UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022March 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                       to

 

Commission File No. 001-36913

 


 

KemPharm,Zevra Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

 

20-5894398

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1180 Celebration Boulevard, Suite 103, Celebration, FL

 

34747

(Address of Principal Executive Offices)

 

(Zip Code)

 

(321) 939-3416

(Registrant’s Telephone Number, Including Area Code)
 
 
(Former Name, Former Address, and Former Fiscal Year if Changed Since Last Report)
 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareKMPHZVRA

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

      

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐     No  ☒

 

Total sharesAs of May 8, 2023, the registrant had 33,881,804 shares of common stock outstanding as of August 11, 2022: 34,493,634outstanding.

 



 

 

 

 

INDEX

 

KEMPHARM,ZEVRA THERAPEUTICS, INC.

FORM 10-Q

 

  Page
   

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

unaudited CondeNSed CONSOLIDaTED Financial Statements

 

 

UNAUDITED Condensed CONSOLIDATED Balance Sheets as of JUNE 30, 2022MARCH 31, 2023, and December 31, 20212022

4

 

UNAUDITED Condensed CONSOLIDATED Statements of Operations for the three AND SIX monthsMonths ended JUNE 30,MARCH 31, 2023, and 2022 and 2021

5

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2023, and 20226
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE Three AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023, AND 2022 AND 202167

 

Unaudited condensed CONSOLIDATED Statements of Cash Flows for the SIXTHREE months ended JUNE 30,MARCH 31, 2023, and 2022 and 2021

89

 

Notes to unaudited Condensed CONSOLIDATED Financial Statements

910

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3726

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

5234

Item 4.

Controls and Procedures

5234

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

5335

Item 1A.

Risk Factors

5335

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

5536

Item 3.

Defaults Upon Senior Securities

5536

Item 4.

Mine Safety Disclosures

5536

Item 5.

Other Information

5536

Item 6.

Exhibits

5637

 

 

 

 

Signatures

5738

 

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as may, will, would, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, assume, intend, potential, continue or other similar words or the negative of these terms. We have based these forward-looking statements largely on our current expectations about future events and financial trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Part II, Item 1A. "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022.7, 2023. Accordingly, you should not place undue reliance upon these forward-looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, the timing of events and circumstances and actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements about:

 

 

the progress of, outcome or and timing of any regulatory approval for any of our product candidates and the expected amount or timing of any payment related thereto under any of our collaboration agreements;

   
 

the progress of, timing of and expected amount of expenses associated with our research, development and commercialization activities;

   
 

our ability to raise additional funds on commercially reasonable terms, or at all, in order to support our continued operations;

   
 

the sufficiency of our cash resources to fund our operating expenses and capital investment requirements for any period;

   
 

the expected timing of our clinical trials for our product candidates and the availability of data and results of those trials;

   
 

our expectations regarding federal, state and foreign regulatory requirements;

   
 

the potential therapeutic benefits and effectiveness of our products and product candidates;

   
 

the size and characteristics of the markets that may be addressed by our products and product candidates;

   
 

our intention to seek to establish, and the potential benefits to us from, any strategic collaborations or partnerships for the development or sale of our products and product candidates;

   
 

our expectations as to future financial performance, expense levels and liquidity sources;

   
 

the timing of commercializing our products and product candidates, if approved;

senior leadership and board member transitions and refreshments; and

   
 

other factors discussed elsewhere in this report.

 

The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We have included or made reference to important factors in the cautionary statements included in this report, particularly in the section entitled "Risk Factors" where we make reference to Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022,7, 2023, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Except as required by law, we do not assume any intent to update any forward-looking statements after the date on which the statement is made, whether as a result of new information, future events or circumstances or otherwise.

