximum aggregate number of shares that may be purchased by all participants
in the offering period. If insufficient shares remain available under the plan to permit all participants to purchase the number of
shares to which they would otherwise be entitled, the administrator will make a pro rata allocation of the available shares. Any
amounts withheld from participants’ compensation in excess of the amounts used to purchase shares will be refunded, without
interest.
A participant may not transfer rights granted under the 2016 ESPP other than by will, the laws of descent and distribution
or as otherwise provided under the 2016 ESPP.
In the event of a change in control, an acquiring or successor corporation may assume the Company’s rights and
obligations under outstanding purchase rights or substitute substantially equivalent purchase rights. If the acquiring or successor
corporation does not assume or substitute for outstanding purchase rights, then the purchase date of the offering periods then in
progress will be accelerated to a date prior to the change in control.
The 2016 ESPP will remain in effect until terminated by the administrator. The compensation committee has the authority
to amend, suspend or terminate the 2016 ESPP at any time.
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Warrants
The following table summarizes information about warrants outstanding at December 31, 2017 and 2016:
Balance, December 31, 2015
Granted
Balance, December 31, 2016
Granted
Exercised
Forfeited
Balance, December 31, 2017
Warrants
710,801 $
617,651
1,328,452 $
13,394,338
(22,800)
—
14,699,990 $
Weighted Average
Exercise Price
46.64
10.20
29.70
3.58
3.35
—
5.94
In conjunction with 2015 Credit Agreement, warrants to purchase $6.3 million of Class A units were issued to two lenders
at 85% of the price per share of common stock in the IPO. Upon consummation of the Company’s IPO on August 1, 2016 with a
price per share of common stock in the IPO of $12.00, these warrants to purchase Class A units were exchanged for 617,651
warrants at a strike price of $10.20 to purchase the same number of shares of the Company’s common stock (Note 8).
14. Accrued Expenses and Other Short Term Liabilities
Short‑term accrued expenses at December 31, 2017 and 2016 include the following (in thousands):
Commission payable
Compensation and benefits
Severance
Royalty arrangements
Other
Total Accrued Expenses
Commission Payable
December 31,
December 31,
2017
2016
2,395 $
758
1,122
—
4,302
8,577 $
2,395
954
1,744
2,502
4,555
12,150
$
$
During 2015, the Company raised $873,000 in gross proceeds, $833,000 net of $40,000 in transaction costs, through the
issuance of 75,875 Class E redeemable convertible units. At December 31, 2017 and 2016, $40,000 remains in accrued liabilities
relating to commissions to third parties for Class E redeemable convertible raises during 2015.
During 2014, the Company raised $39.5 million in gross proceeds, $36.4 million net of $3.1 million in transaction costs,
through the issuance of 3,438,984 Class E redeemable convertible units. Of the $3.1 million in transaction costs, $2.4 million
remains in accrued liabilities at December 31, 2017 and 2016 relating to commissions to third parties for Class E redeemable
convertible raises during 2014.
Severance
Severance balances represent contractual compensation to be paid to former employees, a significant portion of which
relates to the separation agreement with Dr. Samuel D. Waksal. Effective as of February 8, 2016, Dr. Samuel D. Waksal resigned
from all positions with the Company and is no longer employed by the Company in any capacity. At December 31, 2017, accrued
severance payable to Dr. Samuel D. Waksal totaled $1.2 million, of which $1.0 million is recorded as accrued expense and
$0.2 million is recorded as other long‑term liabilities. At December 31, 2016, accrued severance payable to Dr. Samuel D. Waksal
totaled $2.2 million, of which $1.0 is recorded as accrued expense and $1.2 million is recorded as other long-term liabilities. The
separation agreement with Dr. Samuel D. Waksal contains certain supplement conditional payments, none of which have been met
at December 31, 2017. The Company has not recorded any expense related to these conditional payments at December 31, 2017
and will continue to evaluate the probability of these conditional payments.
Separation Agreement with Dr. Samuel D. Waksal
Dr. Samuel D. Waksal founded the Company in October 2010 and, until August 2014, was the chairman of the
Company’s board of directors and the Company’s Chief Executive Officer. In August 2014, he stepped down as the Company’s
Chief Executive Officer and became the Company’s Chief of Innovation, Science and Strategy.
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In connection with his resignation on February 8, 2016, the Company entered into a separation agreement with
Dr. Samuel D. Waksal terminating his employment with the Company and providing that he shall perform no further paid or
unpaid services for the Company whether as employee, consultant, contractor or any other service provider. The principal
provisions of the separation agreement are summarized below.
Severance and Other Payments
The Company agreed to make a series of payments (all subject to withholding taxes) to Dr. Samuel D. Waksal, some of
which are contingent, structured as follows:
·
·
·
a $3.0 million severance payment, of which $0.9 million and $1.0 million was paid during 2016 and 2017, with the
remaining $1.1 million payable during 2018 and 2019. Severance expense totaling $3.1 million, including the cost of
Company‑paid medical benefits, was recorded during the first quarter of 2016 as these payments are probable and
estimable;
supplemental conditional payments of up to $6.75 million in the aggregate that are payable in 2017 ($2.25 million),
2018 ($2.25 million) and 2019 ($2.25 million) if specified benchmarks related to the valuation of the Company
implied by the public offering price in the IPO, the net proceeds to the Company from the IPO and the Company’s
equity market capitalization on specified dates are achieved and subject to the Company having cash and cash
equivalents less payables of $50 million or more on the dates when the Company makes those payments. The
supplemental conditional payments that were payable in 2017 and 2018 were not earned and will therefore not be
paid. The remaining conditional payment in 2019, although estimable, is not probable at December 31, 2017 as the
Company is not able to determine if or when the benchmark related to the valuation of the Company will be
achieved. The Company has not recorded any expense related to these conditional payments at December 31, 2017
and will continue to evaluate the probability of these conditional payments;
an amount equal to five percent (up to a maximum of $15 million) of any cash received by the Company or
guaranteed cash payments (as defined below) payable to the Company pursuant to the first three business
development programs that the Company enters into on or before February 8, 2019 to research, develop, market or
commercialize the Company’s ROCK2 program or the Company’s immuno‑oncology program. For purposes of the
separation agreement, ROCK2 program is defined to mean pathways involving ROCK2 or other pathways effecting
inflammation, fibrosis, cancer or neurodegenerative diseases; immunooncology program is defined to mean
antibodies or small molecules involved in inducing the immune system to make an anti‑tumor response; and
guaranteed cash payments is defined to mean payments to the Company of cash contractually provided for pursuant
to an agreement entered into by the Company with respect to a business development program, which payments are
not subject to the Company’s meeting any milestones or thresholds. If the aggregate cash and guaranteed cash
payments received by the Company pursuant to any business development program exceed $800 million before the
completion of the IPO, the equity market capitalization requirements that must be met for Dr. Samuel D. Waksal to
earn the supplemental payments of up to $6.75 million described above shall be deemed fulfilled, regardless of the
Company’s equity market capitalization at the applicable time. These conditional payments are not estimable or
probable at December 31, 2017 as the Company is not able to determine if or when the Company will enter into these
business development programs. The Company has not recorded any expense related to these conditional payments
at December 31, 2017 and will continue to evaluate the probability of these conditional payments.
LTIP EAR Unit Award
In December 2014, Dr. Samuel D. Waksal received an award of EAR units under the 2014 LTIP with a base price of $6.00
per EAR unit (see description under “Executive Compensation” for the terms of our EAR units). The number of EAR units granted
to Dr. Samuel D. Waksal was adjusted to equal 0.75% of our common stock determined on the first trading date following the date
of the IPO. Based on the adjustments, the number of shares underlying Dr. Samuel D. Waksal’s LTIP award is 1,783,618. The
separation agreement provides that:
·
·
·
by virtue of his separation from the Company, Dr. Samuel D. Waksal acknowledges that he is no longer entitled to
vesting at December 16, 2024 date but is eligible to vest based on a change in control or stock price increase, as
described herein below;
the service component included in the vesting condition related to the occurrence of a change of control after an
initial public offering but before December 16, 2024 is now satisfied;
the service component included in the vesting condition related to the occurrence of a 333% increase in the fair
market value of each EAR unit from the $6.00 grant price per unit before December 16, 2024 is now satisfied; and
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·
Dr. Samuel D. Waksal’s EAR units shall not be subject to forfeiture, termination or recapture payment for violation
of the restrictive covenants contained in the 2014 LTIP.
The compensation expense for this award was recognized upon consummation of the Company’s IPO on August 1, 2016
and was recorded as additional paid in capital. No compensation expense had been recorded prior to this date. The Company
utilized a Monte-Carlo simulation to determine the fair value of the award granted under the LTIP of $11.6 million, which was
recorded during the third quarter of 2016 as this award is not forfeitable.
Lock‑up Agreement
Dr. Samuel D. Waksal has agreed to enter into a 180‑day lock‑up agreement in connection with the IPO. If requested by
the managing underwriters in any subsequent offering at the time of which Dr. Samuel D. Waksal owns five percent or more the
Company’s common stock, he will enter into a lock‑up agreement for a period not to exceed 90 days and in the form customarily
requested by the managing underwriters for that offering (subject to mutually agreed exceptions), so long as other equityholders
enter into substantially similar lock‑up agreements. If any of our equityholders that signs a lock‑up agreement is released from its
provisions by the managing underwriters, Dr. Samuel D. Waksal will also be released from his lock‑up agreement.
Covenants
The separation agreement contains customary non‑solicitation, non‑competition and non‑disparagement provisions that
continue in effect until February 8, 2019. In addition, Dr. Samuel D. Waksal agrees to make himself available, at the Company’s
expense, to assist the Company in protecting its ownership of intellectual property and in accessing his knowledge of scientific
and/or research and development efforts undertaken during his employment with the Company.
Releases
The separation agreement provides for mutual releases by the parties and related persons of all claims arising out of
Dr. Samuel D. Waksal’s relationship with the Company as employee, founder, investor, member, owner, member or Chairman of
the Board, Chief Executive Officer, or officer.
Royalty Arrangements
The Company has contracts with third parties, which require the Company to make royalty payments based on the sales
revenue of the products specified in the contract. The Company records royalty expense as the associated sales are recognized, and
classifies such amounts as selling, general and administrative expenses in the accompanying consolidated statements of operations.
Royalty payable was $0.1 million and $2.5 million at December 31, 2017 and 2016, respectively. These royalties are generally paid
quarterly. Royalty expense was $0.1 million, $1.2 million and $2.7 million for the years ended December 31, 2017, 2016 and 2015,
respectively. Approximately $2.2 million of the royalty payable at December 31, 2016 is the prepaid royalty that was refunded to
the Company’s commercial partner (Note 6).
15. 401(k) Profit‑Sharing Plan
In October 2011, the Company began sponsoring a qualified Tax Deferred Savings Plan (401(k)) for all eligible
employees of the Company and its subsidiaries. Participation in the plan is voluntary. Participating employees may defer up to
75% of their compensation up to the maximum prescribed by the Internal Revenue Code. The Company has an obligation to match
non‑highly compensated employee contributions of up to 6% of deferrals and also has the option to make discretionary matching
contributions and profit sharing contributions to the plan annually, as determined by the Company’s board of directors. The plan’s
effective date is October 1, 2011 and incorporates funds converted from the Kadmon Pharmaceuticals Profit Sharing Plan.
The Company expensed employer matching contributions of $0.2 million, $0.3 million and $0.3 million for the years
ended December 31, 2017, 2016 and 2015, respectively. The Company made disbursements of $0.3 million in each of the years
ended December 31, 2017 and 2016. The Company typically disburses employer matching contributions during the first quarter
following the plan year.
16. Commitments
Lease Commitments
The Company has three primary operating locations which are occupied under long‑term leasing arrangements. In
October 2010, Kadmon Corporation, LLC entered into a corporate headquarters and laboratory lease in New York, New York,
expiring in February 2021 and opened a secured letter of credit with a third party financial institution in lieu of a security
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deposit for $2.0 million. As of December 31, 2016, there were four amendments to this lease agreement, which altered office and
laboratory capacity and extended the lease term through October 2024. On August 11, 2017, the Company entered into the fifth
and sixth amendments for the corporate headquarters and laboratory lease in New York, New York. Pursuant to the terms of the
amendments, the Company surrendered a portion of its laboratory space, made a surrender payment of approximately $1.1 million
which equated to the Company’s deferred rent liability for the surrendered space, extended the term of the lease for an additional
year through October 28, 2025, and received approximately $1.1 million in rent abatement beginning on September 1, 2017, which
will be recognized straight-line over the remaining term of the lease. All other material terms of the lease remain intact. Rental
expense for this lease amounted to $5.7 million, $6.4 million and $6.2 million for each of the years ended December 31, 2017,
2016 and 2015. During future years, the base rent amount associated with these premises will increase 3.5% annually. The
Company has the ability to extend portions of the lease on the same terms and conditions as the current lease, except that the base
rent will be adjusted to the fair market rental rate for the building based on the rental rate for comparable space in the building at
the time of extension.
The Company is party to an operating lease in Warrendale, Pennsylvania (the Company’s specialty-focused commercial
operation), which expires on September 30, 2019, with a five‑year renewal option. Rental payments under the renewal period will
be at market rates determined from the average rentals of similar tenants in the same industrial park. Rental expense for this lease
was $0.6 million for each of the years ended December 31, 2017, 2016 and 2015, respectively.
In August 2015, the Company entered into an office lease agreement in Cambridge, Massachusetts (the Company’s new
clinical office) effective January 2016 and expiring in April 2023. The Company opened a secured letter of credit with a third party
financial institution in lieu of a security deposit for $91,000. Rental expense for this lease was $0.3 million in each of the years
ended December 31, 2017 and 2016. No rental expense was incurred for this lease during the year ended December 31, 2015.
Future minimum rental payments under noncancellable leases are as follows (in thousands) at December 31, 2017:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Licensing Commitments
Amount
4,579
4,517
4,049
4,148
4,286
11,884
33,463
$
$
The Company has entered into several license agreements for products currently under development (Note 12). The
Company may be obligated in future periods to make additional payments, which would become due and payable only upon the
achievement of certain research and development, regulatory, and approval milestones. The specific timing of such milestones
cannot be predicted and depends upon future discretionary clinical developments as well as regulatory agency actions which
cannot be predicted with certainty (including action which may never occur). These additional contingent milestone payments
aggregate to $400.4 million at December 31, 2017. Any payments made prior to FDA approval will be expensed as research and
development. Payments made after FDA approval will be capitalized.
Further, under the terms of certain licensing agreements, the Company may be obligated to pay commercial milestones
contingent upon the realization of sales revenues and sublicense revenues. Due to the long‑range nature of such commercial
milestones, they are neither probable at this time nor predictable, and consequently are not included in the additional contingent
milestone payment amount.
Employment Agreements
Two former employees of the Company received $1.25 million each upon the consummation of the IPO, which the
Company settled through the issuance of an aggregate of 208,334 shares of its common stock on August 1, 2016. The amount of
compensation due to another former employee as a result of this event is contingent upon the valuation of the Company at the time
of the transaction, which was not achieved upon consummation of the IPO on August 1, 2016. Certain employment agreements
also provide for routine severance compensation. The Company has recorded a liability for such agreements of $1.2 million and
$2.9 million at December 31, 2017 and 2016, respectively, which is primarily attributable to the severance expense recognized in
connection with the resignation of Dr. Samuel D. Waksal (Note 14).
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17. Contingencies
The Company is subject to various legal proceedings that arise from time to time in the ordinary course of its business.
Although the Company believes that the various proceedings brought against it are without merit, and that it has adequate product
liability and other insurance to cover any claims, litigation is subject to many factors which are difficult to predict and there can be
no assurance that the Company will not incur material costs in the resolution of legal matters. Should the Company determine that
any future obligations will exist, the Company will record expense equal to the amount which is deemed probable and estimable.
Legal Proceedings
The Glodek Litigation
On July 25, 2016, Kevin Glodek filed and served a Summons with Notice against Kadmon Holdings, LLC and Kadmon
Holdings, Inc. in the New York State Supreme Court, for the county of New York, for an amount of no less than $2.8 million with
interest, plus costs and disbursements. Company counsel demanded a complaint and that complaint was served and filed on
September 6, 2016. In the complaint, Glodek alleges fraud, misrepresentation, breach of contract, breach of the implied covenant
of good faith and fair dealing, and unjust enrichment, for amounts to be determined at trial, but in no event less than $4 million
with interest, plus costs and disbursements. Glodek’s claims arise out of a 2015 settlement agreement, in which he released all
claims he had against Kadmon Holdings, LLC and Kadmon Holdings, Inc. On September 21, 2016, Glodek filed an Amended
Summons and an Amended Complaint adding Steven N. Gordon and Mr. Poukalov as named defendants. All defendants moved (i)
to dismiss the Amended Complaint and (ii) for sanctions or, in the alternative, to disqualify Glodek’s counsel. Argument on the
motions was conducted on January 24, 2017 before the Honorable Anil Singh. On April 18, 2017, the complaint was dismissed in
its entirety. Glodek filed a Notice of Appeal on May 18, 2017, and had 9 months within which to “perfect” his appeal by filing a
brief and the record. Defendants filed a Notice of Cross Appeal on May 18, 2017. Glodek has filed a motion to expand his time to
perfect his appeal, which the defendants have opposed.
18. Concentrations
Major Customers
Sales to two major customers aggregate to approximately 29% , 41% and 31% of the Company’s net sales for the years
ended December 31, 2017, 2016 and 2015, respectively. Net accounts receivable from these customers totaled $0.1 at each of the
years ended December 31, 2017 and 2016.
Major Suppliers
Due to requirements of the U.S. Food and Drug Administration and other factors, the Company is generally unable to
make immediate changes to its supplier arrangements. Manufacturing services related to each of the Company’s pharmaceutical
products are primarily provided by a single source. The Company’s raw materials are also provided by a single source for each
product. Management attempts to mitigate this risk through long‑term contracts and inventory safety stock.
19. Related Party Transactions
At December 31, 2016, Kadmon I held approximately 12.1% of the total outstanding common stock of Kadmon
Holdings. The sole manager of Kadmon I was an executive officer of the Company. Kadmon I has no special rights or preferences
in connection with its investment into Kadmon Holdings, and had the same rights as all other holders of Kadmon Holdings Class A
units. On January 23, 2017, Kadmon I, LLC was dissolved and liquidated. Upon dissolution and liquidation, all assets of Kadmon
I, LLC which consists solely of the shares of common stock in Kadmon Holdings, Inc., were distributed to the members of
Kadmon I, LLC.
During 2014 the Chief Executive Officer and member, a family member of the Chief Executive Officer and member and
an executive officer provided the Company with short‑term, interest‑free loans to meet operating obligations. During this time the
maximum amount which was outstanding in the aggregate was $3.5 million and was recorded as a related party loan on the
Company’s balance sheet. The $0.5 million related party loan with a family member of the Chief Executive Officer and member
was settled in January 2015 through the issuance of 43,478 Class E redeemable convertible units. At December 31, 2015, the
$3.0 million related party loan with the Chief Executive Officer and director was still outstanding and was repaid in full during the
fourth quarter of 2016.
