KemPharm, Inc. Form 10-Q Summary
Entity and period: The supplied filing is for KemPharm, Inc. (Nasdaq: KMPH), for the quarter and six months ended June 30, 2019; it is not filed under the name Zevra Therapeutics, Inc. The financial statements are unaudited and report dollars in thousands unless otherwise noted.
Business context
KemPharm was a specialty pharmaceutical company developing prodrugs using its LAT technology. Its clinical ADHD candidates were KP415 and KP484; KP879 was preclinical for stimulant use disorder. FDA-approved APADAZ was licensed exclusively in the U.S. to KVK Tech for commercialization. KemPharm reported no revenue through the period.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $4.8m | $10.5m | $13.3m | $22.1m |
| General and administrative expense | $3.0m | $3.4m | $5.8m | $6.6m |
| Operating loss | $7.8m | $13.9m | $19.2m | $28.7m |
| Net loss | $9.3m | $10.0m | $21.5m | $36.2m |
| Basic loss per share | $0.33 | $0.65 | $0.78 | $2.41 |
For Q2, lower operating expenses improved operating loss, but the prior-year period included a $5.6m favorable fair-value adjustment on derivative and warrant liabilities; Q2 2019 instead recorded a $0.02m expense. For the first half, lower operating expenses and a more favorable fair-value adjustment helped reduce net loss by $14.7m year over year. Margins are not meaningful because the company had no revenue.
- Cash and liquidity: At June 30, 2019, cash and cash equivalents were $7.3m and restricted cash was $0.5m; marketable securities were nil, versus $3.3m at year-end 2018. Current assets were $8.6m and current liabilities $15.0m, a $6.3m working-capital deficit. Total assets were $13.0m and stockholders’ deficit was $81.5m.
- Cash flow: First-half operating cash use was $18.4m, compared with $23.3m in 2018. Investing provided $3.2m, mainly from securities maturities; financing provided $3.8m, principally from Lincoln Park equity sales. Cash, cash equivalents and restricted cash declined $11.3m to $7.8m.
- Debt: The company disclosed $83.4m principal outstanding on convertible notes: $6.7m under the 9.75% Deerfield note and $76.7m of 5.50% notes due 2021. The balance sheet reported $82.0m of convertible notes, including current and long-term portions, net of applicable accounting adjustments. The Deerfield payment due in June/July 2019 was extended to August 16, 2019; the remaining principal was due February 14, 2020.
Material changes, outlook and risks
- R&D expense fell $5.7m in Q2 and $8.8m in the first half, primarily from lower third-party development costs; first-half G&A declined $0.7m.
- Management stated that available resources were expected to fund operations and capital needs into, but not through, the third quarter of 2019. The filing says recurring losses, negative operating cash flows and the working-capital and stockholders’ deficits raise substantial doubt about the company’s ability to continue as a going concern. Additional financing was necessary and might not be available on acceptable terms or at all.
- Financing options were constrained: the company estimated Form S-3 capacity of about $18.5m over 12 months, allocated through prospectus supplements to approximately $15.3m under the Lincoln Park purchase agreement and $3.2m under its ATM. By June 30, it had sold 2.2m shares to Lincoln Park for about $4.0m gross proceeds and had made no sales under the ATM; stockholder approval might be needed to access part of the purchase agreement.
- Management targeted a KP415 505(b)(2) NDA submission in Q4 2019; KP484 additional data and NDA submission were targeted for 2020. The company was in discussions with potential ADHD partners and aimed to conclude the process as early as the end of Q3 2019, but gave no assurance of a transaction.
- KVK’s APADAZ regional pilot launch was anticipated as early as the second half of 2019. KemPharm could receive up to $53m in sales milestones and tiered shares of U.S. net profits, but timing and proceeds depended on adoption and commercial performance. No APADAZ revenue had yet been reported.
- Other notable risks included a Nasdaq Global Market listing deficiency notice received May 17, 2019, with a November 13, 2019 deadline to regain compliance; potential dilution from equity sales, convertible notes, preferred stock and awards; debt repayment and interest obligations; clinical and regulatory uncertainty; reliance on third-party manufacturers and KVK; and opioid-related market, regulatory and REMS risks. No material litigation accruals were reported.
Important facts for investors to verify
- Whether the company obtained financing sufficient to address the stated cash runway and going-concern uncertainty, and the terms of any subsequent Deerfield amendments or payments.
- Whether the KP415/KP484 partnering process produced an agreement, including upfront, milestone and royalty terms and any Takeda right-of-first-refusal implications.
- Whether KVK launched APADAZ and achieved the initial adoption milestone or any other payment triggers.
- Whether KP415 and KP484 met the stated development and NDA timelines, and whether clinical, FDA or controlled-substance requirements changed those plans.
- Whether Nasdaq listing compliance was regained by the stated deadline and how financing, conversions and equity awards affected dilution.