 

Note Regarding Company Reference

 

Unless the context otherwise requires, we use the terms ZevraKemPharm,, Company, we, us and our in this Quarterly Report on Form 10-Q to refer to Zevra Therapeutics, Inc., formerly known as KemPharm, Inc. prior to February 21, 2023. We have proprietary rights to a number of trademarks used in this Quarterly Report on Form 10-Q that are important to our business, including KemPharm,LAT® and the KemPharmZevra logo. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.

unaudited condensed CONSOLIDATED Financial Statements

 

KEMPHARM,ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Assets

        

Current assets:

  

Cash and cash equivalents

 $76,779  $112,346  $40,181 $65,466 

Short-term investments

 4,199  0 

Securities at fair value

 34,403 16,900 

Short-term investments - other

 20,700 481 

Accounts and other receivables

 2,820  1,528  7,822 8,299 

Prepaid expenses and other current assets

  3,637   1,182   1,174   1,877 

Total current assets

 87,435  115,056  104,280  93,023 

Inventories

 779  0  620 671 

Property and equipment, net

 904  884  744 794 

Operating lease right-of-use assets

 1,165  1,141  898 988 

Long-term investments

 33,535  15,422 

Long-term investments - other

  20,000 

Other long-term assets

  440   438   53   53 

Total assets

 $124,258  $132,941  $106,595  $115,529 
  

Liabilities and stockholders' equity

        

Current liabilities:

  

Accounts payable and accrued expenses

 $3,600  $3,038  $10,098 $6,169 

Current portion of operating lease liabilities

 469  356  470 480 

Current portion of discount and rebate liabilities

 1,796  0  4,746 4,655 

Other current liabilities

  1,294   836   302   422 

Total current liabilities

 7,159  4,230  15,616  11,726 

Line of credit payable

 12,800  0  12,914 12,800 

Derivative and warrant liability

 57  330  3 1 

Operating lease liabilities, less current portion

 1,082  1,232  736 843 

Discount and rebate liabilities, less current portion

 3,900  0  5,764 4,327 

Other long-term liabilities

  27   31   158   25 

Total liabilities

  25,025   5,823   35,191   29,722 
  

Commitments and contingencies (Note D)

              
  

Stockholders’ equity:

  

Preferred stock:

  

Undesignated preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2022 or December 31, 2021

 0  0 

Common stock, $0.0001 par value, 250,000,000 shares authorized, 35,399,267 shares issued and 34,489,314 shares outstanding as of June 30, 2022; 35,325,801 shares issued and 35,005,640 shares outstanding as of December 31, 2021

 3  4 

Undesignated preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2023 or December 31, 2022

    

Common stock, $0.0001 par value, 250,000,000 shares authorized, 35,457,496 shares issued and 33,881,804 shares outstanding as of March 31, 2023; 35,450,257 shares issued and 34,540,304 shares outstanding as of December 31, 2022

 3 3 

Additional paid-in capital

 399,701  396,957  402,786 401,799 

Treasury stock, at cost

 (7,536) (2,814) (10,983) (7,536)

Accumulated deficit

  (292,935)  (267,029) (320,339) (308,572)

Accumulated other comprehensive (loss) income

  (63)  113 

Total stockholders' equity

  99,233   127,118   71,404   85,807 

Total liabilities and stockholders' equity

 $124,258  $132,941  $106,595  $115,529 

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

 

4

 

 

 KEMPHARM,ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

 

Three months ended June 30,

  

Six months ended June 30,

  

Three months ended March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Revenue, net

 $1,300  $11,986  $5,265  $24,103  $2,879  $3,965 

Operating expenses:

  

Cost of revenue

 51  1,000  59  2,000  125  8 

Research and development

 4,795  2,848  7,877  5,113  8,844  3,082 

General and administrative

 3,558  2,305  6,292  4,197 

Acquired in-process research and development

  17,663   0   17,663   0 

Selling, general and administrative

  6,834   2,734 

Total operating expenses

  26,067   6,153   31,891   11,310   15,803   5,824 

(Loss) income from operations

  (24,767)  5,833   (26,626)  12,793 

Other income (expense):

 

Gain (loss) on extinguishment of debt

 0  789  0  (16,096)

Interest expense related to amortization of debt issuance costs and discount

 0  0  0  (150)

Interest expense on principal

 (36) (16) (41) (215)

Loss from operations

  (12,924)  (1,859)

Other (expense) income:

 

Interest expense

 (182) (5)

Fair value adjustment related to derivative and warrant liability

 32  (394) 273  (424) (2) 241 

Interest and other income (expense), net

  14   (9)  (231)  (1)