In April 2015, the Company executed several agreements which transferred the Company’s ownership of KGT to
MeiraGTx, a then wholly‑owned subsidiary of the Company. The execution of all these agreements resulted in a 48% ownership in
MeiraGTx by the Company, or a $24.0 million equity investment at the time of the initial transaction (Note 12).
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In July and August 2015, a family member of the Chief Executive Officer and member provided the Company with
interest‑free loans totaling $2.0 million. The loans were repaid in full in August 2015.
In September 2015, the Company entered into an agreement with GoldenTree Asset Management LP and certain of its
affiliated entities in connection with (i) a settlement of certain claims alleging breaches of a letter agreement between the Company
and such entities relating to a prior investment by such entities in the Company’s securities, which letter agreement was terminated
as part of this settlement and (ii) participation by such entities in an aggregate amount of $15.0 million in the 2015 Credit
Agreement, including the warrants issued in connection therewith, and the Senior Convertible Term Loan (the GoldenTree
Agreement). Subject to certain terms and conditions contained therein, the GoldenTree Agreement provided GoldenTree Asset
Management LP and certain of its affiliated entities with certain most favored nation rights, anti‑dilution protections including the
issuance of additional Class E redeemable convertible membership units with a conversion price equal to any down round price
and a right to appoint a member of the Company’s board of directors, among other things. The aforementioned rights terminated
upon the closing of the IPO on August 1, 2016.
In June 2016, the Company entered into an agreement with 72 KDMN Investments, LLC whereby the Company agreed to
extend certain rights to 72 KDMN Investments, LLC which shall survive closing of the IPO, including board of director
designation rights and confidentiality rights, subject to standard exceptions. In addition, the Company agreed to provide 72 KDMN
Investments, LLC with most favored nation rights which terminated upon the closing of the IPO on August 1, 2016. Andrew B.
Cohen, a former member of our board of directors, is an affiliate of 72 KDMN. In January 2017, Mr. Cohen resigned from the
Company’s board of directors and the Company received notice that 72 KDMN forfeits, relinquishes and waives any and all rights
it has to designate a director to the Company’s board of directors.
In June 2016, Dr. Harlan W. Waksal, the Company’s President and Chief Executive Officer, certain entities affiliated with
GoldenTree Asset Management LP, Bart M. Schwartz, the chairman of the Company’s board of directors, 72 KDMN and D. Dixon
Boardman, a member of the Company’s board of directors, subscribed for 86,957, 43,479, 21,740, 86,957 and 21,740 of the
Company’s Class E redeemable convertible units, respectively, at a value of $11.50 per unit.
In June 2016, the Company entered into certain agreements with Falcon Flight LLC and one of its affiliates in connection
with a settlement of certain claims alleging breaches of a letter agreement between the Company and Falcon Flight LLC relating to
a prior investment by Falcon Flight LLC and its affiliate in the Company’s securities, which letter agreement was amended and
restated as part of this settlement, which, together with a supplemental letter agreement, we refer to as the Falcon Flight
Agreement. Subject to certain terms and conditions contained therein, the Falcon Flight Agreement provides Falcon Flight LLC
and its affiliate with certain most favored nation rights, information rights, consent rights, anti‑dilution protections including the
issuance of 1,061,741 additional Class E redeemable convertible membership units with a conversion price equal to any
down‑round price, a right to designate a member of the Company’s board of then managers or observer and notice requirements
with respect to any waivers by the underwriters in connection with lock‑up agreements, among other things. The aforementioned
rights terminated upon the closing of the IPO on August 1, 2016, except for indemnification of Falcon Flight LLC’s board
designee or observer, which survives termination. In addition, the Company agreed to pay $0.5 million to Falcon Flight LLC
within one business day following the consummation of the IPO, and $0.3 million within sixty days following the consummation
of the IPO. The Company recorded an estimate for this settlement of approximately $10.4 million in September 2015 and recorded
an additional expense of $2.6 million in June 2016 based on the excess of the fair value of this settlement over the $10.4 million
previously expensed in 2015.
Certain of the Company’s existing institutional investors, including investors affiliated with certain of the Company’s
directors, purchased an aggregate of 2,708,332 shares of the Company’s common stock in its IPO at the IPO price of $12.00 per
share, for an aggregate purchase price of $32.5 million, and on the same terms as the shares that were sold to the public generally.
Perceptive Advisors, LLC, Third Point Partners, LLC. and GoldenTree purchased 1,458,333 shares of the Company’s common
stock for $17.5 million, 1,041,666 shares of the Company’s common stock for $12.5 million and 208,333 shares of the Company’s
common stock for $2.5 million, respectively.
20. Income Taxes
The Company files U.S. federal and state tax returns for Kadmon Holdings, Inc. and the required information returns for
its international subsidiaries, all of which are wholly owned. The Company recorded an income tax benefit of $0.1 million for the
year ended December 31, 2017, related to a $0.4 million adjustment to the deferred tax liability, as explained below, net of $0.3
million of income tax expense related to a $2.0 million milestone payment received from Jinghua. The Company recorded income
tax expense of $0.3 million for the year ended December 31, 2016, related to a $2.0 million milestone payment received from
Jinghua. The Company recorded an immaterial amount of income tax benefit for the year ended December 31, 2015.
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduces the U.S. federal corporate tax
rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign
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subsidiaries that were previously tax deferred, creates new taxes on certain foreign earnings and reduces the orphan drug tax credit.
The Company recognized a deferred income tax benefit of $0.4 million for the year ended December 31, 2017 due to the write-
down of a deferred tax liability related to the reduction of the corporate income tax rate per the Act.
The income tax provision consists of the following components (in thousands):
Current tax expense (benefit)
Foreign
Federal
State
Total current tax expense
Deferred tax expense (benefit)
Federal
State
Total deferred tax benefit
Total income tax expense (benefit)
For the Year Ended
December 31,
2017
2016
2015
$
$
316 $
—
—
316
(485)
48
(437)
(121) $
315 $
—
—
315
(15)
42
27
342 $
—
—
—
—
1
(4)
(3)
(3)
The income tax expense (benefit) differs from the expense (benefit) that would result from applying federal statutory rates
to loss before income taxes as follows (in thousands):
Expected federal statutory income tax
State income taxes, net of federal benefits
Change in federal tax rate used for deferred
purposes
Adjustment to deferred tax assets
Change in valuation allowance
Income tax expense (benefit )
$
For the Year Ended December 31,
2017
2016
2015
$
Amount
(27,821)
(8,314)
Rate
-35.0% $
-10.5%
Amount
(72,945)
(9,485)
Rate
-35.0% $
-4.6%
Amount
(51,480)
(4,544)
112,611
15,210
(91,807)
(121)
141.7%
19.1%
-115.5%
-0.2% $
200
—
82,572
342
0.1%
0.0%
39.6%
0.1% $
972
(6,492)
61,541
(3)
160
Rate
-35.0%
-3.1%
0.7%
-4.4%
41.8%
0.0%
Table of Contents
Deferred income tax expense (benefit) results primarily from the timing of temporary differences between the tax and
financial statement carrying amounts of goodwill. The net deferred tax asset and liability in the accompanying consolidated
balance sheets consists of the following components (in thousands):
Deferred tax assets
Net operating loss carryforward
Foreign tax credit carryforward
Capitalized research and development
Share-based compensation
Loss on equity investment
Organization costs
Depreciation
Intangibles
Inventory reserve and other
Total deferred tax assets
Deferred tax liability
Goodwill
Total deferred tax liability
Total deferred tax assets, net
Valuation allowance
Deferred tax liability
For the Year Ended
December 31,
2017
2016
$
112,289 $
631
66,500
18,735
6,294
30
772
30,788
2,145
238,184
(939)
(939)
237,245
(238,184)
$
(939) $
171,074
315
78,147
22,233
5,900
46
1,050
47,595
3,631
329,991
(1,376)
(1,376)
328,615
(329,991)
(1,376)
At December 31, 2017, the Company has unused federal and state net operating loss carry-forwards of $419.2 million and
$362.0 million, respectively, that may be applied against future taxable income. These carry-forwards expire at various dates
through December 31, 2037. The Company experienced ownership changes under Internal Revenue Code Section 382 in 2010,
2011 and 2016, which limits the Company’s ability to utilize net operating loss carry-forwards. The Company did not reduce the
gross deferred tax assets related to the net operating loss carry-forwards, however, because the limitations do not hinder the
Company’s ability to potentially utilize all of the net operating loss carry-forwards.
In accordance with ASC 740, “Income Taxes,” the Company recorded a valuation allowance to fully offset the gross
deferred tax asset, because it is more likely than not that the Company will not realize future benefits associated with these
deferred tax assets at December 31, 2017 and 2016. The change in deferred tax liability has been recognized as an income tax
benefit in the consolidated statements of operations for the years ended December 31, 2017 and 2015 and as income tax expense
for the year ended December 31, 2016.
The federal income tax return for the period of September 16, 2010 through December 31, 2010 was audited by the
Internal Revenue Service during 2012 and early 2013. As a result of the audit, the Company’s operating loss carry-forwards were
reduced by $1.4 million, which is reflected in the table above.
The Company follows guidance on accounting for uncertainty in income taxes which prescribes a minimum threshold a
tax position is required to meet before being recognized in the financial statements. The Company does not have any liabilities as
of December 31, 2017 and 2016 to account for potential income tax exposure. The Company is obligated to file income tax returns
in the U.S. federal jurisdiction and several U.S. States. Since the Company had losses in the past, all prior years that generated net
operating loss carry-forwards are open and subject to audit examination in relation to the net operating loss generated from those
years.
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21. Quarterly Financial Data (unaudited)
The following table presents our unaudited quarterly financial data. Our quarterly results of operations for these periods
are not necessarily indicative of our future results of operations.
Three Months Ended Three Months Ended
December 31,
September 30,
Three Months
Ended
June 30,
Three Months Ended
March 31,
2017
2016
2017
2016
2017
2016
2017
2016
(in thousands,
except per
share data)
187 $
3,010 $
1,036 $
4,345 $
1,698 $
4,967 $
2,336 $
6,192
1,277
1,464
222
(22)
1,264
1,267
4,277
640
119
3,518
1,241
2,277
277
933
1,067
1,350
5,695
880
129
4,686
1,259
2,957
266
373
2,318
1,453
6,420
880
2
5,538
3,230
5,566
567
370
4,629
3,471
9,663
1,085
135
8,443
10,499
8,539
11,775
9,631
10,056
8,587
8,447
9,083
7,916
14,620
9,121
48,426
9,902
19,148
10,118
23,686
—
—
—
(256)
—
—
—
(3,875)
18,415
23,159
20,896
57,801
19,958
27,735
18,565
28,894
(17,151)
(19,641)
(19,829)
(53,115)
(17,640)
(22,197)
(13,936)
(20,451)
1,476
1,716
1,874
64,049
4,674
14,837
3,315
12,407
(437)
(18,190)
27
(21,384)
—
(21,703)
—
(117,164)
—
(22,314)
—
(37,034)
316
(17,567)
315
(33,173)
490
469
490
21,264
469
—
469
—
(18,680)
(21,853)
(22,193)
(138,428)(1)
(22,783)
(37,034)
(18,036)
(33,173)
(0.24) $
(0.48) $
(0.42) $
(4.24) $
(0.44) $
(4.46) $
(0.39) $
(4.00)
$
Net sales
License and
other revenue
Total revenue
Cost of sales
Write-down of
inventory
Gross profit
Operating
expenses:
Research and
development
Selling, general
and
administrative
Gain on
settlement of
payable
Total operating
expenses
Loss from
operations
Total other
expense
Income tax
expense
(benefit)
Net loss
Deemed
dividend on
convertible
preferred stock
and Class E
redeemable
convertible units
Net loss
attributable to
common
stockholders
Basic and
diluted net loss
per share of
common stock
Weighted
average basic
and diluted
shares of
common stock
outstanding
$
78,397,156 45,078,666 52,572,880 32,678,259 (2) 51,846,521
8,304,334 46,507,435 8,302,635
(1)
Net loss attributable to common stockholders for the three months ended September 30, 2016 includes the beneficial
conversion feature of the Company’s debt upon conversion into shares of the Company’s common stock on August 1,
2016 of $44.2 million, the beneficial conversion feature of certain outstanding warrants which became exercisable into
shares of the Company’s common stock on August 1, 2016 of $1.7 million, the deemed dividends on the Company’s
convertible preferred stock and Class E redeemable convertible units of $20.9 million and share-based compensation
expense related to the Company’s LTIP of $22.6 million.
(2)
Weighted average basic and diluted shares of common stock outstanding for the three months ended September 30, 2016
includes shares issued as a result of the Corporate Conversion (Note 1).
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Exhibit
Number
EXHIBIT INDEX
Description of Exhibit
3.1 Certificate of Incorporation of Kadmon Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-37841), filed with the SEC on August 1, 2016).
3.2 Certificate of Designations of Kadmon Holdings, Inc. creating the 5% Convertible Preferred Stock (incorporated
herein by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No. 001-37841), filed with
the SEC on August 1, 2016).
3.3 Bylaws of Kadmon Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current
Report on Form 8-K (File No. 001-37841), filed with the SEC on August 1, 2016).
4.1 Form of Kadmon Holdings, Inc.’s Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-211949), filed with the SEC on July 14, 2016).
4.2 Form of Warrant to Purchase Common Stock issued to investors in Kadmon Holdings, Inc.’s March 8, 2017
financing (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
Amendment No. 2 (File No. 001-37841), filed with the SEC on March 9, 2017).
4.3 Form of Warrant Agreement dated September 28, 2017 (incorporated herein by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K (File No. 001-37841), filed with the SEC on September 28, 2017).
10.1 Credit Agreement, dated August 28, 2015 between Kadmon Pharmaceuticals, LLC, the guarantors from time to
time party thereto, the lenders from time to time party thereto and Perceptive Credit Opportunities Fund, L.P.
(incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-
211949), filed with the SEC on June 10, 2016).
10.2 Amendment to Credit Agreement, dated October 27, 2015, by and between Kadmon Pharmaceuticals, LLC, the
guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive (incorporated
by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed
with the SEC on June 10, 2016).
10.3 Second Waiver and Consent Agreement to Credit Agreement, dated as of June 8, 2016, by and among Kadmon
Pharmaceuticals, the guarantors party thereto, the lenders from time to time party thereto and Perceptive Credit
Opportunities Fund, L.P. (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.4 Third Waiver Agreement to Credit Agreement, dated September 29, 2016, by and among Kadmon Pharmaceuticals,
LLC, the guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive
Credit Holdings, L.P (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q (File No. 001-37841), filed with the SEC on November 9, 2016).
10.5 Amendment # 2 to Credit Agreement, dated November 4, 2016, by and among Kadmon Pharmaceuticals, LLC, the
guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive Credit
Holdings, L.P. (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q
(File No. 001-37841), filed with the SEC on November 9, 2016).
10.6 Fourth Waiver Agreement to Credit Agreement, dated March 22, 2017, by and among Kadmon Pharmaceuticals,
LLC, the guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive
Credit Holdings, L.P. (incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K
(File No. 001-37841), filed with the SEC on March 22, 2017).
10.7 Amendment #3 to Credit Agreement, dated March 31, 2017 by and among Kadmon Pharmaceuticals, LLC , the
guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive Credit
Holdings, L.P. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File No. 001-37841), filed with the SEC on April 3, 2017).
10.8 Third Amended and Restated Senior Secured Convertible Credit Agreement ("Third A&R Credit Agreement"),
dated August 28, 2015, between Kadmon Pharmaceuticals, LLC, the guarantors from time to time party thereto, the
lenders from time to time party thereto and Macquarie US Trading LLC (incorporated by reference to Exhibit 10.4
to the Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10,
2016).
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10.9 First Amendment to Third A&R Credit Agreement dated October 27, 2015, between Kadmon Pharmaceuticals,
LLC, the guarantors from time to time party thereto, the lenders from time to time party thereto and Macquarie US
Trading LLC (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1
(File No. 333-211949), filed with the SEC on June 10, 2016).
10.10 Amendment No. 2 to Third A&R Credit Agreement dated June 8, 2016, between Kadmon Pharmaceuticals, LLC,
the guarantors from time to time party thereto, the lenders from time to time party thereto and Macquarie US
Trading LLC (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form
S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.11 Form of Amended and Restated Second-Lien Convertible Paid-in-Kind Note (incorporated by reference to Exhibit
10.7 to the Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10,
2016).
10.12 Intercreditor Agreement, dated August 28, 2015, by and between Perceptive Credit Opportunities Fund, LP,
Macquarie US Trading LLC, Cortland Capital Market Services LLC, Kadmon Pharmaceuticals, LLC, Kadmon
Holdings, LLC and the guarantors from time to time party thereto (incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.13 First Amended and Restated License Agreement, dated August 13, 2010, by and between Symphony Evolution, Inc.
and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.14 First Amendment to First Amended and Restated License Agreement, dated December 11, 2012, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.15 Second Amendment to First Amended and Restated License Agreement, dated March 28, 2013, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.16 Third Amendment to First Amended and Restated License Agreement, dated October 31, 2013, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.17 Fourth Amendment to First Amended and Restated License Agreement, dated May 1, 2014, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.18 Fifth Amendment to First Amended and Restated License Agreement, dated June 11, 2014, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.19 Sixth Amendment to First Amended and Restated License Agreement, dated September 30, 2014, by and between
Symphony Evolution, Inc. and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.20 Sub-license Agreement, dated April 8, 2011, by and among NT Life Sciences, LLC, Kadmon Pharmaceuticals, LLC
and Surface Logix, Inc. (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.21 Non-Exclusive License and Compound Library Sale Agreement, dated November 18, 2011, by and between
Chiromics, LLC and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.18 to the Registrant's
Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.22 License Agreement, dated June 17, 2013, by and between Kadmon Pharmaceuticals, LLC and AbbVie Inc.
(incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (File No. 333-
211949), filed with the SEC on June 10, 2016).
10.23 First Amendment to the License Agreement, dated May 22, 2014, by and between Kadmon Pharmaceuticals, LLC
and AbbVie Inc. (incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement on Form S-1
(File No. 333-211949), filed with the SEC on June 10, 2016).
10.24 Amendment and Modification Agreement, dated October 2, 2014, by and between Kadmon Pharmaceuticals, LLC
and AbbVie Inc. (incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1
(File No. 333-211949), filed with the SEC on June 10, 2016).
10.25 Third Amendment to the License Agreement, dated May 2015, by and between Kadmon Pharmaceuticals, LLC and
AbbVie Inc. (incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1
(File No. 333-211949), filed with the SEC on June 10, 2016).
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10.26 Supply Agreement, dated June 17, 2013, by and between Kadmon Pharmaceuticals, LLC and AbbVie Bahamas Ltd.
(incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1 (File No. 333-
211949), filed with the SEC on June 10, 2016).
10.27 Non-Exclusive Patent License Agreement, dated June 20, 2008, by and among Three Rivers Pharmaceuticals, LLC,
Zydus Pharmaceuticals USA, Inc., and Cadila Healthcare Limited d/b/a Zydus-Cadila (incorporated by reference to
Exhibit 10.27 to the Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on
June 10, 2016).
