ZEVRA THERAPEUTICS, INC. quarterly report, Q2 FY2015

Business context and reporting period

This is KemPharm, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2015, filed August 14, 2015. The request metadata names Zevra Therapeutics, Inc., but the filing identifies the registrant as KemPharm, Inc.; verify the intended company. KemPharm was a clinical-stage specialty pharmaceutical company developing prodrugs using its Ligand Activated Therapy platform. Its lead candidate, KP201/APAP, was being developed for acute pain.

The company had no product revenue. In April and May 2015, it completed an IPO, raising approximately $59.9 million net of underwriting discounts and commissions. Preferred stock converted or reclassified into common stock in connection with the IPO.

Financial highlights

For the six months ended June 30, 2015, operating cash flow was negative $9.3 million, investing cash flow negative $0.04 million, and financing cash flow positive $63.3 million. Cash increased by $54.0 million to $64.2 million. At June 30, current assets were $64.8 million and current liabilities $4.9 million, implying working capital of approximately $59.9 million. Total assets were $66.5 million; total liabilities were $63.1 million.

Outstanding Deerfield debt principal was $25 million and bore interest at 9.75%. The balance sheet reported convertible notes and term notes, net of discounts, of $7.6 million and $11.3 million, respectively. Derivative and warrant liabilities were $39.3 million. The filing does not present a meaningful operating margin because revenue was zero.

Material changes versus prior comparable periods

• Operating expenses rose year over year: six-month R&D increased $2.1 million, mainly from greater KP201/APAP third-party development spending and increased personnel; G&A increased $2.3 million, reflecting staffing, IPO-related professional costs, and stock-based compensation.
• The six-month net loss increased $30.2 million. A $24.4 million fair-value adjustment to derivative and warrant liabilities was the principal unusual, non-cash driver; the prior-year period included a $1.9 million gain on extinguishment of debt that did not recur.
• Cash rose materially following the IPO. The company reported $59.9 million of net IPO proceeds and said it had not used those proceeds as of the report date.
• Common shares outstanding increased to 14,228,401 at June 30, 2015, following IPO issuance and conversion of preferred shares. A 1-for-7.5 reverse stock split was effected in April 2015; reported share and per-share amounts reflect it.

Outlook, risks, contingencies, and unusual items

• Management expected significant operating losses and rising R&D and G&A costs for the foreseeable future, with no expectation of significant product revenue unless and until candidates receive approval and are commercialized. Based on its current plan, management believed cash would fund operating and capital needs for at least 18 months, while cautioning that assumptions could prove wrong and additional financing would be needed.
• Management planned to submit a 505(b)(2) NDA for KP201/APAP in the fourth quarter of 2015. Regulatory review, clinical outcomes, and FDA-approved abuse-deterrent labeling were material uncertainties; none of the company’s candidates had received marketing approval.
• Deerfield had up to $35 million of additional facility tranches available at June 30, subject to conditions including FDA acceptance of the KP201/APAP NDA and, for later tranches, commercial approval. The facility imposed transaction restrictions and could create dilution and repayment obligations.
• A lawsuit with former financial advisor DeWaay Financial Network was scheduled for trial in September 2015. An adverse ruling could require fees tied to specified transactions, potentially including the IPO, Deerfield facility, and future financings. The company could not predict the outcome or quantify any resulting payment.
• The company disclosed recurring operating losses and noted that its 2014 auditor report contained a going-concern explanatory paragraph. It cited the IPO proceeds in discussing liquidity but warned that future capital might not be available on acceptable terms.
• Fair values of the warrant and derivative liabilities depended on significant unobservable inputs. The reported fair-value losses could materially affect GAAP earnings without representing equivalent current-period cash outflows.

Important facts for investors to verify

1. Confirm that this KemPharm filing is the intended filing given the Zevra Therapeutics metadata.
2. Check progress and outcome of the planned KP201/APAP NDA submission, FDA review, and requested abuse-deterrent labeling.
3. Assess cash burn against the stated 18-month runway, including subsequent financing, spending, and any use of IPO proceeds.
4. Review Deerfield facility draw conditions, debt service and covenants, warrant terms, and potential dilution.
5. Check the outcome and any financial impact of the DeWaay litigation.
6. Evaluate the assumptions behind the Level 3 derivative and warrant valuations and their effect on reported losses.