Total other income (expense)

  10   370   1   (16,886)

(Loss) income before income taxes

 (24,757) 6,203  (26,625) (4,093)

Fair value adjustment related to investments

 196  (352)

Interest and other income, net

  1,042   107 

Total other (expense) income

  1,054   (9)

Loss before income taxes

 (11,870) (1,868)

Income tax benefit

  715   0   719   0   103   4 

Net (loss) income

 $(24,042) $6,203  $(25,906) $(4,093)

Deemed dividend

  0   (16,898)  0   (54,342)

Net loss

 $(11,767) $(1,864)

Net loss attributable to common stockholders

 $(24,042) $(10,695) $(25,906) $(58,435) $(11,767) $(1,864)
  

Basic and diluted net loss per share of common stock:

  

Net loss attributable to common stockholders

 $(0.70) $(0.40) $(0.75) $(2.42) $(0.34) $(0.05)
  

Weighted average number of shares of common stock outstanding:

  

Basic and diluted

  34,447,206   29,174,565   34,476,737   24,187,484   34,466,542   34,506,597 

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

5

 

ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share amounts)

  

Three months ended March 31,

 
  

2023

  

2022

 

Net loss attributable to common stockholders

 $(11,767) $(1,864)

Other comprehensive (loss) income:

        

Foreign currency translation adjustment

  (176)   

Other comprehensive (loss) income

  (176)   

Comprehensive loss

 $(11,943) $(1,864)

See accompanying notes to unaudited condensed consolidated financial statements.

6

 

KEMPHARM,ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

 

 

Undesignated

    

Additional

 

Treasury

    

Total

     

Additional

 

Treasury

    

Other

 

Total

 
 

Preferred

 

Common

 

Paid-in

 

Stock,

 

Accumulated

 

Stockholders'

  

Common

 

Paid-in

 

Stock,

 

Accumulated

 

Comprehensive

 

Stockholders'

 
 

Stock

  

Stock

  

Capital

  

at cost

  

Deficit

  

Equity

  

Stock

  

Capital

  

at cost

  

Deficit

  

Income (Loss)

  

Equity

 

Balance as of January 1, 2022

 $0  $4  $396,957  $(2,814) $(267,029) $127,118 

Balance as of January 1, 2023

 $3  $401,799  $(7,536) $(308,572) $113  $85,807 

Net loss

 0  0  0  0  (1,864) (1,864)    (11,767)  (11,767)

Stock-based compensation expense

 0  0  918  0  0  918   591    591 

Shares repurchased as part of the Share Repurchase Program

 0  (1) 0  (4,722) 0  (4,723)   (3,447)   (3,447)

Issuance of common stock in exchange for consulting services

  0   0   50   0   0   50   42    42 

Balance as of March 31, 2022

 $0  $3  $397,925  $(7,536) $(268,893) $121,499 

Net loss

 0  0  0  0  (24,042) (24,042)

Stock-based compensation expense

 0  0  1,510  0  0  1,510 

Issuance of common stock in exchange for consulting services

 0  0  50  0  0  50 

Issuance of common stock as part of the Employee Stock Purchase Plan

  0   0   216   0   0   216 

Balance as of June 30, 2022

 $0  $3  $399,701  $(7,536) $(292,935) $99,233 

Severance expense

  354    354 

Other comprehensive loss

              (176)  (176)

Balance as of March 31, 2023

 $3  $402,786  $(10,983) $(320,339) $(63) $71,404 

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

67

 

KEMPHARM,ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY, CONTINUED

(in thousands)

 

  

Preferred Stock

                 
  

Series A

  

Series B-1

  

Series B-2

                     
  

Convertible

  

Convertible

  

Convertible

  

Undesignated

      

Additional

      

Total

 
  

Preferred

  

Preferred

  

Preferred

  

Preferred

  

Common

  

Paid-in

  

Accumulated

  

Stockholders'

 
  

Stock

  

Stock

  

Stock

  

Stock

  

Stock

  

Capital

  

Deficit

  

(Deficit) Equity

 