10.28 Collaboration and License Agreement, dated November 20, 2015, by and between Kadmon Pharmaceuticals, LLC
and Jinghua Pharmaceutical Group Co., Ltd. (incorporated by reference to Exhibit 10.30 to the Registrant's
Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.29 Supply and Distribution Agreement, dated February 23, 2016, by and between Kadmon Pharmaceuticals, LLC and
Camber Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.31 to the Registrant's Registration Statement
on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.30 Amendment to Supply and Distribution Agreement, dated May 20, 2016, by and between Kadmon Pharmaceuticals,
LLC and Camber Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.32 to the Registrant's Registration
Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.31 Second Amendment to Supply and Distribution Agreement, dated August 23, 2016, by and among Kadmon
Pharmaceuticals, LLC and Camber Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K (File No. 001-37841), filed with the SEC on March 22, 2017).
10.32 Third Amendment to Supply and Distribution Agreement, dated February 13, 2017, by and among Kadmon
Pharmaceuticals, LLC and Camber Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K (File No. 001-37841), filed with the SEC on March 22, 2017).
10.33 Employment Agreement between Kadmon Corporation, LLC and Harlan W. Waksal, M.D., dated effective as of
November 1, 2015 (incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form
S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.34 Employment Agreement between Kadmon Corporation, LLC and Konstantin Poukalov, effective as of November 1,
2015 (incorporated by reference to Exhibit 10.34 to the Registrant's Registration Statement on Form S-1 (File No.
333-211949), filed with the SEC on June 10, 2016).
10.35 Employment Agreement between Kadmon Corporation, LLC and Steven N. Gordon, dated and effective as of July
1, 2015 (incorporated by reference to Exhibit 10.35 to the Registrant's Registration Statement on Form S-1 (File No.
333-211949), filed with the SEC on June 10, 2016).
10.36 Separation Agreement, dated February 3, 2016, by and between Kadmon Holdings, LLC and Samuel D. Waksal,
Ph.D. (incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-1 (File No.
333-211949), filed with the SEC on June 10, 2016).
10.37 Lease Agreement, dated October 28, 2010, by and between ARE-East River Science Park, LLC and Kadmon
Pharmaceuticals, LLC (incorporated by reference to Exhibit 10.37 to the Registrant's Registration Statement on
Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.38 First Amendment to Lease Agreement, dated July 1, 2011, by and between ARE-East River Science Park, LLC and
Kadmon Pharmaceuticals, LLC (incorporated by reference to Exhibit 10.38 to the Registrant's Registration
Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.39 Second Amendment to Lease Agreement, dated November 16, 2011, by and between ARE-East River Science Park,
LLC and Kadmon Pharmaceuticals, LLC (incorporated by reference to Exhibit 10.39 to the Registrant's
Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.40 Third Amendment to Lease Agreement, dated January 4, 2013, by and between ARE-East River Science Park, LLC
and Kadmon Pharmaceuticals, LLC (incorporated by reference to Exhibit 10.40 to the Registrant's Registration
Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.41 Fourth Amendment to Lease Agreement, dated July 25, 2013, by and between ARE-East River Science Park, LLC
and Kadmon Pharmaceuticals, LLC (incorporated by reference to Exhibit 10.41 to the Registrant's Registration
Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.42 Fifth Amendment to Lease Agreement, dated August 11, 2017, by and between ARE-East River Science Park, LLC
and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K (File No. 001-37841), filed with the SEC on August 14, 2017).
10.43 Sixth Amendment to Lease Agreement, dated August 11, 2017, by and between ARE-East River Science Park, LLC
and Kadmon Corporation, LLC (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K (File No. 001-37841), filed with the SEC on August 14, 2017).
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10.44 Kadmon Holdings, LLC 2014 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.43
to the Registrant's Registration Statement on Form S-1 (File No. 333-211949), filed with the SEC on June 10,
2016).
10.45 Form of Kadmon Holdings, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.44 to the
Registrant's Registration Statement on Form S-1/A (File No. 333-211949), filed with the SEC on July 26, 2016).
10.46 Form of Kadmon Holdings, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.45 to
the Registrant's Registration Statement on Form S-1/A (File No. 333-211949), filed with the SEC on July 26, 2016).
10.47 Form of 2013 Warrant (incorporated by reference to Exhibit 10.46 to the Registrant's Registration Statement on
Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.48 Form of 2013/2014 Warrant (incorporated by reference to Exhibit 10.47 to the Registrant's Registration Statement
on Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.49 Form of 2015 Warrant (incorporated by reference to Exhibit 10.48 to the Registrant's Registration Statement on
Form S-1 (File No. 333-211949), filed with the SEC on June 10, 2016).
10.50 Exchange Agreement ("Exchange Agreement") dated June 8, 2016 by and among Kadmon Holdings, LLC,
Kadmon Pharmaceuticals, LLC and the lenders under the Third Amended and Restated Convertible Credit
Agreement (incorporated by reference to Exhibit 10.49 to the Registrant's Registration Statement on Form S-1 (File
No. 333-211949), filed with the SEC on June 10, 2016).
10.51 Securities Purchase Agreement, dated March 8, 2017, by and among Kadmon Holdings, Inc. and the investors
referenced therein (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
Amendment No. 2 (File No. 001-37841), filed with the SEC on March 9, 2017).
10.52 Registration Rights Agreement dated August 28, 2015 by and among Kadmon Holdings, LLC and the holders of
the second-lien convertible paid-in-kind notes. (incorporated by reference to Exhibit 10.53 to the Registrant's
Registration Statement on Form S-1/A (File No. 333-211949), filed with the SEC on July 7, 2016).
10.53 Registration Rights Agreement by and between Kadmon Holdings, Inc. and the lenders under the Third Amended
and Restated Convertible Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K (File No. 001-37841), filed with the SEC on August 1, 2016).
10.54 Registration Rights Agreement, dated March 8, 2017, by and among Kadmon Holdings, Inc. and the investors
referenced therein (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
Amendment No. 2 (File No. 001-37841), filed with the SEC on March 9, 2017).
10.55 Form of Indemnification to be entered into by Kadmon Holdings, Inc. and each of its directors, executive officers
and certain key employees (incorporated by reference to Exhibit 10.55 to the Registrant's Registration Statement on
Form S-1/A (File No. 333-211949), filed with the SEC on July 14, 2016).
10.56 Form of Subscription Agreement dated September 26, 2017 (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-37841), filed with the SEC on September 28, 2017).
10.57* Amended and Restated Kadmon Holdings, Inc. 2016 Equity Incentive Plan.
10.58* Form of Stock Appreciation Right Agreement under Amended and Restated Kadmon Holdings, Inc. 2016 Equity
Incentive Plan.
10.59* Fifth Waiver Agreement to Credit Agreement, dated March 2, 2018, by and among Kadmon Pharmaceuticals, LLC,
the guarantors from time to time party thereto, the lenders from time to time party thereto and Perceptive Credit
Holdings, L.P.
21.1* List of subsidiaries.
23.1* Consent of independent registered public accounting firm.
31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.
31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.
32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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101* The following materials from the Kadmon Holdings, Inc. Form 10-K for the year ended December 31, 2017,
formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31,
2017 and 2016, (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015,
(iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015, (iv)
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, and (v) Notes to
the Financial Statements.
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Kadmon Holdings, Inc.
Date: March 6, 2018
By:
/s/ Harlan W. Waksal
Harlan W. Waksal
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant in the capacities and on the dates indicated.
March 6, 2018
Signature
/s/ Harlan W. Waksal
Harlan W. Waksal
/s/ Konstantin Poukalov
Konstantin Poukalov
/s/ Charles Darder
Charles Darder
/s/ Bart M. Schwartz
Bart M. Schwartz
/s/ Eugene Bauer
Eugene Bauer
/s/ D. Dixon Boardman
D. Dixon Boardman
/s/ Steven Meehan
Steven Meehan
/s/ Alexandria Forbes
Alexandria Forbes
/s/ Tasos Konidaris
Tasos Konidaris
/s/ Thomas E. Shenk
Thomas E. Shenk
/s/ Susan Wiviott
Susan Wiviott
Title
President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
168
Date
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
Exhibit 10.57
KADMON HOLDINGS, INC.
EQUITY INCENTIVE PLAN
TABLE OF CONTENTS
1 Establishment, Purpose and Term of Plan
1.1 Establishment
1.2 Purpose
1.3 Term of Plan
2 Definitions and Construction
2.1 Definitions
2.2 Construction
3 Administration
3.1 Administration by the Committee
3.2 Authority of Officers
3.3 Administration with Respect to Insiders
3.4 Committee Complying with Section 162(m)
3.5 Powers of the Committee
3.6 Option or SAR Repricing
3.7 Indemnification
4 Shares Subject to Plan
4.1 Maximum Number of Shares Issuable
4.2 Annual Increase in Maximum Number of Shares Issuable
4.3 Adjustment for Unissued or Forfeited Predecessor Plan Shares
4.4 Share Counting
4.5 Adjustments for Changes in Capital Structure
4.6 Assumption or Substitution of Awards
5 Eligibility, Participation and Award Limitations
5.1 Persons Eligible for Awards
5.2 Participation in the Plan
5.3 Incentive Stock Option Limitations
5.4 Nonemployee Director Award Limit
6 Stock Options
6.1 Exercise Price
6.2 Exercisability and Term of Options
6.3 Payment of Exercise Price
6.4 Effect of Termination of Service
6.5 Transferability of Options
7 Stock Appreciation Rights
7.1 Types of SARs Authorized
7.2 Exercise Price
7.3 Exercisability and Term of SARs
7.4 Exercise of SARs
7.5 Deemed Exercise of SARs
7.6 Effect of Termination of Service
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7.7 Transferability of SARs
8 Restricted Stock Awards
8.1 Types of Restricted Stock Awards Authorized
8.2 Purchase Price
8.3 Purchase Period
8.4 Payment of Purchase Price
8.5 Vesting and Restrictions on Transfer
8.6 Voting Rights; Dividends and Distributions
8.7 Effect of Termination of Service
8.8 Nontransferability of Restricted Stock Award Rights
9 Restricted Stock Units
9.1 Grant of Restricted Stock Unit Awards
9.2 Purchase Price
9.3 Vesting
9.4 Voting Rights, Dividend Equivalent Rights and Distributions
9.5 Effect of Termination of Service
9.6 Settlement of Restricted Stock Unit Awards
9.7 Nontransferability of Restricted Stock Unit Awards
10 Performance Awards
10.1 Types of Performance Awards Authorized
10.2 Initial Value of Performance Shares and Performance Units
10.3 Establishment of Performance Period, Performance Goals and Performance Award
Formula
10.4 Measurement of Performance Goals
10.5 Settlement of Performance Awards
10.6 Voting Rights; Dividend Equivalent Rights and Distributions
10.7 Effect of Termination of Service
10.8 Nontransferability of Performance Awards
11 Cash-Based Awards and Other Stock-Based Awards
11.1 Grant of Cash-Based Awards
11.2 Grant of Other Stock-Based Awards
11.3 Value of Cash-Based and Other Stock-Based Awards
11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards
11.5 Voting Rights; Dividend Equivalent Rights and Distributions
11.6 Effect of Termination of Service
11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards
12 Standard Forms of Award Agreement
12.1 Award Agreements
12.2 Authority to Vary Terms
13 Change in Control
13.1 Effect of Change in Control on Awards
13.2 Effect of Change in Control and Termination of Service or Failure to Assume, Continue or
Substitute Awards
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13.3 Effect of Change in Control on Nonemployee Director Awards
13.4 Federal Excise Tax Under Section 4999 of the Code
14 Compliance with Securities Law
15 Compliance with Section 409A
15.1 Awards Subject to Section 409A
15.2 Deferral and/or Distribution Elections
15.3 Subsequent Elections
15.4 Payment of Section 409A Deferred Compensation
16 Tax Withholding
16.1 Tax Withholding in General
16.2 Withholding in or Directed Sale of Shares
17 Amendment, Suspension or Termination of Plan
18 Miscellaneous Provisions
18.1 Repurchase Rights
18.2 Forfeiture Events
18.3 Provision of Information
18.4 Rights as Employee, Consultant or Director
18.5 Rights as a Stockholder
18.6 Delivery of Title to Shares
18.7 Fractional Shares
18.8 Retirement and Welfare Plans
18.9 Beneficiary Designation
18.1 Severability
18.1 No Constraint on Corporate Action
18.1 Unfunded Obligation
18.1 Choice of Law
3
KADMON HOLDINGS, INC.
2016 Equity Incentive Plan
1. Establishment, Purpose and Term of Plan.
1.1 Establishment. The Kadmon Holdings, Inc. 2016 Equity Incentive Plan (the “Plan”),
established effective as of July 13, 2016, the date of its approval by the stockholders of the Company (the
“Effective Date”), is hereby amended and restated as of December 5, 2017.
1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company
Group and its stockholders by providing an incentive to attract, retain and reward persons performing services
for the Participating Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for
Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units,
Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards.
1.3 Term of Plan. The Plan shall continue in effect until its termination by the Committee;
provided, however, that all Awards shall be granted, if at all, within ten (10) years from the Effective Date.
2. Definitions and Construction.
2.1 Definitions. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) “Affiliate” means (i) a parent entity, other than a Parent Corporation, that directly,
or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other
than a Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more
intermediary entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall
have the meanings assigned such terms for the purposes of registration of securities on Form S-8 under the
Securities Act.
(b) “Award” means any Option, Stock Appreciation Right, Restricted Stock Purchase
Right, Restricted Stock Bonus, Restricted Stock Unit, Performance Share, Performance Unit, Cash-Based
Award or Other Stock-Based Award granted under the Plan.
(c) “Award Agreement” means a written or electronic agreement between the
Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award.
(d) “Board” means the Board of Directors of the Company.
(e) “Cash-Based Award” means an Award denominated in cash and granted pursuant
to Section 11.
(f) “Cashless Exercise” means a Cashless Exercise as defined in Section 6.3(b)(i).
(g) “Cause” means, unless such term or an equivalent term is otherwise defined by
the applicable Award Agreement or other written agreement between a Participant and a Participating
Company applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful
misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company
documents or records; (ii) the Participant’s material failure to abide by a Participating Company’s code of
conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable
workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any
tangible or intangible asset or corporate opportunity of a Participating Company (including, without limitation,
the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary
information); (iv) any intentional act by the Participant which has a material detrimental effect on a
Participating Company’s reputation or business; (v) the Participant’s repeated failure to perform any
reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity
to cure, such failure; (vi) any material breach by the Participant of any employment, service, non-disclosure,
non-competition, non-solicitation or other similar agreement between the Participant and a Participating
Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s
conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty,
misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with
a Participating Company.
(h) “Change in Control” means, unless such term or an equivalent term is otherwise
defined by the applicable Award Agreement or other written agreement between the Participant and a
Participating Company applicable to an Award, the occurrence of any one or more of the following:
(i) any Person, is (or becomes, during any 12-month period) the beneficial
owner, directly or indirectly, of securities of the Company representing 30% or more of the total voting power
of the stock of the Company; provided that the provisions of this subsection (i) are not intended to apply to or
include as a Change in Control any transaction that is specifically excepted from the definition of Change in
Control under subsection (iii) below;
(ii) a change in the composition of the Board such that, during any 12-month
period, the individuals who, as of the beginning of such period, constitute the Board (the “Existing Board”)
cease for any reason to constitute at least 50% of the Board; provided, however, that any individual becoming
a member of the Board subsequent to the beginning of such period whose election, or nomination for election
by the Company’s stockholders, was approved by a vote of at least a majority of the Directors immediately
prior to the date of such appointment or election shall be considered as though such individual were a member
of the Existing Board; provided further, that, notwithstanding the foregoing, no individual whose initial
assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used
in Rule 14a-11 or Regulation 14A promulgated under the Exchange Act or successor statutes or rules
containing analogous concepts) or other actual or threatened solicitation of proxies or consents by or on behalf
of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, shall
in any event be considered to be a member of the Existing Board;
(iii) the consummation of a merger, reorganization or consolidation involving
the Company or any of its subsidiaries, or the issuance of voting securities in connection with a merger or
consolidation of the Company; provided that immediately following such merger or consolidation the voting
securities of the Company outstanding immediately prior thereto do not continue to represent (either by
remaining outstanding or by being converted into voting securities of the surviving entity of such merger or
consolidation or parent entity thereof) 40% or more of the total voting power of the Company’s stock (or, if the
Company is not the surviving entity of such merger or consolidation, 40% or more of the total voting power of
the stock of such surviving entity or parent entity thereof); and provided, further, that a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or
becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any
2
urities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its
iliates of a business) representing 40% or more of either the then-outstanding shares of Stock or the combined voting power of
Company’s then-outstanding voting securities shall not be considered a Change in Control;
(iv) the sale or disposition by the Company of all or substantially all of the
Company’s assets in which any Person acquires (or has acquired during the 12-month period ending on the
date of the most recent acquisition by such Person) assets from the Company that have a total gross fair market
value equal to more than 40% of the total gross fair market value of all of the assets of the Company
immediately prior to such acquisition or acquisitions; or
of a plan of complete liquidation or dissolution of the Company.
(v) a date specified by the Committee following approval by the stockholders
Notwithstanding the foregoing, (A) no Change in Control shall be deemed to have occurred if there is
consummated any transaction or series of integrated transactions immediately following which the record
holders of the Stock immediately prior to such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity which owns substantially all of the assets of the
Company immediately prior to such transaction or series of transactions, (B) no event or circumstances
described in any of clauses (i) through (v) above shall constitute a Change in Control unless such event or
circumstances also constitute a change in the ownership or effective control of the Company, or in the
ownership of a substantial portion of the Company’s assets, as defined in Section 409A of the Code and (C) no
Change in Control shall be deemed to have occurred upon the acquisition of additional control of the Company
by any Person that is considered to effectively control the Company. Terms used in the definition of a Change
in Control shall be as defined or interpreted in a manner consistent with Section 409A of the Code.
applicable regulations and administrative guidelines promulgated thereunder.
(i) “Code” means the Internal Revenue Code of 1986, as amended, and any
(j) “Committee” means the Compensation Committee and such other committee or
subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each
instance as shall be specified by the Board. If, at any time, there is no committee of the Board then authorized
or properly constituted to administer the Plan, the Board shall exercise all of the powers of the Committee
granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.
successor corporation thereto.
(k) “Company” means Kadmon Holdings, Inc., a Delaware corporation, and any
(l) “Consultant” means a person engaged to provide consulting or advisory services
(other than as an Employee or a Director) to a Participating Company, provided that the identity of such
person, the nature of such services or the entity to which such services are provided would not preclude the
Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on
Form S-8 under the Securities Act.
(m) “Covered Employee” means, at any time the Plan is subject to Section 162(m),
any Employee who is or may reasonably be expected to become a “covered employee” as defined in Section
162(m), or any successor statute, and who, with respect to a Performance Award, is designated, either as an
individual Employee or a member of a class of Employees, by the Committee no later than the earlier of (i) the
date that is ninety (90) days after the beginning of the Performance Period,
3
or (ii) the date on which twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered
Employee” under this Plan for such applicable Performance Period.
