ZEVRA THERAPEUTICS, INC. quarterly report, Q2 FY2017

Filing identity and reporting period

The supplied filing is KemPharm, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2017—not a filing under the name Zevra Therapeutics, Inc. Investors should verify that this is the intended company and filing. Unless otherwise noted, dollar figures below are in millions.

Business context

KemPharm was a clinical-stage pharmaceutical company developing proprietary prodrugs using its LAT platform, with candidates targeting ADHD, pain, and CNS disorders. It had no product revenue and was dependent on external financing. Common shares outstanding at June 30 were 14.66 million.

Financial performance and liquidity

Margins are not meaningful because the company had no revenue. For the six months, operating cash used was $15.99, compared with $12.14 in 2016. Investing activities provided $11.74, principally from securities maturities; financing activities used $0.12. Cash, cash equivalents, and restricted cash declined $4.38 to $13.49.

At June 30, cash and cash equivalents were $12.39, restricted cash $1.10, marketable securities $41.11, and long-term investments $11.22. Total assets were $69.05, total liabilities $108.33, and stockholders’ deficit $39.28. Current assets were $55.36 versus current liabilities of $6.59.

Convertible notes had $96.3 million of principal outstanding: $10.0 million under the Deerfield facility at 9.75% and $86.3 million of 5.50% notes due 2021. The balance sheet reported convertible notes, net, of $91.95 million. The Deerfield balance is due in installments in 2018 and 2019, with the remaining principal due February 2020; the 2021 Notes mature February 2021. No line-of-credit borrowings were outstanding.

Changes versus prior comparable periods

• Second-quarter net income of $9.77 million in 2016 changed to a $6.52 million net loss in 2017. The main driver was a smaller non-cash fair-value gain on derivative and warrant liabilities: $3.52 million in 2017 versus $20.76 million in 2016.
• Six-month net income of $6.83 million in 2016 changed to a $22.84 million net loss in 2017. Fair-value adjustments shifted from $31.04 million of non-cash income to $3.69 million of non-cash expense. The 2016 period also included a $4.74 million loss on extinguishment of debt.
• Operating expenses decreased $1.05 million in the quarter year over year, as lower R&D and G&A more than offset one another; for the six months, expenses decreased $0.64 million. Six-month R&D rose $0.54 million, while G&A fell $1.18 million.
• Operating cash use increased $3.86 million year over year for the six-month period. The prior-year financing inflow reflected the 2021 Notes issuance; no comparable debt proceeds were received in 2017.

Outlook, commentary, risks, and unusual items

Management said existing cash, restricted cash, marketable securities, and long-term investments were expected to fund operating expenses and capital expenditures through the second quarter of 2019. This estimate depends on assumptions that may prove incorrect; the company expected ongoing losses and said substantial additional funding would be needed. No formal earnings guidance was provided.

Management deferred commercial operations and redirected resources toward product development in 2016. In June 2017, it announced KP484, a super-extended-release ADHD candidate, and anticipated an IND filing as early as Q3 2017. The pipeline table listed potential NDA submissions for KP415 and KP201/IR in 2018 and KP484 in 2019. These were plans, not guaranteed milestones.

Apadaz, a hydrocodone/APAP candidate, had received an FDA complete response letter in June 2016 over whether proposed labeling accurately conveyed abuse-deterrence study results. The company had submitted a formal dispute resolution request and said the process could take up to 12 months; approval and abuse-deterrent labeling remained uncertain. Other material risks included clinical and regulatory setbacks, financing needs, reliance on third-party manufacturers and CROs, controlled-substance regulation, potential dilution, and debt service.

A stockholder class action concerning the 2015 IPO registration materials remained at a preliminary stage; damages were not quantified and the company could not predict the outcome. No contingency accruals were recorded at June 30. A $0.1 million loss on sublease was included in six-month cash-flow adjustments. Derivative and warrant liabilities were measured using Level 3 inputs, making reported earnings sensitive to valuation changes. Management concluded disclosure controls were effective; no material change in internal control was reported.

Important facts for investors to verify

• Confirm the intended issuer: the filing is for KemPharm, Inc., although the request names Zevra Therapeutics, Inc.
• Check the FDA status and timing of the Apadaz dispute process and whether any abuse-deterrent labeling was achievable.
• Assess whether the stated runway through Q2 2019 remained realistic against operating cash burn, development plans, and the need for additional capital.
• Review debt terms, upcoming Deerfield payments, 2021 Notes obligations, conversion and dilution exposure, and transaction-related restrictions.
• Track clinical milestones for KP415, KP484, KP201/IR, and other candidates; the dates in the filing were anticipated targets.
• Follow the IPO-related class action and the effects of Level 3 fair-value movements on reported results.