Balance as of January 1, 2021

 $0  $0  $0  $0  $0  $192,062  $(258,474) $(66,412)

Net loss

  0   0   0   0   0   0   (10,296)  (10,296)

Stock-based compensation expense

  0   0   0   0   0   675   0   675 

Issuance of common stock in connection with Public Offering, net of discounts and commissions

  0   0   0   0   1   49,284   0   49,285 

Issuance of common stock in connection with the exercise of warrants in the Inducement Transaction, net of discounts and commissions

  0   0   0   0   1   40,390   0   40,391 

Issuance of common stock in connection with the exercise of common stock warrants

  0   0   0   0   0   25,593   0   25,593 

Fair value of warrants issued in connection with the Exchange Agreement

  0   0   0   0   0   15,990   0   15,990 

Fair value of Series B-2 Preferred Stock issued in accordance with the Exchange Agreement

  0   0   29,056   0   0   0   0   0 

Issuance of common stock as a result of Series B-2 Preferred Stock conversion

  0   0   (29,056)  0   1   29,055   0   29,056 

Fair value of warrants issued in connection with the Inducement Transaction

  0   0   0   0   0   38,437   0   38,437 

Deemed dividend related the Inducement Transaction

  0   0   0   0   0   (37,444)  0   (37,444)

Offering expenses charged to equity

  0   0   0   0   0   (1,106)  0   (1,106)

Issuance of common stock in exchange for consulting services

  0   0   0   0   0   82   0   82 

Balance as of March 31, 2021

 $0  $0  $0  $0  $3  $353,018  $(268,770) $84,251 

Net income

  0   0   0   0   0   0   6,203   6,203 

Stock-based compensation expense

  0   0   0   0   0   318   0   318 

Issuance of common stock in connection with the exercise of warrants in the June 2021 Inducement Transaction, net of discounts and commissions

  0   0   0   0   0   35,455   0   35,455 

Issuance of common stock in connection with the exercise of common stock warrants

  0   0   0   0   0   4,191   0   4,191 

Fair value of warrants issued in connection with the June 2021 Inducement Transaction

  0   0   0   0   0   17,089   0   17,089 

Deemed dividend related the June 2021 Inducement Transaction

  0   0   0   0   0   (16,898)  0   (16,898)

Offering expenses charged to equity

  0   0   0   0   0   (18)  0   (18)

Issuance of common stock in exchange for consulting services

  0   0   0   0   0   72   0   72 

Balance as of June 30, 2021

 $0  $0  $0  $0  $3  $393,227  $(262,567) $130,663 

See accompanying notes to unaudited condensed consolidated financial statements

7

KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

  

Six months ended June 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net loss

 $(25,906) $(4,093)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Loss on extinguishment of debt

  0   16,096 

Stock-based compensation expense

  2,428   993 

Non-cash interest expense

  0   8 

Amortization of debt issuance costs and debt discount

  0   150 

Depreciation and amortization expense

  246   128 

Fair value adjustment related to derivative and warrant liability

  (273)  424 

Fair value adjustment related to investments

  495   0 

Loss on sublease and disposal of property and equipment

  9   76 

Consulting fees paid in common stock

  100   154 

Acquired in-process research and development

  17,663   0 

Change in assets and liabilities:

        

Accounts and other receivables

  (1,292)  691 

Prepaid expenses and other assets

  (1,892)  (1,330)

Inventories

  39   0 

Operating lease right-of-use assets

  (24)  87 

Accounts payable and accrued expenses

  630   (1,702)

Discount and rebate liabilities

  496   0 

Operating lease liabilities

  (37)  (159)

Other liabilities

  (339)  2,494 

Net cash (used in) provided by operating activities

  (7,657)  14,017 
         

Cash flows from investing activities:

        

Acquisitions, net

  (14,090)  0 

Purchases of property and equipment

  (31)  (81)

Purchases of investments

  (23,832)  0 

Maturities of investments

  1,025   0 

Net cash used in investing activities

  (36,928)  (81)
         

Cash flows from financing activities:

        

Proceeds from issuance of debt

  12,800   0 

Proceeds from Public Offering, net of discounts and commissions

  0   49,285 

Proceeds from January 2021 Inducement Transaction, net of discounts and commissions