(n) “Director” means a member of the Board.
(o) “Disability” means, unless such term or an equivalent term is otherwise defined
by the applicable Award Agreement or other written agreement between the Participant and a Participating
Company applicable to an Award, the permanent and total disability of the Participant, within the meaning of
Section 22(e)(3) of the Code.
(p) “Dividend Equivalent Right” means the right of a Participant, granted at the
discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such
Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock
represented by an Award held by such Participant.
(q) “Employee” means any person treated as an employee (including an Officer or a
Director who is also treated as an employee) in the records of a Participating Company and, with respect to any
Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code;
provided, however, that neither service as a Director nor payment of a Director’s fee shall be sufficient to
constitute employment for purposes of the Plan. The Company shall determine in good faith and in the
exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective
date of such individual’s employment or termination of employment, as the case may be. For purposes of an
individual’s rights, if any, under the terms of the Plan as of the time of the Company’s determination of
whether or not the individual is an Employee, all such determinations by the Company shall be final, binding
and conclusive as to such rights, if any, notwithstanding that the Company or any court of law or governmental
agency subsequently makes a contrary determination as to such individual’s status as an Employee.
(r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(s) “Fair Market Value” means, as of any date, the value of a share of Stock or other
property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such
determination is expressly allocated to the Company herein, subject to the following:
(i) Except as otherwise determined by the Committee, if, on such date, the
Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market
Value of a share of Stock shall be the closing price of a share of Stock as quoted on the national or regional
securities exchange or quotation system constituting the primary market for the Stock, as reported in The Wall
Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day
on which the Stock has traded on such securities exchange or quotation system, the date on which the Fair
Market Value shall be established shall be the last day on which the Stock was so traded or quoted prior to the
relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.
(ii) Notwithstanding the foregoing, the Committee may, in its discretion,
determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high
and low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a
share of Stock received by a Participant, any other reasonable basis using actual transactions in the Stock as
reported on a national or regional securities exchange or quotation system, or on any other basis consistent
with the requirements of Section 409A. The Committee may also determine the Fair Market Value upon the
average selling price of the Stock during a specified period that is within thirty
4
) days before or thirty (30) days after such date, provided that, with respect to the grant of an Option or SAR, the commitment to
nt such Award based on such valuation method must be irrevocable before the beginning of the specified period. The Committee
y vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan to
extent consistent with the requirements of Section 409A.
(iii) If, on such date, the Stock is not listed or quoted on a national or regional
securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by
the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will
never lapse, and in a manner consistent with the requirements of Section 409A.
(t) “Full Value Award” means any Award settled in Stock, other than (i) an Option,
(ii) a Stock Appreciation Right, or (iii) a Restricted Stock Purchase Right or an Other Stock-Based Award
under which the Company will receive monetary consideration equal to the Fair Market Value (determined on
the effective date of grant) of the shares subject to such Award.
(u) “Good Reason” means, with respect to any Participant, “good reason” as defined
in such Participant’s employment agreement or Award Agreement, if any, or if not so defined, except as
otherwise provided in such Participant’s Award Agreement, the occurrence of any one or both of the following
events:
Participant’s base salary rate from that in effect immediately prior to the Change in Control, unless related to
performance; or
(i) a material reduction by the Company or any of its Affiliates of such
location of such Participant’s principal place of employment by more than seventy-five (75) miles;
(ii) relocation by the Company or any of its Affiliates of the geographic
in each case, without the Participant’s consent. A Participant must provide notice to the Company of the
existence of any one or more of the conditions described in (i) through (ii) above within sixty (60) days of the
initial existence of the condition, upon the notice of which the Company will have a period of thirty (30) days
during which it may remedy the condition before the condition gives rise to Good Reason.
(v) “Incentive Stock Option” means an Option intended to be (as set forth in the
Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of
the Code.
Stock are subject to Section 16 of the Exchange Act.
(w) “Insider” means an Officer, a Director or other person whose transactions in
(x) “Net Exercise” means a Net Exercise as defined in Section 6.3(b)(iii).
(y) “Nonemployee Director” means a Director who is not an Employee.
(z) “Nonemployee Director Award” means any Award granted to a Nonemployee
Director.
(aa) “Nonstatutory Stock Option” means an Option not intended to be (as set forth in
the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section
422(b) of the Code.
5
Company.
(bb) “Officer” means any person designated by the Board as an officer of the
granted pursuant to the Plan.
(cc) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option
and granted pursuant to Section 11.
(dd) “Other Stock-Based Award” means an Award denominated in shares of Stock
Company, as defined in Section 424(e) of the Code.
(ee) “Parent Corporation” means any present or future “parent corporation” of the
Awards.
(ff) “Participant” means any eligible person who has been granted one or more
Subsidiary Corporation or Affiliate.
(gg) “Participating Company” means the Company or any Parent Corporation,
all other entities collectively which are then Participating Companies.
(hh) “Participating Company Group” means, at any point in time, the Company and
Units.
(ii) “Performance Award” means an Award of Performance Shares or Performance
(jj) “Performance Award Formula” means, for any Performance Award, a formula or
table established by the Committee pursuant to Section 10.3 which provides the basis for computing the value
of a Performance Award at one or more levels of attainment of the applicable Performance Goal(s) measured
as of the end of the applicable Performance Period.
(kk) “Performance-Based Compensation” means compensation under an Award that
satisfies the requirements of Section 162(m) for certain performance-based compensation paid to Covered
Employees.
pursuant to Section 10.3.
(ll) “Performance Goal” means a performance goal established by the Committee
to Section 10.3 at the end of which one or more Performance Goals are to be measured.
(mm) “Performance Period” means a period established by the Committee pursuant
(nn) “Performance Share” means a right granted to a Participant pursuant to Section
10 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based
upon attainment of applicable Performance Goal(s).
(oo) “Performance Unit” means a right granted to a Participant pursuant to Section
10 to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based
upon attainment of applicable Performance Goal(s).
(pp) “Person” has the meaning ascribed to such term in Section 3(a)(9) of the
Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d)
thereof.
6
Plan, and the Kadmon Holdings, LLC 2014 Long-Term Incentive Plan.
(qq) “Predecessor Plan” means the Kadmon Holdings, LLC 2011 Equity Incentive
Restricted Stock Purchase Right.
(rr) “Restricted Stock Award” means an Award of a Restricted Stock Bonus or a
Section 8.
(ss) “Restricted Stock Bonus” means Stock granted to a Participant pursuant to
Participant pursuant to Section 8.
(tt) “Restricted Stock Purchase Right” means a right to purchase Stock granted to a
(uu) “Restricted Stock Unit” means a right granted to a Participant pursuant to
Section 9 to receive on a future date or occurrence of a future event a share of Stock or cash in lieu thereof, as
determined by the Committee.
to time, or any successor rule or regulation.
(vv) “Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time
(ww) “SAR” or “Stock Appreciation Right” means a right granted to a Participant
pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to
the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the
exercise price thereof.
(xx) “Section 162(m)” means Section 162(m) of the Code.
(yy) “Section 409A” means Section 409A of the Code.
to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.
(zz) “Section 409A Deferred Compensation” means compensation provided pursuant
(aaa) “Securities Act” means the Securities Act of 1933, as amended.
(bbb) “Service” means a Participant’s employment or service with the Participating
Company Group, whether as an Employee, a Director or a Consultant. Unless otherwise provided by the
Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the
capacity in which the Participant renders Service or a change in the Participating Company for which the
Participant renders Service, provided that there is no interruption or termination of the Participant’s Service.
Furthermore, a Participant’s Service shall not be deemed to have been interrupted or terminated if the
Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company.
However, unless otherwise provided by the Committee, if any such leave taken by a Participant exceeds ninety
(90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s
Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by
law, an unpaid leave of absence shall not be treated as Service for purposes of determining vesting under the
Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an
actual termination of Service or upon the business entity for which the Participant performs Service ceasing to
be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether
the Participant’s Service has terminated and the effective date of and reason for such termination.
7
time in accordance with Section 4.5.
(ccc) “Stock” means the common stock of the Company, as adjusted from time to
6.3(b)(ii).
(ddd) “Stock Tender Exercise” means a Stock Tender Exercise as defined in Section
of the Company, as defined in Section 424(f) of the Code.
(eee) “Subsidiary Corporation” means any present or future “subsidiary corporation”
(fff) “Ten Percent Owner” means a Participant who, at the time an Option is granted
to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)
(6) of the Code.
(ggg) “Trading Compliance Policy” means the written policy of the Company
pertaining to the purchase, sale, transfer or other disposition of the Company’s equity securities by Directors,
Officers, Employees or other service providers who may possess material, nonpublic information regarding the
Company or its securities.
(hhh) “Vesting Conditions” mean those conditions established in accordance with the
Plan prior to the satisfaction of which an Award or shares subject to an Award remain subject to forfeiture or a
repurchase option in favor of the Company exercisable for the Participant’s monetary purchase price, if any,
for such shares upon the Participant’s termination of Service or failure of a performance condition to be
satisfied.
2.2 Construction. Captions and titles contained herein are for convenience only and shall not
affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is
not intended to be exclusive, unless the context clearly requires otherwise.
3. Administration.
3.1 Administration by the Committee. The Plan shall be administered by the Committee.
All questions of interpretation of the Plan, of any Award Agreement or of any other form of agreement or other
document employed by the Company in the administration of the Plan or of any Award shall be determined by
the Committee, and such determinations shall be final, binding and conclusive upon all persons having an
interest in the Plan or such Award, unless fraudulent or made in bad faith. Any and all actions, decisions and
determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or Award
Agreement or other agreement thereunder (other than determining questions of interpretation pursuant to the
preceding sentence) shall be final, binding and conclusive upon all persons having an interest therein. All
expenses incurred in connection with the administration of the Plan shall be paid by the Company.
3.2 Authority of Officers. Any Officer shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, determination or election that is the responsibility of or
that is allocated to the Company herein, provided that the Officer has apparent authority with respect to such
matter, right, obligation, determination or election. To the extent permitted by applicable law, the Committee
may, in its discretion, delegate to a committee comprised of one or more Officers the authority to grant one or
more Awards, without further approval of the Committee, to any Employee, other than a person who, at the
time of such grant, is an Insider or a Covered Employee, and to exercise such other powers under the Plan as
the Committee may determine; provided, however, that (a) the Committee shall
8
fix the maximum number of shares subject to Awards that may be granted by such Officers, (b) each
such Award shall be subject to the terms and conditions of the appropriate standard form of Award
Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan,
and (c) each such Award shall conform to such other limits and guidelines as may be established from
time to time by the Committee.
3.3 Administration with Respect to Insiders. With respect to participation by Insiders in the
Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.
3.4 Committee Complying with Section 162(m). If the Company is a “publicly held
corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside
directors” within the meaning of Section 162(m) to approve the grant of any Award intended to result in the
payment of Performance-Based Compensation.
3.5 Powers of the Committee. In addition to any other powers set forth in the Plan and
subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its
discretion:
granted and the number of shares of Stock, units or monetary value to be subject to each Award;
(a) to determine the persons to whom, and the time or times at which, Awards shall be
(b) to determine the type of Award granted;
to result in Performance-Based Compensation;
(c) to determine whether an Award granted to a Covered Employee shall be intended
(d) to determine the Fair Market Value of shares of Stock or other property;
(e) to determine the terms, conditions and restrictions applicable to each Award
(which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the
exercise or purchase price of shares pursuant to any Award, (ii) the method of payment for shares purchased
pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection
with any Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and
conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the
Performance Measures, Performance Period, Performance Award Formula and Performance Goals applicable
to any Award and the extent to which such Performance Goals have been attained, (vi) the time of expiration
of any Award, (vii) the effect of any Participant’s termination of Service on any of the foregoing, and (viii) all
other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not
inconsistent with the terms of the Plan;
property or in any combination thereof;
(f) to determine whether an Award will be settled in shares of Stock, cash, other
(g) to approve one or more forms of Award Agreement;
or conditions applicable to any Award or any shares acquired pursuant thereto;
(h) to amend, modify, extend, cancel or renew any Award or to waive any restrictions
9
(i) to accelerate, continue, extend or defer the exercisability or vesting of any Award
or any shares acquired pursuant thereto, including with respect to the period following a Participant’s
termination of Service;
(j) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or
to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the
Committee deems necessary or desirable to comply with the laws of, or to accommodate the tax policy,
accounting principles or custom of, foreign jurisdictions whose residents may be granted Awards; and
(k) to correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award Agreement and to make all other determinations and take such other actions with respect to
the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions
of the Plan or applicable law.
3.6 Option or SAR Repricing. Without the affirmative vote of holders of a majority of the
shares of Stock cast in person or by proxy at a meeting of the stockholders of the Company at which a quorum
representing a majority of all outstanding shares of Stock is present or represented by proxy, the Committee
shall not approve a program providing for either (a) the cancellation of outstanding Options or SARs having
exercise prices per share greater than the then Fair Market Value of a share of Stock (“Underwater Awards”)
and the grant in substitution therefore of new Options or SARs having a lower exercise price, Full Value
Awards or payments in cash, or (b) the amendment of outstanding Underwater Awards to reduce the exercise
price thereof. This Section shall not be construed to apply to (i) “issuing or assuming a stock option in a
transaction to which Section 424(a) applies,” within the meaning of Section 424 of the Code, (ii) adjustments
pursuant to the assumption of or substitution for an Option or SAR in a manner that would comply with
Section 409A, or (iii) an adjustment pursuant to Section 4.5.
3.7 Indemnification. In addition to such other rights of indemnification as they may have as
members of the Board or the Committee or as officers or employees of the Participating Company Group, to
the extent permitted by applicable law, members of the Board or the Committee and any officers or employees
of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is
delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees,
actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party by reason of any action taken
or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts
paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected
by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60)
days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
4. Shares Subject to Plan.
4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Sections
4.2, 4.3, 4.4 and 4.5, the maximum aggregate number of shares of Stock that may be issued under the Plan
shall be equal to Six Million Seven Hundred Twenty Thousand (6,720,000) shares and shall consist of
authorized but unissued or reacquired shares of Stock or any combination thereof.
10
4.2 Annual Increase in Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 4.5, the maximum aggregate number of shares of Stock that may be issued under the Plan
as set forth in Section 4.1 shall be cumulatively increased on January 1, 2016 and on each subsequent January
1 through and including January 1, 2025, by a number of shares (the “Annual Increase”) equal to the smaller
of (a) 4% of the number of shares of Stock issued and outstanding on the immediately preceding December 31,
or (b) an amount determined by the Board.
4.3 Adjustment for Unissued or Forfeited Predecessor Plan Shares. The maximum
aggregate number of shares of Stock that may be issued under the Plan as set forth in Section 4.1 shall be
cumulatively increased from time to time by:
of awards under the Predecessor Plan immediately prior to its termination as of the Effective Date;
(a) the aggregate number of shares of Stock that remain available for the future grant
(b) the number of shares of Stock subject to that portion of any option or other award
outstanding pursuant to the Predecessor Plan as of the Effective Date which, on or after the Effective Date,
expires or is terminated or canceled for any reason without having been exercised or settled in full; and
(c) the number of shares of Stock acquired pursuant to the Predecessor Plan subject to
forfeiture or repurchase by the Company for an amount not greater than the Participant’s purchase price which,
on or after the Effective Date, is so forfeited or repurchased;
provided, however, that the aggregate number of shares of Stock authorized for issuance under the Predecessor
Plan that may become authorized for issuance under the Plan pursuant to this Section 4.3 shall not exceed
3,198,416 shares.
4.4 Share Counting. If an outstanding Award for any reason expires or is terminated or
canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award
subject to forfeiture or repurchase are forfeited or repurchased by the Company for an amount not greater than
the Participant’s purchase price, the shares of Stock allocable to the terminated portion of such Award or such
forfeited or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock
shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is
settled in cash. Upon payment in shares of Stock pursuant to the exercise of an SAR, the number of shares
available for issuance under the Plan shall be reduced by the gross number of shares for which the SAR is
exercised. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Participant, or by means of a Net Exercise, the number of shares available for
issuance under the Plan shall be reduced by the gross number of shares for which the Option is exercised.
Shares withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to the
exercise or settlement of Options or SARs pursuant to Section 16.2 shall not again be available for issuance
under the Plan. Shares withheld or reacquired by the Company in satisfaction of tax withholding obligations
pursuant to the vesting or settlement of Full Value Awards pursuant to Section 16.2 shall again become
available for issuance under the Plan.
4.5 Adjustments for Changes in Capital Structure. Subject to any required action by the
stockholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent
applicable, in the event of any change in the Stock effected without receipt of consideration by the Company,
whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares,
or similar change in the capital structure of the Company, or in the event of
11
payment of a dividend or distribution to the stockholders of the Company in a form other than Stock
(excepting regular, periodic cash dividends) that has a material effect on the Fair Market Value of
shares of Stock, appropriate and proportionate adjustments shall be made in the number and kind of
shares subject to the Plan and to any outstanding Awards, the Annual Increase, the Award limits set
forth in Section 5.3, and in the exercise or purchase price per share under any outstanding Award in
order to prevent dilution or enlargement of Participants’ rights under the Plan. For purposes of the
foregoing, conversion of any convertible securities of the Company shall not be treated as “effected
without receipt of consideration by the Company.” If a majority of the shares which are of the same
class as the shares that are subject to outstanding Awards are exchanged for, converted into, or
otherwise become (whether or not pursuant to a Change in Control) shares of another corporation (the
“New Shares”), the Committee may unilaterally amend the outstanding Awards to provide that such
Awards are for New Shares. In the event of any such amendment, the number of shares subject to, and
the exercise or purchase price per share of, the outstanding Awards shall be adjusted in a fair and
equitable manner as determined by the Committee, in its discretion. Any fractional share resulting
from an adjustment pursuant to this Section shall be rounded down to the nearest whole number and
the exercise or purchase price per share shall be rounded up to the nearest whole cent. In no event may
the exercise or purchase price, if any, under any Award be decreased to an amount less than the par
value, if any, of the stock subject to such Award. The Committee in its discretion, may also make such
adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of
the Company or distributions as it deems appropriate, including modification of Performance Goals,
Performance Award Formulas and Performance Periods. The adjustments determined by the
Committee pursuant to this Section shall be final, binding and conclusive.
4.6 Assumption or Substitution of Awards. The Committee may, without affecting the
number of shares of Stock reserved or available hereunder, authorize the issuance or assumption of benefits
under this Plan in connection with any merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with Section
409A and any other applicable provisions of the Code.
5. Eligibility, Participation and Award Limitations.
5.1 Persons Eligible for Awards. Awards may be granted only to Employees, Consultants
and Directors.
5.2 Participation in the Plan. Awards are granted solely at the discretion of the Committee.
Eligible persons may be granted more than one Award. However, eligibility in accordance with this Section
shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an
additional Award.
5.3 Incentive Stock Option Limitations.
(a) Maximum Number of Shares Issuable Pursuant to Incentive Stock Options.
