KemPharm, Inc. (now Zevra Therapeutics, Inc.) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The filing was made under the name KemPharm, Inc.; financial amounts below are in U.S. dollars unless noted.
Business context and reporting period
KemPharm was a specialty pharmaceutical company developing prodrugs using its LAT technology. Its portfolio included partnered ADHD candidates KP415 and KP484, preclinical KP879, and FDA-approved APADAZ, licensed to KVK. Commave held worldwide development and commercialization rights to KP415 and KP484. The unaudited interim statements are prepared under U.S. GAAP.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.9m | $11.5m | $10.9m | $11.5m |
| Operating expenses | $3.1m | $8.2m | $13.3m | $27.4m |
| Operating income (loss) | $(1.2)m | $3.2m | $(2.4)m | $(15.9)m |
| Net income (loss) | $(3.0)m | $3.1m | $(7.9)m | $(18.5)m |
| Operating cash flow | Not separately provided | Not separately provided | $(0.9)m | $(20.6)m |
- Revenue drivers: Q3 2020 revenue was primarily consulting revenue under the Corium agreement. The prior-year quarter included the $10.0m KP415 license upfront payment. Nine-month 2020 revenue included a $5.0m KP415 regulatory milestone following FDA acceptance of its NDA, plus consulting and reimbursable costs.
- Margins: No gross profit or gross margin is presented. Operating expenses exceeded revenue by $1.2m in Q3 and $2.4m for the nine-month period.
- Cash and liquidity: September 30 cash and cash equivalents were $5.3m, plus $0.2m restricted cash. Current assets were $8.1m versus current liabilities of $70.8m, a $62.7m working-capital deficit.
- Debt: Convertible-note principal was $67.1m ($65.9m net of discounts and issuance costs). The notes were substantially due March 31, 2021; $65.9m was classified as current. The debt was secured by substantially all assets and generally bore 6.75% interest.
- Equity and dilution: Common shares outstanding rose to 72.5m from 36.4m at year-end 2019. The filing reports $62.3m of stockholders’ deficit.
Material changes versus the prior comparable period
- Q3 revenue fell $9.5m year over year as the 2019 KP415 upfront payment did not recur; lower reimbursements were partly offset by higher consulting revenue.
- Q3 operating expenses declined $5.1m, mainly from lower R&D and general and administrative costs, but the company moved from operating income to an operating loss as revenue fell.
- Nine-month net loss narrowed by $10.6m, primarily because operating expenses were substantially lower; higher interest and less favorable derivative and warrant fair-value movements partly offset the improvement.
- Operating cash used declined to $0.9m from $20.6m. Financing provided $2.8m, including $2.3m from Lincoln Park equity sales and $0.8m from a PPP loan.
- Shares outstanding approximately doubled, reflecting conversions of debt into common stock, equity-line issuances, and other stock issuances. The Deerfield lenders had converted $17.1m of principal into 28.4m shares under the optional conversion feature by quarter-end.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that recurring losses, negative operating cash flows, working-capital and stockholders’ deficits raise substantial doubt about the company’s ability to continue as a going concern. Management projected available resources would fund operations past the potential March 2, 2021 KP415 PDUFA date and up to the March 31, 2021 debt maturity, but additional financing and lender forbearance were critical; financing was not assured.
- Pipeline outlook: The filing anticipated a potential March 2021 PDUFA date for KP415 and, subject to Commave’s approval, KP484 trial activity in 2021. These were expectations, not guaranteed outcomes. COVID-19 could delay trials, regulatory review, milestones, and access to financing.
- Financing constraints: The company had exhausted the maximum shares permitted under its current Lincoln Park registration arrangement by May 2020. It described further equity or debt financing as uncertain and potentially dilutive or restrictive.
- Listing status: Common stock was delisted from Nasdaq on May 21, 2020 for failure to meet the $35m minimum market-value requirement and began trading on OTCQB, potentially limiting liquidity and access to capital.
- PPP loan: The company received $0.8m at 1% interest, due April 2022. Management expected substantially all might be forgiven, but stated there was no assurance; any unforgiven balance would require repayment. The filing also discussed eligibility, audit, penalty, and reputational risks.
- Controls and contingencies: A material weakness in controls over non-routine transactions, identified for year-end 2019, remained under evaluation and was not yet determined to be remediated. No contingency accruals were reported, and management said no pending litigation was expected to have a material adverse effect.
- Unusual items: Nine-month severance expense was $0.8m following the February 2020 elimination of the chief business officer role. Q3 included a $0.1m expense from fair-value changes in derivative and warrant liabilities; these valuations can make reported results volatile.
Most important facts for investors to verify
- Whether the company obtained financing, lender forbearance, or debt restructuring before the March 31, 2021 maturity, and the ultimate repayment or conversion terms.
- The actual FDA decision and timing for KP415, and any resulting milestone receipts, royalty prospects, or changes to the company’s cash runway.
- Cash collections, recognized revenue, and remaining payment obligations under the Corium and other consulting arrangements; distinguish contracted amounts from conditional milestones.
- Whether APADAZ achieved its formulary and sales milestones and generated profit-share or royalty payments.
- Subsequent share-count changes, conversion-price adjustments, and potential dilution from convertible notes, warrants, and equity plans.
- Progress in remediating the material weakness and any later changes to the going-concern assessment, Nasdaq/OTC trading status, or PPP forgiveness.