  0   41,384 

Proceeds from June 2021 Inducement Transaction, net of discounts and commissions

  0   35,646 

Proceeds from insurance financing arrangements

  1,273   0 

Proceeds from Employee Stock Purchase Plan

  216   0 

Payments of principal on insurance financing arrangements

  (469)  0 

Payment to repurchase shares as part of the Share Repurchase Program

  (4,723)  0 

Payment of offering costs

  (68)  (1,124)

Repayment of principal on finance lease liabilities

  (11)  (133)

Payment of debt issuance costs

  0   (2,881)

Repayment of principal on convertible notes

  0   (37,924)

Net proceeds from exercise of common stock warrants

  0   29,784 

Net cash provided by financing activities

  9,018   114,037 

Net (decrease) increase in cash and cash equivalents

  (35,567)  127,973 

Cash and cash equivalents, beginning of period

  112,346   4,322 

Cash and cash equivalents, end of period

 $76,779  $132,295 
         

Supplemental cash flow information:

        

Cash paid for interest

 $41  $207 

Facility Notes principal converted to Series B-2 Preferred Stock

  0   31,477 

Amounts due for property and equipment included in accounts payable and accrued expenses

  0   22 

Amounts due for deferred offering costs included in accounts payable and accrued expenses

  0   107 

Fair value of warrants issued to underwriters in connection with Public Offering

  0   3,485 
      

Additional

          

Total

 
  

Common

  

Paid-in

  

Treasury

  

Accumulated

  

Stockholders'

 
  

Stock

  

Capital

  

Stock, at cost

  

Deficit

  

Equity

 

Balance as of January 1, 2022

 $4  $396,957  $(2,814) $(267,029) $127,118 

Net loss

           (1,864)  (1,864)

Stock-based compensation expense

     918         918 

Shares repurchased as part of the Share Repurchase Program

  (1)     (4,722)     (4,723)

Issuance of common stock in exchange for consulting services

     50         50 

Balance as of March 31, 2022

 $3  $397,925  $(7,536) $(268,893) $121,499 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8

 

KEMPHARM,ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

  

Three months ended March 31,

 
  

2023

  

2022

 

Cash flows from operating activities:

        

Net loss

 $(11,767) $(1,864)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Stock-based compensation expense

  591   918 

Non-cash severance expense

  354    

Depreciation and amortization expense

  79   65 

Fair value adjustment related to derivative and warrant liability

  2   (241)

Fair value adjustment related to investments

  (196)  352 

Consulting fees paid in common stock

  42   50 

Gain on foreign currency exchange

  (240)   

Change in assets and liabilities:

        

Accounts and other receivables

  477   (1,792)

Prepaid expenses and other assets

  703   303 

Inventories

  51    

Operating lease right-of-use assets

  80   51 

Accounts payable and accrued expenses

  3,929   (486)

Discount and rebate liability

  1,528    

Operating lease liabilities

  (107)  (88)

Other liabilities

  429   (821)

Net cash used in operating activities

  (4,045)  (3,553)
         

Cash flows from investing activities:

        

Purchases of property and equipment

  (29)  (16)

Purchases of investments

  (17,526)  (3,832)

Net cash used in investing activities

  (17,555)  (3,848)
         

Cash flows from financing activities:

        

Proceeds from issuance of debt

  12,914    

Repayment of debt

  (12,800)   

Payments of principal on insurance financing arrangements

  (415)   

Payment to repurchase shares as part of the share repurchase program

  (3,447)  (4,723)

Repayment of principal on finance lease liabilities

  (2)  (10)

Net cash used in financing activities

  (3,750)  (4,733)

Effect of exchange rate changes on cash and cash equivalents

  65    

Net decrease in cash and cash equivalents

  (25,285)  (12,134)

Cash and cash equivalents, beginning of period

  65,466   112,346 

Cash and cash equivalents, end of period

 $40,181  $100,212 
         

Supplemental cash flow information:

        

Cash paid for interest

 $68  $5 

See accompanying notes to unaudited condensed consolidated financial statements.

