Business context and reporting period
This is KemPharm, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The filing names KemPharm, Inc. as the registrant; the request metadata names Zevra Therapeutics, Inc. KemPharm described itself as a clinical-stage specialty pharmaceutical company developing proprietary prodrugs using its Ligand Activated Therapy platform. Its lead candidate was KP201/APAP, a hydrocodone prodrug combination for acute pain. The company had no commercial products or revenue.
Financial performance and position
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | 0 | 0 | 0 | 0 |
| Research and development | 4.328 | 3.253 | 9.215 | 6.006 |
| General and administrative | 2.152 | 1.086 | 6.317 | 2.949 |
| Operating loss | (6.480) | (4.339) | (15.532) | (8.955) |
| Net loss | (9.744) | (7.137) | (45.461) | (12.615) |
| Net loss per share | $(0.68) | $(3.00) | $(4.71) | $(5.30) |
- Margins: Gross margin is not meaningful because the company had no revenue. Operating margin is likewise not meaningful.
- Cash flow: Nine-month operating cash use was $13.865 million, investing cash use $0.095 million, and financing cash provided $62.714 million. Cash increased $48.754 million to $59.009 million.
- Liquidity: At September 30, 2015, current assets were $59.616 million and current liabilities $6.792 million; working capital was $52.824 million. Management said existing cash was expected to fund operating and capital needs for at least 15 months, while cautioning that estimates could prove wrong.
- Debt and other liabilities: Deerfield facility principal outstanding was $25 million, bearing 9.75% interest. Balance-sheet carrying amounts for convertible and term notes totaled about $22.0 million. The facility had $35 million of additional potential borrowings subject to conditions, with availability ending June 30, 2016. Derivative and warrant liabilities were $41.097 million.
- Equity: The April–May IPO generated $59.9 million net of underwriting discounts and commissions; offering expenses were an additional $2.8 million. Preferred shares converted or reclassified into common stock at the IPO. Stockholders’ deficit improved to $5.746 million from $48.508 million at year-end 2014.
Material changes versus the prior comparable period
For the first nine months, operating expenses rose $6.577 million, with increases in both R&D and G&A. Net loss increased by $32.846 million. The main driver was a $26.512 million fair-value expense on derivative and warrant liabilities, compared with $4.002 million in the prior-year period; this was a non-cash item and substantially affected reported loss. Interest expense and debt discount amortization also increased, while the prior-year period included a $1.9 million gain on debt extinguishment. Operating cash use increased from $7.708 million to $13.865 million. The IPO substantially increased cash and common shares outstanding.
Outlook, risks, contingencies and unusual items
- Management planned to submit an NDA for KP201/APAP under the 505(b)(2) pathway as early as year-end 2015; this was an intention, not a guarantee. Approval, timing, and abuse-deterrent labeling were uncertain. The company expected continued losses and increasing R&D and G&A spending and anticipated needing additional capital.
- Further Deerfield borrowing depended on milestones, including FDA acceptance of the NDA and, for later tranches, commercial approval. The agreement also restricts certain financing and strategic transactions and carries potential repayment and warrant-redemption obligations in specified events.
- A former financial advisor’s appeal remained pending after a September 2015 summary judgment in the company’s favor. Settlements with two intervenors did not materially differ from the company’s prior accrual. An adverse outcome could require fees related to past or future strategic transactions; the amount was not clearly quantified in the filing.
- Key business risks include clinical and regulatory failure or delay, inability to obtain abuse-deterrent claims, controlled-substance and manufacturing requirements, competition, dependence on third parties, and difficulty obtaining future financing. The filing also references a going-concern explanatory paragraph in the auditor’s 2014 report; management stated the IPO occurred after that report and projected at least 15 months of cash runway.
- Management reported disclosure controls were effective as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether and when the KP201/APAP NDA was submitted and accepted, and what FDA review and labeling requirements followed.
- Cash burn against the stated runway, and whether additional financing is needed or available on acceptable terms.
- Deerfield facility conditions, covenants, interest capitalization, potential dilution, and repayment obligations.
- The status and potential financial exposure of the financial-advisor litigation appeal.
- The assumptions underlying the $41.097 million derivative and warrant liability and its potential effect on reported earnings and dilution.