Subject to adjustment as provided in Section 4.5, the maximum aggregate number of shares of Stock that may
be issued under the Plan pursuant to the exercise of Incentive Stock Options shall not exceed One Million
Eight Thousand (1,008,000) shares, cumulatively increased on January 1, 2016 and on each subsequent
January 1, through and including January 1, 2025, by a number of shares equal to the smaller of the Annual
Increase determined under Section 4.2 or Six Hundred Thousand (600,000) shares. The maximum aggregate
number of shares of Stock that may be issued under the Plan pursuant to all Awards other than Incentive Stock
Options shall be the number of shares determined in accordance with Section 4.1, subject to adjustment as
provided in Sections 4.2, 4.3, 4.4 and 4.5.
12
(b) Persons Eligible. An Incentive Stock Option may be granted only to a person
who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary
Corporation (each being an “ISO-Qualifying Corporation”). Any person who is not an Employee of an ISO-
Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option.
(c) Fair Market Value Limitation. To the extent that options designated as Incentive
Stock Options (granted under all stock plans of the Participating Company Group, including the Plan) become
exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value
greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such
amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as
Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair
Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the
Code is amended to provide for a limitation different from that set forth in this Section, such different
limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as
required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in
part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the
Participant may designate which portion of such Option the Participant is exercising. In the absence of such
designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option
first. Upon exercise of the Option, shares issued pursuant to each such portion shall be separately identified.
5.4 Nonemployee Director Award Limit. No Nonemployee Director shall be granted within
any fiscal year of the Company one or more Nonemployee Director Awards pursuant to the Plan which in the
aggregate are for more than a number of shares of Stock determined by dividing three hundred thousand
dollars U.S. ($300,000) by the fair value of the Nonemployee Director Award determined on the day the
applicable Nonemployee Director Award is granted.
6. Stock Options.
Options shall be evidenced by Award Agreements specifying the number of shares of Stock
covered thereby, in such form as the Committee shall establish. Such Award Agreements may incorporate all
or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and
conditions:
6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of
the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market
Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted
to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the
Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with
an exercise price less than the minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner that would qualify under the provisions of Section
409A or Section 424(a) of the Code.
6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times,
or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as
shall be determined by the Committee and set forth in the Award Agreement evidencing such Option;
provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the
effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be
exercisable after the expiration of five (5) years after the effective date of grant of
13
such Option and (c) no Option granted to an Employee who is a non-exempt employee for purposes of
the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6)
months following the date of grant of such Option (except in the event of such Employee’s death,
disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic
Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant
of an Option, each Option shall terminate ten (10) years after the effective date of grant of the Option,
unless earlier terminated in accordance with its provisions.
6.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise provided below,
payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall
be made (i) in cash, by check or in cash equivalent; (ii) if permitted by the Committee and subject to the
limitations contained in Section 6.3(b), by means of (1) a Cashless Exercise, (2) a Stock Tender Exercise or (3)
a Net Exercise; (iii) by such other consideration as may be approved by the Committee from time to time to the
extent permitted by applicable law, or (iv) by any combination thereof. The Committee may at any time or
from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in
payment of the exercise price or which otherwise restrict one or more forms of consideration.
(b) Limitations on Forms of Consideration.
(i) Cashless Exercise. A “Cashless Exercise” means the delivery of a
properly executed notice of exercise together with irrevocable instructions to a broker providing for the
assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal
Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute
discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options
by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company
notwithstanding that such program or procedures may be available to other Participants.
(ii) Stock Tender Exercise. A “Stock Tender Exercise” means the delivery
of a properly executed exercise notice accompanied by a Participant’s tender to the Company, or attestation to
the ownership, in a form acceptable to the Company of whole shares of Stock owned by the Participant having
a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the
Option is exercised. A Stock Tender Exercise shall not be permitted if it would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required
by the Company, an Option may not be exercised by tender to the Company, or attestation to the ownership, of
shares of Stock unless such shares either have been owned by the Participant for a period of time required by
the Company (and not used for another option exercise by attestation during such period) or were not acquired,
directly or indirectly, from the Company.
(iii) Net Exercise. A “Net Exercise” means the delivery of a properly
executed exercise notice followed by a procedure pursuant to which (1) the Company will reduce the number
of shares otherwise issuable to a Participant upon the exercise of an Option by the largest whole number of
shares having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect
to which the Option is exercised, and (2) the Participant shall pay to the Company in cash the remaining
balance of such aggregate exercise price not satisfied by such reduction in the number of whole shares to be
issued.
14
6.4 Effect of Termination of Service.
(a) Option Exercisability. Subject to earlier termination of the Option as otherwise
provided by this Plan and unless otherwise provided by the Committee, an Option shall terminate immediately
upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after
the Participant’s termination of Service to the extent it is then vested only during the applicable time period
determined in accordance with this Section and thereafter shall terminate.
(i) Disability. If the Participant’s Service terminates because of the Disability
of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which
the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal
representative) at any time prior to the expiration of twelve (12) months (or such longer or shorter period
provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any
event no later than the date of expiration of the Option’s term as set forth in the Award Agreement evidencing
such Option (the “Option Expiration Date”).
(ii) Death. If the Participant’s Service terminates because of the death of the
Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the
Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person
who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the
expiration of twelve (12) months (or such longer or shorter period provided by the Award Agreement) after the
date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.
The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within
three (3) months (or such longer or shorter period provided by the Award Agreement) after the Participant’s
termination of Service.
(iii) Termination for Cause. Notwithstanding any other provision of the Plan
to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination
of Service and during any period in which the Option otherwise would remain exercisable, the Participant
engages in any act that would constitute Cause, the Option shall terminate in its entirety and cease to be
exercisable immediately upon such termination of Service or act.
(iv) Other Termination of Service. If the Participant’s Service terminates for
any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for vested
shares on the date on which the Participant’s Service terminated, may be exercised by the Participant at any
time prior to the expiration of three (3) months (or such longer or shorter period provided by the Award
Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the
Option Expiration Date.
(b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other
than termination of Service for Cause, if the exercise of an Option within the applicable time periods set forth
in Section 6.4(a) is prevented by the provisions of Section 14 below, the Option shall remain exercisable until
the later of (i) thirty (30) days after the date such exercise first would no longer be prevented by such
provisions or (ii) the end of the applicable time period under Section 6.4(a), but in any event no later than the
Option Expiration Date.
6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be
exercisable only by the Participant or the Participant’s guardian or legal representative. An Option shall not be
subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or
garnishment by creditors of the Participant or the Participant’s beneficiary, except
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transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent
permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such
Option, an Option shall be assignable or transferable subject to the applicable limitations, if any,
described in the General Instructions to Form S-8 under the Securities Act or, in the case of an
Incentive Stock Option, only as permitted by applicable regulations under Section 421 of the Code in a
manner that does not disqualify such Option as an Incentive Stock Option.
7. Stock Appreciation Rights.
Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of
shares of Stock subject to the Award, in such form as the Committee shall establish. Such Award Agreements
may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the
following terms and conditions:
7.1 Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a
related Option (a “Tandem SAR”) or may be granted independently of any Option (a “Freestanding SAR”).
A Tandem SAR may only be granted concurrently with the grant of the related Option.
7.2 Exercise Price. The exercise price for each SAR shall be established in the discretion of
the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the
exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding
SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR.
Notwithstanding the foregoing, an SAR may be granted with an exercise price lower than the minimum
exercise price set forth above if such SAR is granted pursuant to an assumption or substitution for another
stock appreciation right in a manner that would qualify under the provisions of Section 409A of the Code.
7.3 Exercisability and Term of SARs.
(a) Tandem SARs. Tandem SARs shall be exercisable only at the time and to the
extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the
Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares
of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement
evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company
and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its
terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related
Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of
the shares subject to such SAR, the related Option shall be canceled automatically as to the number of shares
with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem
SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled
automatically as to the number of shares with respect to which the related Option was exercised.
(b) Freestanding SARs. Freestanding SARs shall be exercisable at such time or times,
or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as
shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided,
however, that (i) no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the
effective date of grant of such SAR and (ii) no Freestanding SAR granted to an Employee who is a non-exempt
employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at
least six (6) months following the date of grant of such SAR (except in the event of such Employee’s death,
disability or retirement, upon a Change in Control, or as
16
otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise
specified by the Committee in the grant of a Freestanding SAR, each Freestanding SAR shall terminate ten
(10) years after the effective date of grant of the SAR, unless earlier terminated in accordance with its
provisions.
7.4 Exercise of SARs. Upon the exercise (or deemed exercise pursuant to Section 7.5) of an
SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to
exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment of an amount for
each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a
share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be
made (a) in the case of a Tandem SAR, solely in shares of Stock in a lump sum upon the date of exercise of the
SAR and (b) in the case of a Freestanding SAR, in cash, shares of Stock, or any combination thereof as
determined by the Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be
made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market
Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, an SAR shall be
deemed exercised on the date on which the Company receives notice of exercise from the Participant or as
otherwise provided in Section 7.5.
7.5 Deemed Exercise of SARs. If, on the date on which an SAR would otherwise terminate or
expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration and, if so
exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not
previously been exercised shall automatically be deemed to be exercised as of such date with respect to such
portion.
7.6 Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise
provided herein and unless otherwise provided by the Committee, an SAR shall be exercisable after a
Participant’s termination of Service only to the extent and during the applicable time period determined in
accordance with Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.
7.7 Transferability of SARs. During the lifetime of the Participant, an SAR shall be
exercisable only by the Participant or the Participant’s guardian or legal representative. An SAR shall not be
subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or
garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the
laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in
its discretion, and set forth in the Award Agreement evidencing such Award, a Tandem SAR related to a
Nonstatutory Stock Option or a Freestanding SAR shall be assignable or transferable subject to the applicable
limitations, if any, described in the General Instructions to Form S8 under the Securities Act.
8. Restricted Stock Awards.
Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the
Award is a Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock
subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate
all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and
conditions:
8.1 Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted
in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards
may be granted upon such conditions as the Committee shall determine, including, without
17
limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either
the grant of or satisfaction of Vesting Conditions applicable to a Restricted Stock Award is to be
contingent upon the attainment of one or more Performance Goals, the Committee shall follow
procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).
8.2 Purchase Price. The purchase price for shares of Stock issuable under each Restricted
Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than
applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a
Restricted Stock Bonus, the consideration for which shall be services actually rendered to a Participating
Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the
Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company
or for its benefit having a value not less than the par value of the shares of Stock subject to a Restricted Stock
Award.
8.3 Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period
established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the
grant of the Restricted Stock Purchase Right.
8.4 Payment of Purchase Price. Except as otherwise provided below, payment of the
purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase
Right shall be made (a) in cash, by check or in cash equivalent, (b) by such other consideration as may be
approved by the Committee from time to time to the extent permitted by applicable law, or (c) by any
combination thereof.
8.5 Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock
Award may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service
requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals
as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement
evidencing such Award. During any period in which shares acquired pursuant to a Restricted Stock Award
remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned
or otherwise disposed of other than pursuant to a Change in Control or as provided in Section 8.8. The
Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Award that,
if the satisfaction of Vesting Conditions with respect to any shares subject to such Restricted Stock Award
would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading
Compliance Policy, then satisfaction of the Vesting Conditions automatically shall be determined on the next
trading day on which the sale of such shares would not violate the Trading Compliance Policy. Upon request
by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the
receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates
representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends
evidencing any such transfer restrictions.
8.6 Voting Rights; Dividends and Distributions. Except as provided in this Section, Section
8.5 and any Award Agreement, during any period in which shares acquired pursuant to a Restricted Stock
Award remain subject to Vesting Conditions, the Participant shall have all of the rights of a stockholder of the
Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares; provided, however, that if so determined by the Committee and
provided by the Award Agreement, such dividends and distributions shall be subject to the same Vesting
Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or
distributions were paid, and otherwise shall be paid no later than the end of the calendar year in which such
dividends or distributions are paid to stockholders (or, if later, the
18
15th day of the third month following the date such dividends or distributions are paid to
stockholders). In the event of a dividend or distribution paid in shares of Stock or other property or any
other adjustment made upon a change in the capital structure of the Company as described in Section
4.5, any and all new, substituted or additional securities or other property (other than regular, periodic
cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock
Award shall be immediately subject to the same Vesting Conditions as the shares subject to the
Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments
were made.
8.7 Effect of Termination of Service. Unless otherwise provided by the Committee in the
Award Agreement evidencing a Restricted Stock Award, if a Participant’s Service terminates for any reason,
whether voluntary or involuntary (including the Participant’s death or disability), then (a) the Company shall
have the option to repurchase for the purchase price paid by the Participant any shares acquired by the
Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the
date of the Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares
acquired by the Participant pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions
as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any
time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as
may be selected by the Company.
8.8 Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock
pursuant to a Restricted Stock Award shall not be subject in any manner to anticipation, alienation, sale,
exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the
Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect
to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime
only by such Participant or the Participant’s guardian or legal representative.
9. Restricted Stock Units.
Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number
of Restricted Stock Units subject to the Award, in such form as the Committee shall establish. Such Award
Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be
subject to the following terms and conditions:
9.1 Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted
upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of
one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Unit Award
or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more
Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in
Sections 10.3 through 10.5(a).
9.2 Purchase Price. No monetary payment (other than applicable tax withholding, if any)
shall be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall
be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if
required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or
past services rendered to a Participating Company or for its benefit having a value not less than the par value
of the shares of Stock issued upon settlement of the Restricted Stock Unit Award.
9.3 Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting
Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance
criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established
by the Committee and set forth in the Award Agreement evidencing such Award. The
19
Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Unit
Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to the Award
would otherwise occur on a day on which the sale of such shares would violate the provisions of the
Trading Compliance Policy, then the satisfaction of the Vesting Conditions automatically shall be
determined on the first to occur of (a) the next trading day on which the sale of such shares would not
violate the Trading Compliance Policy or (b) the last day of the calendar year in which the original
vesting date occurred.
9.4 Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have
no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the
issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the
Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to
Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period
beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on
the earlier of the date the Award is settled or the date on which it is terminated. Dividend Equivalent Rights, if
any, shall be paid by crediting the Participant with a cash amount or with additional whole Restricted Stock
Units as of the date of payment of such cash dividends on Stock, as determined by the Committee. The number
of additional Restricted Stock Units (rounded to the nearest whole number), if any, to be credited shall be
determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the
number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by
(b) the Fair Market Value per share of Stock on such date. If so determined by the Committee and provided by
the Award Agreement, such cash amount or additional Restricted Stock Units shall be subject to the same
terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units
originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares
of Stock or other property or any other adjustment made upon a change in the capital structure of the Company
as described in Section 4.5, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit
Award so that it represents the right to receive upon settlement any and all new, substituted or additional
securities or other property (other than regular, periodic cash dividends) to which the Participant would be
entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted
or additional securities or other property shall be immediately subject to the same Vesting Conditions as are
applicable to the Award.
9.5 Effect of Termination of Service. Unless otherwise provided by the Committee and set
forth in the Award Agreement evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates
for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the
Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain
subject to Vesting Conditions as of the date of the Participant’s termination of Service.
9.6 Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant
on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on
such other date determined by the Committee in compliance with Section 409A, if applicable, and set forth in
the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other
property pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming
vested or otherwise to be settled on such date, subject to the withholding of applicable taxes, if any. If
permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to
defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant
pursuant to this Section, and such deferred issuance date(s) and amount(s) elected by the Participant shall be
set forth in the Award Agreement.
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Notwithstanding the foregoing, the Committee, in its discretion, may provide for settlement of any
Restricted Stock Unit Award by payment to the Participant in cash of an amount equal to the Fair
Market Value on the payment date of the shares of Stock or other property otherwise issuable to the
Participant pursuant to this Section.
9.7 Nontransferability of Restricted Stock Unit Awards. The right to receive shares
pursuant to a Restricted Stock Unit Award shall not be subject in any manner to anticipation, alienation, sale,
exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the
Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with
respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or
her lifetime only by such Participant or the Participant’s guardian or legal representative.
10. Performance Awards.
Performance Awards shall be evidenced by Award Agreements in such form as the Committee
shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and
shall comply with and be subject to the following terms and conditions:
10.1 Types of Performance Awards Authorized. Performance Awards may be granted in the
form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance
Award shall specify the number of Performance Shares or Performance Units subject thereto, the Performance
Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other
terms, conditions and restrictions of the Award.
10.2 Initial Value of Performance Shares and Performance Units. Unless otherwise
provided by the Committee in granting a Performance Award, each Performance Share shall have an initial
monetary value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in
Section 4.5, on the effective date of grant of the Performance Share, and each Performance Unit shall have an
initial monetary value established by the Committee at the time of grant. The final value payable to the
Participant in settlement of a Performance Award determined on the basis of the applicable Performance
Award Formula will depend on the extent to which Performance Goals established by the Committee are
attained within the applicable Performance Period established by the Committee.
10.3 Establishment of Performance Period, Performance Goals and Performance Award
Formula. In granting each Performance Award, the Committee shall establish in writing the applicable
Performance Period, Performance Award Formula and one or more Performance Goals which, when measured
at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final
value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with
the requirements under Section 162(m) with respect to each Performance Award intended to result in the
payment of Performance-Based Compensation, the Committee shall establish the Performance Goal(s) and
Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date
ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25%
of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance
Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award
Formula applicable to a Performance Award intended to result in the payment of Performance-Based
Compensation to a Covered Employee shall not be changed during the Performance Period. The Company
shall notify each Participant granted a Performance Award of the terms of such Award, including the
Performance Period, Performance Goal(s) and Performance Award Formula.
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10.4 Measurement of Performance Goals. Performance Goals shall be established by the
Committee on the basis of targets to be attained (“Performance Targets’) with respect to one or more
measures of business or financial performance (each, a “Performance Measure’), subject to the following:
(a) Performance Measures. Performance Measures shall be calculated in accordance
with the Company’s financial statements, or, if such measures are not reported in the Company’s financial
statements, they shall be calculated in accordance with generally accepted accounting principles, a method
used generally in the Company’s industry, or in accordance with a methodology established by the Committee
prior to the grant of the Performance Award. As specified by the Committee, Performance Measures may be
calculated with respect to the Company and each Subsidiary Corporation consolidated therewith for financial
reporting purposes, one or more Subsidiary Corporations or such division or other business unit of any of them
selected by the Committee. Unless otherwise determined by the Committee prior to the grant of the
Performance Award, the Performance Measures applicable to the Performance Award shall be calculated prior
to the accrual of expense for any Performance Award for the same Performance Period and excluding the
effect (whether positive or negative) on the Performance Measures of any change in accounting standards or
any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after the
establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any,
shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of
Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to
a Performance Award. Performance Measures may be based upon one or more of the following, as determined
by the Committee:
(i) revenue;
(ii) sales;
(iii) expenses;
(iv) operating income;
(v) gross margin;
(vi) operating margin;
interest, taxes, depreciation and amortization;
(vii) earnings before any one or more of: stock-based compensation expense,
(viii) pre-tax profit;
(ix) net operating income;
(x) net income;
(xi) economic value added;
(xii) free cash flow;
(xiii) operating cash flow;
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(xiv) balance of cash, cash equivalents and marketable securities;
(xv) stock price;
(xvi) earnings per share;
(xvii) return on stockholder equity;
(xviii) return on capital;
(xix) return on assets;
(xx) return on investment;
(xxi) total stockholder return;
(xxii) market share;
(xxiii) product development;
(xxiv) research and development expenses;
(xxv) completion of an identified special project; and
(xxvi) completion of a joint venture or other corporate transaction.