9

ZEVRA THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 
A.Description of Business, and Basis of Presentation, and Significant Transactions

 

Organization

 

KemPharm,Zevra Therapeutics, Inc. (the "Company") is a specialty pharmaceuticalrare disease company focused on the discoverymelding science, data and developmentpatient need to create transformational therapies for diseases with limited or no treatment options. The Company has a diverse portfolio of treatmentsproducts and product candidates, which includes a combination of both a clinical stage pipeline and commercial stage assets. The Company's pipeline includes arimoclomol, an orally-delivered, first-in-class investigational product candidate being developed for central nervous systemNiemann-Pick disease type C ("CNS"NPC"), which has been granted orphan drug designation, Fast-track designation, Breakthrough Therapy designation and rare pediatric disease indications that allowdesignation for the Company to target high-value areas with significant unmet needs. The Company's core competency is the discovery and developmenttreatment of proprietary prodrugs to treat serious medical conditions through its proprietary Ligand Activated Therapy ("LAT®") platform technology. The Company utilizes its proprietary LAT platform technology to generate improved prodrug versions of drugs approvedNPC by the U.S. Food and Drug Administration ("FDA") as well as to generate prodrug versionsand orphan medical product designation for the treatment of existing compounds that may have applications for new disease indications. The Company's prodrug product candidate pipeline is currently focused onNPC by the high need areas of idiopathic hypersomniaEuropean Medicines Agency ("IH") and other CNS/rare diseases. The Company's approved product, AZSTARYS®, formerly referred to as KP415, a new once-daily treatment for attention deficit hyperactivity disorder ("ADHD") in patients age six years and older contains the Company's prodrug, serdexmethylphenidate ("SDX"EMA"). AZSTARYSKP1077 is being commercialized in the United States by Corium, Inc., an affiliate of Gurnet Point Capital, L.P. The Company's lead clinical development product candidate which is being developed as a treatment for idiopathic hypersomnia ("IH"), a rare neurological sleep disorder, and narcolepsy. KP1077 is based on SDX,comprised solely of serdexmethylphenidate ("SDX"), the Company's proprietary prodrug of d-methlyphenidate ("d-MPH"d-methylphenidate (“d-MPH”) and is in development. The FDA has granted KP1077 orphan drug designation for the treatment of IH and narcolepsy.IH. The Company's prodrug product candidate for the treatmentCompany changed its name from KemPharm, Inc. to Zevra Therapeutics, Inc. effective as of stimulant use disorder ("SUD") is KP879.February 21, 2023.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. Operating results for the three and sixmonths ended June 30, 2022,March 31, 2023, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022.2023.

 

This interim information should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the United States Securities and Exchange Commission (“SEC”) on March 31, 2022.7, 2023.

 

Basis of Presentation

 

The Company prepared the consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”)U.S. GAAP and the rules and regulations of the United States Securities and Exchange Commission (the "SEC")SEC and, in the Company's opinion, reflect all adjustments, including normal recurring items that are necessary.

 

9

Arimoclomol Acquisition

 

On May 15, 2022, the Company and Zevra Denmark A/S (formerly known as KemPharm Denmark A/S (“KemPharmprior to February 21, 2023) (“Zevra DK”), a newly formed Danish company and wholly-owned subsidiary of KemPharm, Inc.,the Company, entered into an asset purchase agreement (the “Arimoclomol Purchase Agreement”) with Orphazyme A/S in restructuring, a Danish public limited liability company (“Orphazyme”). The Arimoclomol Purchase Agreement closed on May 31, 2022. Under the terms of the Arimoclomol Purchase Agreement, KemPharmZevra DK purchased all of the assets and operations of Orphazyme related to arimoclomol and settled all of Orphazyme’s actual outstanding liabilities to its creditors with a cash payment of $12.8 million. In addition, KemPharmZevra DK agreed to assume an estimated reserve liability of $5.2 million related to revenue generated from Orphazyme’s Early Access Program in France.

