KemPharm, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing is under KemPharm, Inc.; the supplied company metadata names Zevra Therapeutics, Inc.
Business context and period highlights
KemPharm is a specialty pharmaceutical company developing prodrugs using its LAT technology. Its partnered pipeline included KP415 and KP484 for ADHD; APADAZ, an FDA-approved opioid pain product, was licensed to KVK. In May 2020, the FDA accepted the KP415 NDA, triggering a $5.0 million milestone payment from Commave. The company reported no commercial product sales.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $6.9 million | $0 | $9.0 million | $0 |
| Operating income (loss) | $2.6 million | ($7.8 million) | ($1.2 million) | ($19.2 million) |
| Net income (loss) | $0.9 million | ($9.3 million) | ($4.9 million) | ($21.5 million) |
| Net income (loss) per share | $0.01 | ($0.33) | ($0.09) | ($0.78) |
- Q2 revenue included the $5.0 million KP415 NDA-acceptance milestone, KP415-related consulting and cost reimbursements, and other consulting revenue and reimbursements. First-half revenue comprised $7.3 million under the KP415 agreement and $1.7 million from consulting arrangements.
- Q2 operating expenses were $4.3 million, including $0.6 million of royalty and direct contract acquisition costs. First-half expenses were $10.2 million, including $1.3 million of those costs and $0.8 million of severance expense. R&D fell to $4.1 million for the first half from $13.3 million a year earlier; G&A fell to $4.0 million from $5.8 million. The filing does not present a gross margin measure.
- At June 30, cash and cash equivalents were $6.4 million, restricted cash $0.2 million, current assets $9.1 million, and total assets $12.3 million. Working capital was negative $63.5 million; stockholders’ deficit was $62.9 million.
- First-half operating cash flow was positive $0.2 million versus cash used of $18.4 million in 2019. Investing used $0.007 million and financing provided $2.8 million; cash, cash equivalents and restricted cash increased $3.0 million to $6.6 million. Operating cash flow included substantial noncash adjustments.
- Convertible-note principal totaled $69.0 million; the balance-sheet carrying amount, net of discounts and issuance costs, was $67.3 million and classified as current. The notes are generally due March 31, 2021, bear 6.75% interest, and are secured by substantially all assets. A $0.8 million PPP loan was also received, at 1% interest, with possible forgiveness.
Changes, outlook, risks and unusual items
- Compared with 2019, revenue began to be recognized under the KP415 license and consulting arrangements. Q2 moved to a profit from a loss; first-half net loss narrowed by $16.7 million, principally because operating expenses decreased and revenue was recorded.
- First-half common shares outstanding rose from 36.4 million at year-end 2019 to 67.2 million at June 30, 2020, reflecting equity-line sales, note conversions and other issuances. The company reported 72,463,841 shares outstanding on August 11, 2020.
- Management said existing cash and projected revenues were expected to fund operations beyond the potential March 2, 2021 KP415 PDUFA date and up to the March 31, 2021 debt maturity. This depends on milestone and other receipts. The filing states that recurring losses, working-capital and stockholders’ deficits, and financing needs raise substantial doubt about the company’s ability to continue as a going concern; additional financing and lender forbearance may be needed and may not be available.
- KP484 pivotal efficacy-trial initiation and additional PK work were anticipated in 2021, subject to Commave’s approval. KP879 remained preclinical, with an IND submission targeted for 2021. KVK’s APADAZ initial-adoption milestone was projected for 2021; no assurance was given that it would be achieved.
- COVID-19 could delay FDA review, trials, milestone achievement and access to financing; the financial impact was not estimable. The company expected substantially all of its PPP loan to be forgiven but could not assure forgiveness and disclosed eligibility, repayment and reputational risks.
- KemPharm was delisted from Nasdaq on May 21, 2020 for failure to meet the minimum market-value requirement and began trading on OTCQB. Management also reported an unresolved material weakness in controls over non-routine transactions; remediation remained under evaluation at June 30. Q2 disclosure controls were described as effective except for that weakness.
- Other risks include substantial debt due in 2021, potential dilution and anti-dilution adjustments, reliance on KVK and Commave, regulatory and commercialization uncertainty, and possible COVID-related disruption. The filing reported no material pending litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether KP415 receives FDA approval, whether the anticipated PDUFA timing changes, and what label is approved.
- Whether projected license, consulting and APADAZ milestone receipts occur, and whether KVK reaches its initial-adoption milestone.
- How the company will address the March 31, 2021 debt maturity, its going-concern warning, and its need for additional capital or lender forbearance.
- Whether the PPP loan is forgiven and whether the material weakness in internal controls is remediated.
- Share-count and potential dilution from note conversions, equity awards and any future financing; also the implications of OTCQB trading for liquidity and capital access.