(b) Performance Targets. Performance Targets may include a minimum, maximum,
target level and intermediate levels of performance, with the final value of a Performance Award determined
under the applicable Performance Award Formula by the Performance Target level attained during the
applicable Performance Period. A Performance Target may be stated as an absolute value, an increase or
decrease in a value, or as a value determined relative to an index, budget or other standard selected by the
Committee.
10.5 Settlement of Performance Awards.
(a) Determination of Final Value. As soon as practicable following the completion of
the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to
which the applicable Performance Goals have been attained and the resulting final value of the Award earned
by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award
Formula.
(b) Discretionary Adjustment of Award Formula. In its discretion, the Committee
may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or
negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any
Participant who is not a Covered Employee to reflect such Participant’s individual performance in his or her
position with the Company or such other factors as the Committee may determine. If permitted under a
Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria
as may be established by the Committee, to reduce some or all of the value of the Performance Award that
would otherwise be paid to the Covered Employee upon its settlement notwithstanding the attainment of any
Performance Goal and the resulting value of the Performance Award determined in accordance with the
Performance Award Formula. No such reduction
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may result in an increase in the amount payable upon settlement of another Participant’s Performance Award
that is intended to result in Performance-Based Compensation.
(c) Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s
Award Agreement, payment of the final value, if any, of a Performance Award held by a Participant who has
taken in excess of thirty (30) days in unpaid leaves of absence during a Performance Period shall be prorated
on the basis of the number of days of the Participant’s Service during the Performance Period during which the
Participant was not on an unpaid leave of absence.
(d) Notice to Participants. As soon as practicable following the Committee’s
determination and certification in accordance with Sections 10.5(a) and (b), the Company shall notify each
Participant of the determination of the Committee.
(e) Payment in Settlement of Performance Awards. As soon as practicable following
the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), but in any event
within the Short-Term Deferral Period described in Section 15.1 (except as otherwise provided below or
consistent with the requirements of Section 409A), payment shall be made to each eligible Participant (or such
Participant’s legal representative or other person who acquired the right to receive such payment by reason of
the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount
shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless
otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a
lump sum. If permitted by the Committee, the Participant may elect, consistent with the requirements of
Section 409A, to defer receipt of all or any portion of the payment to be made to the Participant pursuant to
this Section, and such deferred payment date(s) elected by the Participant shall be set forth in the Award
Agreement. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to,
provide for the payment during the deferral period of Dividend Equivalent Rights or interest.
(f) Provisions Applicable to Payment in Shares. If payment is to be made in shares of
Stock, the number of such shares shall be determined by dividing the final value of the Performance Award by
the Fair Market Value of a share of Stock determined by the method specified in the Award Agreement. Shares
of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or
may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting
Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of
Sections 8.5 through 8.8 above.
10.6 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have
no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the
issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the
Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to Dividend
Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the
date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date
on which the Performance Shares are settled or the date on which they are forfeited. Such Dividend Equivalent
Rights, if any, shall be credited to the Participant either in cash or in the form of additional whole Performance
Shares as of the date of payment of such cash dividends on Stock, as determined by the Committee. The
number of additional Performance Shares (rounded to the nearest whole number), if any, to be so credited shall
be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to
the number of shares of Stock represented by the Performance Shares previously credited to the Participant by
(b) the Fair Market Value per share of Stock on such date. Dividend Equivalent Rights, if any, shall be
accumulated
24
and paid to the extent that the related Performance Shares become nonforfeitable. Settlement of
Dividend Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as
determined by the Committee, and may be paid on the same basis as settlement of the related
Performance Share as provided in Section 10.5. Dividend Equivalent Rights shall not be paid with
respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or other
property or any other adjustment made upon a change in the capital structure of the Company as
described in Section 4.5, appropriate adjustments shall be made in the Participant’s Performance Share
Award so that it represents the right to receive upon settlement any and all new, substituted or
additional securities or other property (other than regular, periodic cash dividends) to which the
Participant would be entitled by reason of the shares of Stock issuable upon settlement of the
Performance Share Award, and all such new, substituted or additional securities or other property shall
be immediately subject to the same Performance Goals as are applicable to the Award.
10.7 Effect of Termination of Service. Unless otherwise provided by the Committee and set
forth in the Award Agreement evidencing a Performance Award, the effect of a Participant’s termination of
Service on the Performance Award shall be as follows:
(a) Death or Disability. If the Participant’s Service terminates because of the death or
Disability of the Participant before the completion of the Performance Period applicable to the Performance
Award, the final value of the Participant’s Performance Award shall be determined by the extent to which the
applicable Performance Goals have been attained with respect to the entire Performance Period and shall be
prorated based on the number of months of the Participant’s Service during the Performance Period. Payment
shall be made following the end of the Performance Period in any manner permitted by Section 10.5.
(b) Other Termination of Service. If the Participant’s Service terminates for any
reason except death or Disability before the completion of the Performance Period applicable to the
Performance Award, such Award shall be forfeited in its entirety; provided, however, that in the event of an
involuntary termination of the Participant’s Service, the Committee, in its discretion, may waive the automatic
forfeiture of all or any portion of any such Award and determine the final value of the Performance Award in
the manner provided by Section 10.7(a). Payment of any amount pursuant to this Section shall be made
following the end of the Performance Period in any manner permitted by Section 10.5.
10.8 Nontransferability of Performance Awards. Prior to settlement in accordance with the
provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale,
exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the
Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with
respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her
lifetime only by such Participant or the Participant’s guardian or legal representative.
11. Cash-Based Awards and Other Stock-Based Awards.
Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements
in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the following terms and conditions:
11.1 Grant of Cash-Based Awards. Subject to the provisions of the Plan, the Committee, at
any time and from time to time, may grant Cash-Based Awards to Participants in such
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amounts and upon such terms and conditions, including the achievement of performance criteria, as
the Committee may determine.
11.2 Grant of Other Stock-Based Awards. The Committee may grant other types of equity-
based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer
for sale of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures
convertible into common stock or other forms determined by the Committee) in such amounts and subject to
such terms and conditions as the Committee shall determine. Other Stock-Based Awards may be made
available as a form of payment in the settlement of other Awards or as payment in lieu of compensation to
which a Participant is otherwise entitled. Other Stock-Based Awards may involve the transfer of actual shares
of Stock to Participants, or payment in cash or otherwise of amounts based on the value of Stock and may
include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of
jurisdictions other than the United States.
11.3 Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall
specify a monetary payment amount or payment range as determined by the Committee. Each Other Stock-
Based Award shall be expressed in terms of shares of Stock or units based on such shares of Stock, as
determined by the Committee. The Committee may require the satisfaction of such Service requirements,
conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described
in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing
such Award. If the Committee exercises its discretion to establish performance criteria, the final value of Cash-
Based Awards or Other Stock-Based Awards that will be paid to the Participant will depend on the extent to
which the performance criteria are met. The establishment of performance criteria with respect to the grant or
vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based
Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set
forth in Section 10.
11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards.
Payment or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be
made in accordance with the terms of the Award, in cash, shares of Stock or other securities or any
combination thereof as the Committee determines. The determination and certification of the final value with
respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based
Compensation shall comply with the requirements applicable to Performance Awards set forth in Section 10.
To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-
Based Award shall be made in compliance with the requirements of Section 409A.
11.5 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have
no voting rights with respect to shares of Stock represented by Other Stock-Based Awards until the date of the
issuance of such shares of Stock (as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company), if any, in settlement of such Award. However, the Committee,
in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that the
Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on
Stock during the period beginning on the date such Award is granted and ending, with respect to each share
subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such
Dividend Equivalent Rights, if any, shall be paid in accordance with the provisions set forth in Section 9.4.
Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards. In the event of a dividend
or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the
capital structure of the Company as described in Section 4.5, appropriate adjustments shall be made in the
Participant’s Other Stock-Based Award so that it represents the right to receive upon settlement any and all
new, substituted or additional securities or
26
other property (other than regular, periodic cash dividends) to which the Participant would be entitled
by reason of the shares of Stock issuable upon settlement of such Award, and all such new, substituted
or additional securities or other property shall be immediately subject to the same Vesting Conditions
and performance criteria, if any, as are applicable to the Award.
11.6 Effect of Termination of Service. Each Award Agreement evidencing a Cash-Based
Award or Other Stock-Based Award shall set forth the extent to which the Participant shall have the right to
retain such Award following termination of the Participant’s Service. Such provisions shall be determined in
the discretion of the Committee, need not be uniform among all Cash-Based Awards or Other Stock-Based
Awards, and may reflect distinctions based on the reasons for termination, subject to the requirements of
Section 409A, if applicable.
11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to
the payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject
in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or
garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the
laws of descent and distribution. The Committee may impose such additional restrictions on any shares of
Stock issued in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable,
including, without limitation, minimum holding period requirements, restrictions under applicable federal
securities laws, under the requirements of any stock exchange or market upon which such shares of Stock are
then listed and/or traded, or under any state securities laws or foreign law applicable to such shares of Stock.
12. Standard Forms of Award Agreement.
12.1 Award Agreements. Each Award shall comply with and be subject to the terms and
conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended
from time to time. No Award or purported Award shall be a valid and binding obligation of the Company
unless evidenced by a fully executed Award Agreement, which execution may be evidenced by electronic
means.
12.2 Authority to Vary Terms. The Committee shall have the authority from time to time to
vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of
an individual Award or in connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended standard form or forms of Award
Agreement are not inconsistent with the terms of the Plan.
13. Change in Control.
13.1 Effect of Change in Control on Awards. Subject to Section 13.2 and the requirements
and limitations of Section 409A, if applicable, the Committee may provide for any one or more of the
following:
(a) Accelerated Vesting. In its discretion, the Committee may provide in the grant of
any Award or at any other time may take such action as it deems appropriate to provide for acceleration of the
exercisability, vesting and/or settlement in connection with a Change in Control of each or any outstanding
Award or portion thereof and shares acquired pursuant thereto upon such conditions, including termination of
the Participant’s Service prior to, upon, or following the Change in Control, and to such extent as the
Committee determines.
27
(b) Assumption, Continuation or Substitution. In the event of a Change in Control,
the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the
case may be (the “Acquiror”), may, without the consent of any Participant, assume or continue the Company’s
rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change
in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent
award with respect to the Acquiror’s stock, as applicable. For purposes of this Section, if so determined by the
Committee in its discretion, an Award denominated in shares of Stock shall be deemed assumed if, following
the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan
and the applicable Award Agreement, for each share of Stock subject to the Award immediately prior to the
Change in Control, the consideration (whether stock, cash, other securities or property or a combination
thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and
if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority
of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock
of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be
received upon the exercise or settlement of the Award, for each share of Stock subject to the Award, to consist
solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by
holders of Stock pursuant to the Change in Control.
(c) Cash-Out of Outstanding Stock-Based Awards. The Committee may, in its
discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in
Control, each or any Award denominated in shares of Stock or portion thereof outstanding immediately prior to
the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with
respect to each share of Stock (whether vested or unvested) subject to such canceled Award in (i) cash, (ii)
stock of the Company or of a corporation or other business entity a party to the Change in Control, or (iii)
other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair
Market Value of the consideration to be paid per share of Stock in the Change in Control, reduced (but not
below zero) by the exercise or purchase price per share, if any, under such Award or as otherwise determined
by the Committee in the exercise of its good faith. Payment pursuant to this Section (reduced by applicable
withholding taxes, if any) shall be made to Participants in respect of their canceled Awards as soon as
practicable following the date of the Change in Control.
13.2 Effect of Change in Control and Termination of Service or Failure to Assume,
Continue or Substitute Awards. Notwithstanding any provision of the Plan or an Award Agreement to the
contrary, in the event that a Double Trigger Event (as defined below) occurs in connection with a Change in
Control, each Award shall immediately vest and become exercisable upon the occurrence of the Double
Trigger Event. For this purpose a “Double Trigger Event” occurs in connection with a Change in Control if:
(i) the Award is not appropriately assumed or continued nor an equivalent award substituted (including if the
Award is substituted for shares of common stock of the Acquiror that are not publicly traded on a national
securities exchange) by the Acquiror or (ii) at the time of or within 24 months following the Change in
Control, the Participant incurs a termination of employment without Cause or, if provided in the Participant’s
employment agreement or Award Agreement, for Good Reason.
13.3 Effect of Change in Control on Nonemployee Director Awards. Subject to the
requirements and limitations of Section 409A, if applicable, including as provided by Section 15.4(f), in the
event of a Change in Control, each outstanding Nonemployee Director Award shall become immediately
exercisable and vested in full and, except to the extent assumed, continued or substituted for pursuant to
Section 13.1(b), shall be settled effective immediately prior to the time of consummation of the Change in
Control.
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13.4 Federal Excise Tax Under Section 4999 of the Code.
(a) Excess Parachute Payment. If any acceleration of vesting pursuant to an Award
and any other payment or benefit received or to be received by a Participant would subject the Participant to
any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting,
payment or benefit as an “excess parachute payment” under Section 280G of the Code, then, provided such
election would not subject the Participant to taxation under Section 409A, the Participant may elect to reduce
the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.
(b) Determination by Tax Firm. To aid the Participant in making any election called
for under Section 13.4(a), no later than the date of the occurrence of any event that might reasonably be
anticipated to result in an “excess parachute payment” to the Participant as described in Section 13.4(a), the
Company shall request a determination in writing by the professional firm engaged by the Company for
general tax purposes, or, if the tax firm so engaged by the Company is serving as accountant or auditor for the
Acquiror, the Company will appoint a nationally recognized tax firm to make the determinations required by
this Section (the “Tax Firm”). As soon as practicable thereafter, the Tax Firm shall determine and report to the
Company and the Participant the amount of such acceleration of vesting, payments and benefits which would
produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Tax Firm
may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Participant shall furnish to the Tax Firm such information and documents as the
Tax Firm may reasonably request in order to make its required determination. The Company shall bear all fees
and expenses the Tax Firm charges in connection with its services contemplated by this Section.
14. Compliance with Securities Law.
The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be
subject to compliance with all applicable requirements of federal, state and foreign law with respect to such
securities and the requirements of any stock exchange or market system upon which the Stock may then be
listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration
statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the
shares issuable pursuant to the Award, or (b) in the opinion of legal counsel to the Company, the shares
issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from
the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory
body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the
lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of
the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a
condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make
any representation or warranty with respect thereto as may be requested by the Company.
15. Compliance with Section 409A.
15.1 Awards Subject to Section 409A. The Company intends that Awards granted pursuant
to the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed. The
provisions of this Section 15 shall apply to any Award or portion thereof that constitutes or provides for
payment of Section 409A Deferred Compensation. Such Awards may include, without limitation:
29
(a) A Nonstatutory Stock Option or SAR that includes any feature for the deferral of
compensation other than the deferral of recognition of income until the later of (i) the exercise or disposition of
the Award or (ii) the time the stock acquired pursuant to the exercise of the Award first becomes substantially
vested.
(b) Any Restricted Stock Unit Award, Performance Award, Cash-Based Award or
Other Stock-Based Award that either (i) provides by its terms for settlement of all or any portion of the Award
at a time or upon an event that will or may occur later than the end of the Short-Term Deferral Period (as
defined below) or (ii) permits the Participant granted the Award to elect one or more dates or events upon
which the Award will be settled after the end of the Short-Term Deferral Period.
Subject to the provisions of Section 409A, the term “Short-Term Deferral Period” means the
21/2 month period ending on the later of (i) the 15th day of the third month following the end of the
Participant’s taxable year in which the right to payment under the applicable portion of the Award is no longer
subject to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the
Company’s taxable year in which the right to payment under the applicable portion of the Award is no longer
subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have
the meaning provided by Section 409A.
15.2 Deferral and/or Distribution Elections. Except as otherwise permitted or required by
Section 409A, the following rules shall apply to any compensation deferral and/or payment elections (each, an
“Election”) that may be permitted or required by the Committee pursuant to an Award providing Section 409A
Deferred Compensation:
of an Award being deferred, as well as the time and form of payment as permitted by this Plan.
(a) Elections must be in writing and specify the amount of the payment in settlement
year in which services commence for which an Award may be granted to the Participant.
(b) Elections shall be made by the end of the Participant’s taxable year prior to the
(c) Elections shall continue in effect until a written revocation or change in Election is
received by the Company, except that a written revocation or change in Election must be received by the
Company prior to the last day for making the Election determined in accordance with paragraph (b) above or
as permitted by Section 15.3.
15.3 Subsequent Elections. Except as otherwise permitted or required by Section 409A, any
Award providing Section 409A Deferred Compensation which permits a subsequent Election to delay the
payment or change the form of payment in settlement of such Award shall comply with the following
requirements:
date on which the subsequent Election is made.
(a) No subsequent Election may take effect until at least twelve (12) months after the
(b) Each subsequent Election related to a payment in settlement of an Award not
described in Section 15.4(a)(ii), 15.4(a)(iii) or 15.4(a)(vi) must result in a delay of the payment for a period of
not less than five (5) years from the date on which such payment would otherwise have been made.
(c) No subsequent Election related to a payment pursuant to Section 15.4(a)(iv) shall
be made less than twelve (12) months before the date on which such payment would otherwise have been
made.
30
(d) Subsequent Elections shall continue in effect until a written revocation or change
in the subsequent Election is received by the Company, except that a written revocation or change in a
subsequent Election must be received by the Company prior to the last day for making the subsequent Election
determined in accordance the preceding paragraphs of this Section 15.3.
15.4 Payment of Section 409A Deferred Compensation.
(a) Permissible Payments. Except as otherwise permitted or required by Section
409A, an Award providing Section 409A Deferred Compensation must provide for payment in settlement of
the Award only upon one or more of the following:
(i) The Participant’s “separation from service” (as defined by Section 409A);
(ii) The Participant’s becoming “disabled” (as defined by Section 409A);
(iii) The Participant’s death;
upon the grant of an Award and set forth in the Award Agreement evidencing such Award or (ii) specified by
the Participant in an Election complying with the requirements of Section 15.2 or 15.3, as applicable;
(iv) A time or fixed schedule that is either (i) specified by the Committee
ownership of a substantial portion of the assets of the Company determined in accordance with Section 409A;
or
(v) A change in the ownership or effective control or the Company or in the
409A).
(vi) The occurrence of an “unforeseeable emergency” (as defined by Section
(b) Installment Payments. It is the intent of this Plan that any right of a Participant to
receive installment payments (within the meaning of Section 409A) shall, for all purposes of Section 409A, be
treated as a right to a series of separate payments.