 

The Company accounted for the arimoclomol acquisition as an asset acquisition as the majority of the value of the assets acquired related to the arimoclomol acquired in-process research and development (“IPR&D”) asset. The intangible asset associated with IPR&D relates to arimoclomol. The estimated fair value of $17.7 million was determined using the excess earnings valuation method, a variation of the income valuation approach. The excess earnings valuation method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset over its remaining economic life. Some of the more significant assumptions utilized in ourthe Company's asset valuations included the estimated net cash flows for asset, including netprojected revenues, costprobability of sales, research and development and other operating expenses, the potential regulatory and commercial success, rates, competitive trends impactingand the assets, and tax rates, and were based on our most recent strategic plan.discount rate. The fair value using the excess earnings valuation method was determined using an estimated weighted average cost of capital of 42%, which reflects the risks inherent in future cash flow projections and represents a rate of return that a market participant would expect for this asset. This fair value measurement was based on significant inputs not observable in the market and thus represent Level 3 fair value measurement.

 

10

In accordance with Accounting Standards Codification ("ASC"), Subtopic 730-10-25, Accounting for Research and Development Costs, the up-front payments to acquire a new drug compound, as well as future milestone payments when paid or payable, are immediately expensed as acquired IPR&D in transactions other than a business combination provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Therefore, the portion of the purchase price that was allocated to the IPR&D assets acquired was immediately expensed. Other assets acquired and liabilities assumed, were recorded at fair value. The companyCompany also recordedrecorded a $0.7$0.8 million income tax benefit for the three and six monthsyear ended June 30, December 31,2022,related to research and development credits that are expected to be realized from the local jurisdiction in Denmark. 

 

The following represents the consideration paid and purchase price allocation for the acquisition of arimoclomol (in thousands):

 

Cash

 $12,800  $12,800 

Assumed reserve liability

  5,200   5,200 

Total consideration

 $18,000  $18,000 
  

Total consideration

 $18,000  $18,000 
Direct transaction costs associated with the acquisition (1)  1,290   1,290 

Total purchase price to be allocated

 $19,290  $19,290 
  

Property and equipment, inventory and assembled workforce acquired

 $1,627  $1,627 

IPR&D (2)

  17,663   17,663 

Total allocated purchase price

 $19,290  $19,290 
    

(1) As a result of the asset acquisition accounting, the transaction costs associated with the acquisition should be included in the costs of the assets acquired and allocated amongst qualifying assets using the relative fair value basis. The transaction costs primarily included financial advisor fees, legal expenses and auditor expenses.

(2) The primary asset acquired, the IPR&D asset, was expensed and the allocated transaction related costs were included with and expensed with this asset.

 

10

Underwriting Agreement

(1) As a result of the asset acquisition accounting, the transaction costs associated with the acquisition should be included in the costs of the assets acquired and allocated amongst qualifying assets using the relative fair value basis. The transaction costs primarily included financial advisor fees and legal expenses.

(2) The primary asset acquired, the IPR&D asset, was expensed and the allocated transaction related costs were included with and expensed with this asset.

 

On January 8,2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC (the “Underwriter” or "Roth"),Amendment to issue and sell 6,765,463 shares of common stock of the Company, pre-funded warrants to purchase 926,844 shares of common stock and warrants to purchase 7,692,307 shares of common stock at an exercise price per share of $6.50 in an underwritten public offering (the “Public Offering”) pursuant to a registration statementRegistration Statement on Form S-13 (File No.333-250945) and a related prospectus, in each case filed with the Securities and Exchange Commission (the “SEC”). The offering price to the public was $6.50 per share of common stock and accompanying warrant, representing a public offering price of $6.4999 per share of common stock and $0.0001 per related warrant. In addition, the Company granted the Underwriter an option to purchase, for a period of 45 days, up to an additional 1,153,846 shares of the Company’s common stock and/or warrants to purchase up to an additional 1,153,846 shares of the Company’s common stock.

On January 8,2021, the Underwriter exercised its over-allotment option, in part, for warrants to purchase 754,035 shares of the Company’s common stock. Further on February 1, 2021, the Underwriter again exercised its over-allotment option to purchase 374,035 shares of common stock.

On January 12,2021, the Company closed the Public Offering. The aggregate gross proceeds to the Company from the Public Offering, including over-allotment, totaled approximately $52.4 million, before deducting underwriting discounts and commissions and offering expenses payable by the Company.

