KemPharm, Inc. (now identified in the request as Zevra Therapeutics, Inc.) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in U.S. dollars. The filing registrant was KemPharm, Inc.
Business context
KemPharm was a specialty pharmaceutical company developing prodrugs using its LAT technology. Its pipeline focused on ADHD candidates KP415 and KP484, and stimulant use disorder candidate KP879. APADAZ, an FDA-approved opioid product, was licensed to KVK for U.S. commercialization. In September 2019, KemPharm licensed KP415, KP484 and certain optional candidates worldwide to Commave.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $11.463 million | $0 | $11.463 million | $0 |
| Cost of revenue | $1.000 million | $0 | $1.000 million | $0 |
| Operating expenses | $8.229 million | $17.958 million | $27.390 million | $46.635 million |
| Income (loss) from operations | $3.234 million | $(17.958) million | $(15.927) million | $(46.635) million |
| Net income (loss) | $3.063 million | $(15.071) million | $(18.485) million | $(51.283) million |
| Operating cash flow | Not separately reported for the quarter | $(20.639) million | $(39.205) million |
- All 2019 revenue came from the Commave license agreement: a $10.0 million nonrefundable upfront license payment, $1.2 million of third-party R&D cost reimbursements and $0.3 million for consulting services. The upfront license payment was recognized upon transfer of the license; future milestones and royalties were excluded from the transaction price because they were constrained.
- Q3 cost of revenue was a $1.0 million royalty payment to Aquestive, equal to 10% of the upfront license payment. The reported quarter’s operating profit therefore reflects a substantial, nonrecurring license payment, not established product sales.
- R&D expense fell to $3.6 million in Q3 from $13.3 million, and to $17.0 million for nine months from $35.5 million, mainly due to lower net third-party development costs; the nine-month reduction also reflected lower personnel costs. Q3 G&A rose $0.6 million to $3.6 million, primarily on professional fees. The prior-year quarter included $1.6 million of severance expense; none was recorded in 2019.
- Q3 other expense was $0.2 million, including $1.2 million of interest on debt principal, partly offset by a $1.4 million favorable fair-value adjustment to derivative and warrant liabilities. For nine months, the fair-value adjustment was a $1.8 million gain. Such noncash fair-value movements affected reported earnings.
- At September 30, cash and cash equivalents were $6.518 million, restricted cash $0.490 million, and marketable securities were zero (versus $3.260 million at year-end 2018). Current assets were $8.684 million against current liabilities of $10.409 million, a $1.725 million working-capital deficit. Total assets were $12.890 million and total liabilities $83.510 million; stockholders’ deficit was $70.620 million.
- Convertible-note principal outstanding was reported as $80.5 million: $6.8 million of Deerfield debt and $73.7 million of 5.50% notes due 2021. Balance-sheet carrying value of convertible notes, including current and long-term portions, was approximately $77.3 million. The Deerfield facility was amended to reduce its rate to 6.75%, capitalize interest and defer payments; $3.333 million plus capitalized interest was due February 14, 2020, with remaining amounts due June 1, 2020.
- Cash, cash equivalents and restricted cash declined $12.111 million over nine months to $7.008 million. Financing provided $5.289 million, principally from $5.446 million gross proceeds under the Lincoln Park purchase agreement; investing provided $3.239 million, principally from securities maturities.
Material changes and financing
- September’s Commave agreement provided the first reported revenue and transferred exclusive worldwide development and commercialization rights for KP415 and KP484. Commave agreed to fund covered development, commercialization and regulatory costs, subject to contractual limitations. Potential additional consideration includes up to $63 million in regulatory milestones, up to $420 million in U.S. sales milestones, and tiered royalties; these are contingent, not guaranteed.
- In September, $3.0 million principal of 2021 notes was exchanged for common shares and Series B-1 preferred shares. The agreement also permitted exchange of up to a further $27 million for common or Series B-2 preferred shares. The filing disclosed up to 28.4 million common-share equivalents associated with this optional exchange, before ownership limits—material potential dilution.
- Common shares issued and outstanding increased to 32.387 million from 26.455 million at December 31, 2018. The filing reported 33,223,877 shares outstanding as of November 14, 2019.
- The company adopted lease accounting in January 2019, recognizing approximately $2.6 million of right-of-use assets and lease liabilities at adoption. At September 30, operating lease liabilities were $2.345 million.
Outlook, risks and unusual items
- Going concern: Management said existing resources were expected to fund operations and capital requirements into, but not through, Q2 2020. The filing states substantial doubt about the company’s ability to continue as a going concern within twelve months after issuance, citing recurring operating cash outflows, working-capital and stockholders’ deficits, and dependence on additional financing. Management said funding would be needed; availability and terms were uncertain.
- Access to registered equity financing was constrained by Form S-3’s one-third public-float limitation. The company estimated approximately $18.5 million of capacity for a 12-month period as of its March 2019 calculation, allocated to the Lincoln Park agreement and a limited ATM prospectus; stockholder approval might be needed for part of the Lincoln Park capacity. A replacement shelf registration for up to $80 million was filed in October 2019, but it did not remove the stated capacity constraint.
- Management’s development targets were KP415 NDA submission in Q4 2019 and KP484 additional data and NDA submission in 2020, subject to Commave’s approval and regulatory outcomes. APADAZ and its authorized generic became nationally available in November 2019, after the quarter; the filing did not establish resulting commercial revenue.
- Key risks include continued reliance on financing and partner payments; clinical, regulatory and commercialization uncertainty; partner termination or underperformance; controlled-substance restrictions and opioid-related market pressures; sole-source manufacturing dependence; debt service and dilution; and restrictions under debt agreements.
- Nasdaq compliance was a significant near-term risk. The company reported it had not regained the $50 million market-value-of-listed-securities requirement by the November 13, 2019 deadline and expected a delisting notice; it intended to request a hearing and seek an extension. It also faced a separate minimum-bid-price deficiency, with a March 25, 2020 deadline.
- No material litigation accruals were recorded, and management said no pending litigation was expected to have a material adverse effect. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the company obtained financing sufficient to extend its runway beyond Q2 2020, and the effective limits on registered share sales.
- Repayment, restructuring or further conversion of Deerfield and 2021 note obligations, including the 2020 Deerfield payment dates and 2021 note maturity.
- Whether the optional exchange of up to $27 million of notes was exercised and the resulting actual dilution relative to the disclosed 28.4 million potential share equivalents.
- Progress and timing of KP415 and KP484 regulatory filings, and whether Commave funds development and advances the licensed programs.
- APADAZ launch uptake, reimbursement, net-profit sharing and any resulting payments from KVK; the filing provides no clear post-launch sales value.
- Nasdaq listing status and any subsequent compliance plan, hearing outcome or transfer of listing.