(c) Required Delay in Payment to Specified Employee Pursuant to Separation from
Service. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, except as
otherwise permitted by Section 409A, no payment pursuant to Section 15.4(a)(i) in settlement of an Award
providing for Section 409A Deferred Compensation may be made to a Participant who is a “specified
employee” (as defined by Section 409A) as of the date of the Participant’s separation from service before the
date (the “Delayed Payment Date”) that is six (6) months after the date of such Participant’s separation from
service, or, if earlier, the date of the Participant’s death. All such amounts that would, but for this paragraph,
become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment
Date.
(d) Payment Upon Disability. All distributions of Section 409A Deferred
Compensation payable pursuant to Section 15.4(a)(ii) by reason of a Participant becoming disabled shall be
paid in a lump sum or in periodic installments as established by the Participant’s Election. If the Participant
has made no Election with respect to distributions of Section 409A Deferred Compensation upon becoming
disabled, all such distributions shall be paid in a lump sum upon the determination that the Participant has
become disabled.
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(e) Payment Upon Death. If a Participant dies before complete distribution of
amounts payable upon settlement of an Award subject to Section 409A, such undistributed amounts shall be
distributed to his or her beneficiary under the distribution method for death established by the Participant’s
Election upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death. If
the Participant has made no Election with respect to distributions of Section 409A Deferred Compensation
upon death, all such distributions shall be paid in a lump sum upon receipt by the Committee of satisfactory
notice and confirmation of the Participant’s death.
(f) Payment Upon Change in Control. Notwithstanding any provision of the Plan or
an Award Agreement to the contrary, to the extent that any amount constituting Section 409A Deferred
Compensation would become payable under this Plan by reason of a Change in Control, such amount shall
become payable only if the event constituting a Change in Control would also constitute a change in ownership
or effective control of the Company or a change in the ownership of a substantial portion of the assets of the
Company within the meaning of Section 409A. Any Award which constitutes Section 409A Deferred
Compensation and which would vest and otherwise become payable upon a Change in Control shall vest to the
extent provided by such Award but shall be converted automatically at the effective time of such Change in
Control into a right to receive, in cash on the date or dates such award would have been settled in accordance
with its then existing settlement schedule (or as required by Section 15.4(c)) to the extent required by Section
409A, an amount or amounts equal in the aggregate to the intrinsic value of the Award at the time of the
Change in Control or as otherwise provided.
(g) Payment Upon Unforeseeable Emergency. The Committee shall have the
authority to provide in the Award Agreement evidencing any Award providing for Section 409A Deferred
Compensation for payment pursuant to Section 15.4(a)(vi) in settlement of all or a portion of such Award in
the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an unforeseeable
emergency. In such event, the amount(s) distributed with respect to such unforeseeable emergency cannot
exceed the amounts reasonably necessary to satisfy the emergency need plus amounts necessary to pay taxes
reasonably anticipated as a result of such distribution(s), after taking into account the extent to which such
emergency need is or may be relieved through reimbursement or compensation by insurance or otherwise, by
liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe
financial hardship) or by cessation of deferrals under the Award. All distributions with respect to an
unforeseeable emergency shall be made in a lump sum upon the Committee’s determination that an
unforeseeable emergency has occurred. The Committee’s decision with respect to whether an unforeseeable
emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be
altered or modified, shall be final, conclusive, and not subject to approval or appeal.
(h) Prohibition of Acceleration of Payments. Notwithstanding any provision of the
Plan or an Award Agreement to the contrary, this Plan does not permit the acceleration of the time or schedule
of any payment under an Award providing Section 409A Deferred Compensation, except as permitted by
Section 409A.
(i) No Representation Regarding Section 409A Compliance. Notwithstanding any
other provision of the Plan, the Company makes no representation that Awards shall be exempt from or
comply with Section 409A. No Participating Company shall be liable for any tax, penalty or interest imposed
on a Participant by Section 409A.
16. Tax Withholding.
16.1 Tax Withholding in General. The Company shall have the right to deduct from any and
all payments made under the Plan, or to require the Participant, through payroll withholding, cash
32
payment or otherwise, to make adequate provision for, the federal, state, local and foreign taxes
(including social insurance), if any, required by law to be withheld by any Participating Company with
respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to
deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award
Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s
tax withholding obligations have been satisfied by the Participant.
16.2 Withholding in or Directed Sale of Shares. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an
Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market
Value, as determined by the Company, equal to all or any part of the tax withholding obligations of any
Participating Company. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such
tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory
withholding rates. The Company may require a Participant to direct a broker, upon the vesting, exercise or
settlement of an Award, to sell a portion of the shares subject to the Award determined by the Company in its
discretion to be sufficient to cover the tax withholding obligations of any Participating Company and to remit
an amount equal to such tax withholding obligations to such Participating Company in cash.
17. Amendment, Suspension or Termination of Plan.
The Committee may amend, suspend or terminate the Plan at any time. However, without the
approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the provisions of Sections 4.2, 4.3,
4.4 and 4.5), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other
amendment of the Plan that would require approval of the Company’s stockholders under any applicable law,
regulation or rule, including the rules of any stock exchange or quotation system upon which the Stock may
then be listed or quoted. No amendment, suspension or termination of the Plan shall affect any then
outstanding Award unless expressly provided by the Committee. Except as provided by the next sentence, no
amendment, suspension or termination of the Plan may have a materially adverse effect on any then
outstanding Award without the consent of the Participant. Notwithstanding any other provision of the Plan or
any Award Agreement to the contrary, the Committee may, in its sole and absolute discretion and without the
consent of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise,
as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any
present or future law, regulation or rule applicable to the Plan, including, but not limited to, Section 409A.
18. Miscellaneous Provisions.
18.1 Repurchase Rights. Shares issued under the Plan may be subject to one or more
repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the
time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may
have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.
Upon request by the Company, each Participant shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any
and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
33
18.2 Forfeiture Events.
(a) The Committee may specify in an Award Agreement that the Participant’s rights,
payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or
recoupment upon the occurrence of specified events, in addition to any otherwise applicable vesting or
performance conditions of an Award. Such events may include, but shall not be limited to, termination of
Service for Cause or any act by a Participant, whether before or after termination of Service, that would
constitute Cause for termination of Service, or any accounting restatement due to material noncompliance of
the Company with any financial reporting requirements of securities laws as a result of which, and to the
extent that, such reduction, cancellation, forfeiture, or recoupment is required by applicable securities laws.
(b) If the Company is required to prepare an accounting restatement due to the
material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement
under the securities laws, any Participant who knowingly or through gross negligence engaged in the
misconduct, or who knowingly or through gross negligence failed to prevent the misconduct, and any
Participant who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-
Oxley Act of 2002, shall reimburse the Company for (i) the amount of any payment in settlement of an Award
received by such Participant during the twelve- (12-) month period following the first public issuance or filing
with the United States Securities and Exchange Commission (whichever first occurred) of the financial
document embodying such financial reporting requirement, and (ii) any profits realized by such Participant
from the sale of securities of the Company during such twelve- (12-) month period.
18.3 Provision of Information. Each Participant shall be given access to information
concerning the Company equivalent to that information generally made available to the Company’s common
stockholders.
18.4 Rights as Employee, Consultant or Director. No person, even though eligible pursuant
to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again
as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a
right to remain an Employee, Consultant or Director or interfere with or limit in any way any right of a
Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a
Participating Company other than the Company receives an Award under the Plan, that Award shall in no event
be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has
an employment relationship with the Company.
18.5 Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect
to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the
date such shares are issued, except as provided in Section 4.5 or another provision of the Plan.
18.6 Delivery of Title to Shares. Subject to any governing rules or regulations, the Company
shall issue or cause to be issued the shares of Stock acquired pursuant to an Award and shall deliver such
shares to or for the benefit of the Participant by means of one or more of the following: (a) by delivering to the
Participant evidence of book entry shares of Stock credited to the account of the Participant, (b) by depositing
such shares of Stock for the benefit of the Participant with any broker with which the Participant has an
account relationship, or (c) by delivering such shares of Stock to the Participant in certificate form.
34
18.7 Fractional Shares. The Company shall not be required to issue fractional shares upon
the exercise or settlement of any Award.
18.8 Retirement and Welfare Plans. Neither Awards made under this Plan nor shares of
Stock or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the
benefits payable to any Participant under any Participating Company’s retirement plans (both qualified and
non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall
be taken into account in computing a Participant’s benefit.
18.9 Beneficiary Designation. Subject to local laws and procedures, each Participant may file
with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which
the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such
benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the Participant in writing with the
Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the
Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s
spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the
Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal
representative.
18.10 Severability. If any one or more of the provisions (or any part thereof) of this Plan shall
be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid,
legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part
thereof) of the Plan shall not in any way be affected or impaired thereby.
18.11 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a)
limit, impair, or otherwise affect the Company’s or another Participating Company’s right or power to make
adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or
consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right
or power of the Company or another Participating Company to take any action which such entity deems to be
necessary or appropriate.
18.12 Unfunded Obligation. Participants shall have the status of general unsecured creditors
of the Company. Any amounts payable to Participants pursuant to the Plan shall be considered unfunded and
unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement
Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its
general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The
Company shall retain at all times beneficial ownership of any investments, including trust investments, which
the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or
maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary
relationship between the Committee or any Participating Company and a Participant, or otherwise create any
vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating
Company. The Participants shall have no claim against any Participating Company for any changes in the
value of any assets which may be invested or reinvested by the Company with respect to the Plan.
18.13 Choice of Law. Except to the extent governed by applicable federal law, the
validity, interpretation, construction and performance of the Plan and each Award Agreement shall be governed
by the laws of the State of Delaware without regard to its conflict of law rules.
35
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing
sets forth the Kadmon Holdings, Inc. 2016 Equity Incentive Plan as duly adopted by the Board on , 2016.
, Secretary
36
KADMON HOLDINGS, INC.
STOCK APPRECIATION RIGHT AGREEMENT
(For U.S. Participants with Employment Agreements)
Exhibit 10.58
Kadmon Holdings, Inc. (the “Company”) has granted to the Participant named in the Notice
of Grant of Stock Appreciation Right (the “Grant Notice”) to which this Stock Appreciation Right
Agreement (For U.S. Participants with Employment Agreements) (the “SAR Agreement”) is
attached a right to acquire shares of Stock (the “SAR”) upon the terms and conditions set forth in the
Grant Notice and this SAR Agreement. The SAR has been granted pursuant to, and shall in all
respects be subject to, the terms and conditions of the Kadmon Holdings, Inc. 2016 Equity Incentive
Plan (the “Plan”), as amended to the Date of Grant, the provisions of which are incorporated herein
by reference. By signing the Grant Notice, the Participant: (a) acknowledges receipt of, and
represents that the Participant has read and is familiar with, the Grant Notice, this SAR Agreement,
the Plan and a prospectus for the Plan prepared in connection with the registration with the Securities
and Exchange Commission of shares issuable pursuant to the SAR (the “Plan Prospectus”);
(b) accepts the SAR subject to all of the terms and conditions of the Grant Notice, this SAR
Agreement and the Plan; and (c) agrees to accept as binding, conclusive and final all decisions or
interpretations of the Committee upon any questions arising under the Grant Notice, this SAR
Agreement or the Plan.
1.
Definitions and Construction.
1.1 Definitions. Unless otherwise defined herein, capitalized terms shall have the
meanings assigned to such terms in the Grant Notice or the Plan.
1.2 Construction. Captions and titles contained herein are for convenience only and
shall not affect the meaning or interpretation of any provision of this SAR Agreement. Except when
otherwise indicated by the context, the singular shall include the plural and the plural shall include
the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires
otherwise.
2.
Administration.
All questions of interpretation concerning the Grant Notice, this SAR Agreement, the
Plan or any other form of agreement or other document employed by the Company in the
administration of the Plan or the SAR shall be determined by the Committee. All such
determinations by the Committee shall be final, binding and conclusive upon all persons having an
interest in the SAR, unless fraudulent or made in bad faith. Any and all actions, decisions and
determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan
or the SAR or other agreement thereunder (other than determining questions of interpretation
pursuant to the preceding sentence) shall be final, binding and conclusive upon all persons having an
interest in the SAR. Any Officer shall have the authority to act on behalf of the Company with
respect to any matter, right, obligation, or election which is the responsibility of or which is allocated
to the Company herein, provided the Officer has apparent authority with respect to such matter, right,
obligation, or election.
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3.
Exercise of the SAR.
3.1 Right to Exercise. Except as otherwise provided herein, the SAR shall be
exercisable on and after the Applicable Vesting Date and prior to the termination of the SAR (as
provided in Section 5) in an amount as set forth below under Section 3.3. In no event shall the SAR
be exercisable for more shares than the Number of SAR Shares, as adjusted pursuant to Section 8.
3.2 Method of Exercise. Exercise of the SAR shall be by means of electronic or
written notice (the “Exercise Notice”) in a form authorized by the Company. An electronic Exercise
Notice must be digitally signed or authenticated by the Participant in such manner as required by the
notice and transmitted to the Company or an authorized representative of the Company (including a
third-party administrator designated by the Company). In the event that the Participant is not
authorized or is unable to provide an electronic Exercise Notice, the SAR shall be exercised by a
written Exercise Notice addressed to the Company, which shall be signed by the Participant and
delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile
transmission, or by such other means as the Company may permit, to the Company, or an authorized
representative of
the
Company). Each Exercise Notice, whether electronic or written, must state the Participant’s election
to exercise the SAR, the number of whole shares of Stock for which the SAR is being exercised and
such other representations and agreements as to the Participant’s investment intent with respect to
such shares as may be required pursuant to the provisions of this SAR Agreement. Further, each
Exercise Notice must be received by the Company prior to the termination of the SAR as set forth in
Section 5. The SAR shall be deemed to be exercised upon receipt by the Company of such electronic
or written Exercise Notice and, subject to Section 3.4, the satisfaction of any tax withholding
requirements.
third-party administrator designated by
the Company (including a
3.3 Exercise of SARs. Upon the exercise of the SAR, the Participant (or the
Participant’s legal representative or other person who acquired the right to exercise the SAR by
reason of the Participant’s death) shall be entitled to receive payment of an amount for each Vested
Share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value
of a share of Stock on the date of exercise of the SAR minus the Exercise Price. Payment of such
amount shall be made in cash, shares of Stock, or any combination thereof as determined by the
Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be made in
shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market
Value of a share of Stock on the date of exercise of the SAR. For purposes of this Section 3.3,
the SAR shall be deemed exercised on the date on which the Company receives the Participant’s
Exercise Notice.
3.4 Tax Withholding.
(a) In General. At the time the SAR is exercised, in whole or in part, or at
any time thereafter as requested by a Participating Company, the Participant hereby authorizes
withholding from payroll and any other amounts payable to the Participant, and otherwise agrees to
make adequate provision for, any sums required to satisfy the federal, state, local and foreign tax
(including any social insurance) withholding obligations of the Participating Company Group, if any,
which arise in connection with the SAR (collectively, “Tax Withholding
EAST\124817978.2
2
Obligations”). The Company shall have no obligation to deliver shares of Stock or cash (or a
combination thereof), as applicable, until the Tax Withholding Obligations of the Participating
Company Group have been satisfied by the Participant.
(b) Withholding Requirement. The Committee shall have the right, but not
the obligation, to require the Participant to satisfy all or any portion of a Participating Company’s Tax
Withholding Obligations upon exercise of the SAR by deducting from the shares of Stock (or the
cash equivalent) otherwise issuable to the Participant upon such exercise a number of whole shares
(or cash equivalent) having a Fair Market Value, as of the date of exercise, not in excess of the
amount of such Tax Withholding Obligations.
3.5 Beneficial Ownership of Shares; Certificate Registration. The Participant
hereby authorizes the Company, in its sole discretion, to deposit for the benefit of the Participant with
any broker with which the Participant has an account relationship of which the Company has notice
any or all shares acquired by the Participant pursuant to the exercise of the SAR. Except as provided
by the preceding sentence, a certificate for the shares as to which the SAR is exercised shall be
registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.
3.6 Restrictions on Grant of the SAR and Issuance of Shares. The grant of the
SAR and the issuance of shares of Stock upon exercise of the SAR shall be subject to compliance
with all applicable requirements of federal, state or foreign law with respect to such securities.
Shares of Stock will not be issued upon the exercise of the SAR if the issuance of shares of Stock
upon exercise would constitute a violation of any applicable federal, state or foreign securities laws
or other law or regulations or the requirements of any stock exchange or market system upon which
the Stock may then be listed or violate the terms of the Plan. In addition, shares of Stock will not be
issued upon the exercise of the SAR unless (i) a registration statement under the Securities Act shall
at the time of exercise of the SAR be in effect with respect to the shares issuable upon exercise of the
SAR or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the
SAR may be issued in accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. THE PARTICIPANT IS CAUTIONED THAT THE SAR MAY
NOT
ARE
THE
SATISFIED. ACCORDINGLY, THE PARTICIPANT MAY NOT BE ABLE TO EXERCISE THE
SAR WHEN DESIRED EVEN THOUGH THE SAR IS VESTED. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s
legal counsel to be necessary to the lawful issuance and sale of any shares subject to the SAR shall
relieve the Company of any liability in respect of the failure to issue or sell such shares as to which
such requisite authority shall not have been obtained. As a condition to the exercise of the SAR, the
Company may require the Participant to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the Company.
CONDITIONS
FOREGOING
EXERCISED
UNLESS
BE
3.7 Fractional Shares. The Company shall not be required to issue fractional shares
upon the exercise of the SAR.
4.
Nontransferability of the SAR.
EAST\124817978.2
3
During the lifetime of the Participant, the SAR shall be exercisable only by the
Participant or the Participant’s guardian or legal representative. The SAR shall not be subject in any
manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or
garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or
by the laws of descent and distribution. Following the death of the Participant, the SAR, to the extent
provided in Section 6, may be exercised by the Participant’s legal representative or by any person
empowered to do so under the deceased Participant’s will or under the then applicable laws of
descent and distribution.
5.
Termination of the SAR.
The SAR shall terminate and may no longer be exercised after the first to occur of
(a) the close of business on the SAR Expiration Date, (b) the close of business on the last date for
exercising the SAR following termination of the Participant’s Service as described in Section 6, or (c)
following a Change in Control to the extent provided in Section 7.
6.
Effect of Termination of Service.
6.1 SAR Exercisability. Except as otherwise provided in this Section 6 and
notwithstanding the terms of any employment agreement between a Participating Company and the
Participant, the SAR shall terminate immediately upon Participant’s termination of Service to the
extent that it is then unvested. Upon the Participant’s termination of Service, the vested portion of the
SAR shall be exercisable after the Participant’s termination of Service only during the applicable time
period as determined below and thereafter shall terminate.
(a) Disability. If the Participant’s Service terminates because of the Disability
of the Participant, the SAR granted hereunder shall be deemed to have vested in its entirety,
immediately, and to the extent unexercised by the Participant on the date on which the Participant’s
Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal
representative) at any time prior to the expiration of twelve (12) months after the date on which the
Participant’s Service terminated, but in any event no later than the SAR Expiration Date.
(b) Death. If the Participant’s Service terminates because of the death of the
Participant, the SAR granted hereunder shall be deemed to have vested in its entirety, immediately,
and to the extent unexercised by the Participant on the date on which the Participant’s Service
terminated, may be exercised by the Participant’s legal representative or other person who acquired
the right to exercise the SAR by reason of the Participant’s death at any time prior to the expiration of
twelve (12) months after the date on which the Participant’s Service terminated, but in any event no
later than the SAR Expiration Date.
(c) Termination for Cause. Notwithstanding any other provision of this SAR
Agreement to the contrary, if the Participant’s Service is terminated for Cause or if, following the
Participant’s termination of Service and during any period in which the SAR otherwise would remain
exercisable, the Participant engages in any act that would constitute Cause, the SAR shall terminate
in its entirety (whether vested or unvested) and cease to be
EAST\124817978.2
4
exercisable immediately upon such termination of Service or act. For purposes hereof, “Cause” shall
have the meaning defined in the Participant’s employment agreement.
(d) Other Termination of Service. If the Participant’s Service terminates for
any reason, except Disability, death or Cause, the SAR, to the extent unexercised and exercisable for
Vested Shares by the Participant on the date on which the Participant’s Service terminated, may be
exercised by the Participant at any time prior to the expiration of three (3) months after the date on
which the Participant’s Service terminated, but in any event no later than the SAR Expiration Date.
Section 6.1 will apply with respect to any unvested shares.
6.2 Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other
than termination of the Participant’s Service for Cause, if the exercise of the SAR within the
applicable time periods set forth in Section 6.1 is prevented by the provisions of Section 3.6, the SAR
shall, to the extent permitted by Section 409A of the Code, remain exercisable until the later of
(a) thirty (30) days after the date such exercise first would no longer be prevented by such provisions,
or (b) the end of the applicable time period under Section 6.1, but in any event no later than the SAR
Expiration Date.
7.
Effect of Change in Control.
In the event of a Change in Control, the SAR granted hereunder shall be deemed to
have vested in its entirety immediately upon the Change in Control. Except to the extent that the
Committee determines to cash out the SAR in accordance with Section 13.1(c) of the Plan, the
surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof,
as the case may be (the “Acquiror”), may, without the consent of the Participant, assume or continue
in full force and effect the Company’s rights and obligations under all or any portion of the SAR or
substitute for all or any portion of the SAR a substantially equivalent stock appreciation right for the
Acquiror’s stock. For purposes of this Section, the SAR or any portion thereof shall be deemed
assumed if, following the Change in Control, the SAR confers the right to receive, subject to the
terms and conditions of the Plan and this SAR Agreement, for each share of Stock subject to such
portion of the SAR immediately prior to the Change in Control, the consideration (whether stock,
cash, other securities or property or a combination thereof) to which a holder of a share of Stock on
the effective date of the Change in Control was entitled (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of the outstanding shares
of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror,
the Committee may, with the consent of the Acquiror, provide for the consideration to be received
upon the exercise of the SAR, for each share of Stock subject to the SAR, to consist solely of
common stock of the Acquiror equal in Fair Market Value to the per share consideration received by
holders of Stock pursuant to the Change in Control. The SAR shall be deemed exercised
immediately upon the time of consummation of the Change in Control to the extent that the SAR is
neither assumed or continued by the Acquiror in connection with the Change in Control, and paid out
in accordance with the terms of this SAR Agreement and the Plan.
EAST\124817978.2
5
8.
Adjustments for Changes in Capital Structure.
Subject to any required action by the stockholders of the Company and the
requirements of Sections 409A and 424 of the Code to the extent applicable, in the event of any
change in the Stock effected without receipt of consideration by the Company, whether through
merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange
of shares, or similar change in the capital structure of the Company, or in the event of payment of a
dividend or distribution to the stockholders of the Company in a form other than Stock (excepting
normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock,
appropriate and proportionate adjustments shall be made in the number, Exercise Price and kind of
shares (or cash equivalent) subject to the SAR, in order to prevent dilution or enlargement of the
Participant’s rights under the SAR. For purposes of the foregoing, conversion of any convertible
securities of the Company shall not be treated as “effected without receipt of consideration by the
Company.” Any fractional share resulting from an adjustment pursuant to this Section shall be
rounded down to the nearest whole number and the Exercise Price shall be rounded up to the nearest
whole cent. In no event may the Exercise Price be decreased to an amount less than the par value, if
any, of the stock (or cash equivalent) subject to the SAR. The Committee in its sole discretion, may
also make such adjustments in the terms of the SAR to reflect, or related to, such changes in the
capital structure of the Company or distributions as it deems appropriate. All adjustments pursuant to
this Section shall be determined by the Committee, and its determination shall be final, binding and
conclusive.
9.
Rights as a Stockholder, Director, Employee or Consultant.
The Participant shall have no rights as a stockholder with respect to any shares
covered by the SAR until the date of the issuance of the shares for which the SAR has been exercised
(as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date the shares are issued, except as provided in Section 8. If the
Participant is an Employee, the Participant understands and acknowledges that, except as otherwise
provided in a separate, written employment agreement between a Participating Company and the
Participant, the Participant’s employment is “at will” and is for no specified term. Nothing in this
SAR Agreement shall confer upon the Participant any right to continue in the Service of a
Participating Company or interfere in any way with any right of the Participating Company Group to
terminate the Participant’s Service as a Director, an Employee or Consultant, as the case may be, at
any time.
10. Legends.
The Company may at any time place legends referencing any applicable federal, state
or foreign securities law restrictions on all certificates representing shares of stock subject to the
provisions of this SAR Agreement. The Participant shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired pursuant to the SAR in
the possession of the Participant in order to carry out the provisions of this Section, and the Company
shall place all appropriate legends, as determined by the Company, on any and all such certificates
representing shares of stock pursuant to this Section.
EAST\124817978.2
6
11. Miscellaneous Provisions.
11.1 Termination or Amendment. The Committee may terminate or amend the Plan
or the SAR at any time; provided, however, that except as provided in Section 7 in connection with a
Change in Control, no such termination or amendment may have a materially adverse effect on the
SAR or any unexercised portion thereof without the consent of the Participant unless such
termination or amendment is necessary to comply with any applicable law or government
regulation. No amendment or addition to this SAR Agreement shall be effective unless in writing.
11.2 Further Instruments. The parties hereto agree to execute such further
instruments and to take such further action as may reasonably be necessary to carry out the intent of
this SAR Agreement.
11.3 Binding Effect. This SAR Agreement shall inure to the benefit of the successors
and assigns of the Company and, subject to the restrictions on transfer set forth herein, be binding
upon the Participant and the Participant’s heirs, executors, administrators, successors and assigns.
11.4 Delivery of Documents and Notices. Any document relating to participation in
the Plan or any notice required or permitted hereunder shall be given in writing and shall be deemed
effectively given (except to the extent that this SAR Agreement provides for effectiveness only upon
actual receipt of such notice) upon personal delivery, electronic delivery at the e-mail address, if any,
provided for the Participant by a Participating Company, or upon deposit in the U.S. Post Office or
foreign postal service, by registered or certified mail, or with a nationally recognized overnight
courier service, with postage and fees prepaid, addressed to the other party at the address of such
party set forth in the Grant Notice or at such other address as such party may designate in writing
from time to time to the other party.
(a) Description of Electronic Delivery. The Plan documents, which may
include but do not necessarily include: the Plan, the Grant Notice, this SAR Agreement, the Plan
Prospectus, and any reports of the Company provided generally to the Company’s stockholders, may
be delivered to the Participant electronically. In addition, if permitted by the Company, the
Participant may deliver electronically the Grant Notice and Exercise Notice called for by Section 3.2
to the Company or to such third party involved in administering the Plan as the Company may
designate from time to time. Such means of electronic delivery may include but do not necessarily
include the delivery of a link to a Company intranet or the Internet site of a third party involved in
administering the Plan, the delivery of the document via e-mail or such other means of electronic
delivery specified by the Company.
(b) Consent to Electronic Delivery. The Participant acknowledges that the
Participant has read Section 11.4(a) of this SAR Agreement and consents to the electronic delivery of
the Plan documents and, if permitted by the Company, the delivery of the Grant Notice and Exercise
Notice, as described in Section 11.4(a). The Participant acknowledges that he or she may receive
from the Company a paper copy of any documents delivered electronically at no cost to the
Participant by contacting the Company by telephone or in writing. The Participant further
acknowledges that the Participant will be provided with a paper copy of any
EAST\124817978.2
7
documents if the attempted electronic delivery of such documents fails. Similarly, the Participant
understands that the Participant must provide the Company or any designated third party
administrator with a paper copy of any documents if the attempted electronic delivery of such
documents fails. The Participant may revoke his or her consent to the electronic delivery of
documents described in Section 11.4(a) or may change the electronic mail address to which such
documents are to be delivered (if the Participant has provided an electronic mail address) at any time
by notifying the Company of such revoked consent or revised e-mail address by telephone, postal
service or electronic mail. Finally, the Participant understands that he or she is not required to
consent to electronic delivery of documents described in Section 11.4(a).
11.5 Integrated Agreement. The Grant Notice, this SAR Agreement and the Plan,
together with the Superseding Agreement, if any, shall constitute the entire understanding and
agreement of the Participant and the Participating Company Group with respect to the subject matter
contained herein and supersede any prior agreements, understandings, restrictions, representations, or
warranties among the Participant and the Participating Company Group with respect to such subject
matter. To the extent contemplated herein, the provisions of the Grant Notice, the SAR Agreement
and the Plan shall survive any exercise of the SAR and shall remain in full force and effect.
11.6 Applicable Law. This SAR Agreement shall be governed by the laws of the
State of Delaware as such laws are applied to agreements between Delaware residents entered into
and to be performed entirely within the State of Delaware.
11.7 Counterparts. The Grant Notice may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and the same instrument.
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8
Exhibit 10.59
FIFTH WAIVER AGREEMENT TO CREDIT AGREEMENT
This FIFTH WAIVER AGREEMENT TO CREDIT AGREEMENT, dated as of March 2,
2018 (this “Agreement”), is entered into by and among Kadmon Pharmaceuticals, LLC, a
Pennsylvania limited liability company (the “Borrower”), the guarantors party hereto and each of the
lenders listed on the signature pages hereof under the heading “LENDERS”. Unless otherwise
defined herein or the context otherwise requires, terms used in this Agreement, including its preamble
and recitals, have the meanings provided in the Credit Agreement (defined below).
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors from time to time party thereto, the Lenders from
time to time party thereto and Perceptive Credit Holdings, LP, as Collateral Representative, have
entered into that certain Credit Agreement, dated as of August 28, 2015 (as subsequently amended or
otherwise modified from time to time, the “Credit Agreement”);
WHEREAS, the Borrower has requested that the Majority Lenders waive Section 8.01(c) of
the Credit Agreement but only to the extent necessary to permit the required report and opinion of
BDO USA LLP for fiscal year 2017 (the “2017 Annual Report”) to contain a “going concern” or like
qualification, exception or explanation (the “Specified Qualification”); and
WHEREAS, upon the request of the Borrower and subject to the terms and conditions set
forth herein, the Majority Lenders have agreed to waive the requirement set forth in Section 8.01(c)
and permit the Specified Qualification only to the extent applicable to fiscal year 2017.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows.
Article I
DEFINITIONS
SECTION 1.1.
Certain Terms. The following terms (whether or
not underscored) when used in this Agreement, including its preamble and recitals, shall have the
following meanings (such definitions to be equally applicable to the singular and plural forms
thereof):
“2017 Annual Report” is defined in the second recital.
“Agreement” is defined in the preamble.
“Borrower” is defined in the preamble.
“Credit Agreement” is defined in the first recital.
“Effective Date” is defined in Section 2.1 of this Agreement.
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Article II
CERTAIN AMENDMENTS AND MODIFICATION TO the CREDIT AGREEMENT
SECTION 2.1.
Partial Waiver of Commitments Under Section
8.01(c). Effective as of the date hereof (the “Effective Date”), the Lenders hereby agree to waive the
requirements of Section 8.01(c) of the Credit Agreement to the extent, and only to the extent,
necessary to permit the 2017 Annual Report to contain the Specified Qualification.
SECTION 2.2.
Limited Waiver. Except as expressly so waived
or consented to, as applicable, the parties hereto expressly acknowledge and agree that (i) all other
terms and provisions of the Credit Agreement and each other Loan Document shall continue in full
force and effect in accordance with its terms and (ii) any waivers, consents or other modifications set
forth in this Agreement are limited as expressly set forth herein, and shall not be deemed to constitute
a waiver of any Default or Event of Default or any future breach of the Credit Agreement or any of
the other Loan Documents.
Article III
conditions TO EFFECTIVENESS
SECTION 3.1.
Conditions to Effectiveness. This Agreement
shall become effective as of the Effective Date upon satisfaction of the following:
(a)
the Lenders shall have received counterparts of this Agreement duly executed
by each of the Obligors and the Lenders party hereto; and
(b)
the Lenders shall have received a certificate, dated as of the date hereof and
duly executed and delivered by a Responsible Officer of the Borrower certifying as to the
matters set forth in Articles IV and V hereof.
Article IV
Representations and Warranties
To induce the Lenders to enter into this Agreement, each Obligor represents and warrants to
the Collateral Representative and the Lenders as set forth below.
SECTION 4.1.
Validity, etc. This Agreement, the Credit
Agreement and the other Loan Documents (both before and after giving effect to this Agreement)
constitute the legal, valid and binding obligation of such Obligor, enforceable in accordance with its
respective terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally,
general equitable principles (whether considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing.
SECTION
and Warranties,
etc. Immediately prior to, on the Effective Date and immediately after giving effect to, this
Agreement, the following statements shall be true and correct:
Representations
4.2.
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(a)
the representations and warranties set forth in each Loan Document shall, in
each case, be true and correct in all material respects with the same effect as if then made
(unless stated to relate solely to an earlier date, in which case such representations and
warranties shall be true and correct in all material respects as of such earlier date); and
(b)
no Default or Event of Default shall have then occurred and be continuing.
Article V
Confirmation
SECTION 5.1.
Guarantees, Security
Interest, Continued
Effectiveness. Each Obligor hereby consents to the modifications made to the Loan Documents
pursuant to this Agreement and hereby agrees that, after giving effect to this Agreement, each Loan
Document to which it is a party is and shall continue to be in full force and effect and the same are
hereby ratified in all respects, except that upon the occurrence of the Waiver Effective Date, all
references in such Loan Documents to the “Credit Agreement”, “Loan Documents”, “thereunder”,
“thereof”, or words of similar import shall mean the Credit Agreement and the other Loan
Documents, as amended or otherwise modified by this Agreement.
Article VI
Miscellaneous
SECTION 6.1.
Cross-References. References in this Agreement
to any Article or Section are, unless otherwise specified, to such Article or Section of this Agreement.
SECTION 6.2.
to Credit
Agreement. This Agreement is a Loan Document executed pursuant to the Credit Agreement and
shall (unless otherwise expressly indicated therein) be construed, administered and applied in
accordance with all of the terms and provisions of the Credit Agreement, as amended hereby,
including Section 13 thereof.
Loan Document Pursuant
SECTION 6.3.
Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
SECTION 6.4.
Counterparts. This Agreement may be executed
in any number of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing any such
counterpart.
SECTION 6.5.
Governing Law. THIS AGREEMENT AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER
JURISDICTION; PROVIDED THAT SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW SHALL APPLY.
SECTION 6.6.
Full Force and Effect; Limited Waiver and
Consent. Except as expressly amended hereby, the Obligors each jointly and severally agree that all
of the
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representations, warranties, terms, covenants, conditions and other provisions of the Credit
Agreement and the other Loan Documents shall remain unchanged and shall continue to be, and shall
remain, in full force and effect in accordance with their respective terms. The amendments, consents
and other waivers and modifications set forth in this Agreement shall be limited precisely as provided
for herein to the provisions expressly amended herein or otherwise modified or waived hereby and
shall not be deemed to be an amendment to, waiver of, consent to or modification of any other term
or provision of the Credit Agreement or any other Loan Document or of any transaction or further or
future action on the part of any Obligor which would require the consent of the Lenders under the
Credit Agreement or any of the Loan Documents.
SECTION 6.7.
No Waiver. Except as otherwise specified
herein, this Agreement is not, and shall not be deemed to be, a waiver or consent to any Default or
Event of Default, or other non-compliance now existing or hereafter arising under the Credit
Agreement and the other Loan Documents.
[Signature pages to follow]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed
and delivered by a Responsible Officer as of the date first above written.
borrower:
Kadmon PHARMACEUTICALS, LLC
By:
Name:
Title:
Guarantors:
Kadmon Corporation, LLC
By:
Name:
Title:
Kadmon Holdings, INC
By:
Name:
Title:
Kadmon Research Institute, LLC
By:
Name:
Title:
Three rivers research institute i, LLC
By:
Name:
Title:
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three rivers biologicS, LLC
By:
Name:
Title:
three rivers global pharma, LLC
By:
Name:
Title:
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COLLATERAL REPRESENTATIVE:
PERceptive credit holdings, Lp
By: Perceptive Credit Opportunities GP, LLC, its
general partner
By
By
Name:
Title:
Name:
Title:
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MAJORITY LENDERS:
PERceptive credit holdings, Lp
By: Perceptive Credit Opportunities GP, LLC, its
general partner
By
By
Name:
Title:
Name:
Title:
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Name of Subsidiary
Kadmon Corporation, LLC
Kadmon Pharmaceuticals, LLC
Delaware
Pennsylvania
Jurisdiction of Organization
List of Subsidiaries of the Registrant
EXHIBIT 21.1
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
Kadmon Holdings, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.333-213748) and Form S-3
(No. 333-222364) of Kadmon Holdings, Inc. of our report dated March 6, 2018, relating to the consolidated financial statements
which appear in the December 31, 2017 annual report on Form 10-K. Our report contains an explanatory paragraph regarding the
Company’s ability to continue as a going concern.
/s/ BDO USA, LLP
New York, New York
March 6, 2018
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14,
AS ADOPTED PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Harlan W. Waksal, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Kadmon Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 6, 2018
/s/ Harlan W. Waksal
Harlan W. Waksal
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14,
AS ADOPTED PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Konstantin Poukalov, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Kadmon Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 6, 2018
/s/ Konstantin Poukalov
Konstantin Poukalov
Executive Vice President, Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Kadmon Holdings, Inc. (the “Company”) for the period ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned,
Harlan W. Waksal, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
A signed original of this written statement has been provided to Kadmon Holdings, Inc. and will be retained by Kadmon
Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: March 6, 2018
/s/ Harlan W. Waksal
Harlan W. Waksal
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Kadmon Holdings, Inc. (the “Company”) for the period ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned,
Konstantin Poukalov, Executive Vice President, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
A signed original of this written statement has been provided to Kadmon Holdings, Inc. and will be retained by Kadmon
Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: March 6, 2018
/s/ Konstantin Poukalov
Konstantin Poukalov
Executive Vice President, Chief Financial Officer