 

On January 25, 2022, the Company filed an amendment to the registration statement on Form S-1 (File No. 333-250945) on Form S-3 covering the issuance of the shares of ourthe Company's common stock issuable upon the exercise of the warrants issued in the Public OfferingCompany's January 2021 underwritten public offering (the "Public Offering") and remaining unexercised as of the date of the amendment, which was declared effective on February 1, 2022.

 

Listing onOn March 1, 2023, following its name change, the Nasdaq Stock Market

On January 7,2021, the Company’s common stock was approved for listing on the Nasdaq Capital Market. The Company’sCompany's common stock began trading on the Nasdaq CapitalGlobal Select Market on January 8,2021, under the ticker symbol “KMPH”"ZVRA".

 

On 

October 19, 2021, 11the Company announced that its shares

Entry into 2021 ATM Agreement

 

On July 2, 2021, the Company entered into an equity distribution agreement (the "2021 ATM Agreement") with JMP Securities LLC ("JMP") and RBC Capital Markets, LLC ("RBCCM") under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock having an aggregate offering price of up to $75.0 million through JMP and RBCCM as its sales agents. The issuance and sale, if any, of common stock by the Company under the 2021 ATM Agreement will be made pursuant to a registration statement on Form S-3. JMP and RBCCM may sell the common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended. JMP and RBCCM will use commercially reasonable efforts to sell the common stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company will pay JMP and RBCCM a commission equal to 3.0% in the aggregate of the gross sales proceeds of any common stock sold through JMP and RBCCM under the 2021 ATM Agreement. The Company filed a registration statement on Form S-3 covering the sale of the shares of its common stock up to $350.0 million, $75.0 million of which was allocated to the sales of the shares of common stock issuable under the 2021 ATM Agreement, which was declared effective on July 12, 2021. As of June 30, 2022,March 31, 2023, 0no shares have been issued or sold under the 2021 ATM Agreement.

 

Share Repurchase Program

 

On December 20, 2021, the Company initiated a share repurchase program (the "Share Repurchase Program") pursuant to which the Company may repurchase up to $50 million of shares of its common stock through December 31, 2023. Capital allocation to the Share Repurchase Program will be based on a variety of factors, including ourthe Company's business results, the receipt of royalties and sales milestones under the KP415AZSTARYS License Agreement (refer to Note B), and potentially other sources of non-dilutive capital that may become available to the Company. Repurchases will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to a variety of factors, including the market price of the Company’s common stock, general market and economic conditions and applicable legal requirements. The exact number of shares to be repurchased by the Company is not guaranteed and the program may be suspended, modified, or discontinued at any time without prior notice. The Company does not currently intend to retire the repurchased treasury shares, rather all repurchased treasury shares will remain authorized but unissued. As of June 30, 2022,March 31, 2023, the Company hashad repurchased 909,9531,575,692 shares of its common stock for approximately $7.5$11.0 million under the Share Repurchase Program.

 

Reclassifications

Certain reclassifications were made to the 112022


unaudited condensed consolidated financial statements to conform to the classifications used in 2023. These reclassifications had no impact on the consolidated net loss, changes in stockholder's equity, or cash flows previously reported.

 
B.Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, the useful lives of property and equipment, the recoverability of long-lived assets, the incremental borrowing rate for leases, and assumptions used for purposes of determining stock-based compensation, income taxes, the fair value of long-term investments and the fair value of the derivative and warrant liability and discount and rebate liabilities, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

 

Investments

The Company maintains investment securities that are classified as available-for-sale securities for which the Company has elected the fair value option under ASC 825,Financial Instruments. As such, these securities are carried at fair value with unrealized gains and losses included in fair value adjustment related to investments on the unaudited condensed consolidated statements of operations. The securities primarily consist of U.S. Treasury securities and U.S. government-sponsored agency securities and are included in securities at fair value in the unaudited condensed consolidated balance sheets. As of March 31,2023, and December 31, 2022, the Company held securities with an aggregate fair value of $34.4 million and $16.9 million, respectively, that contained aggregate unrealized losses of approximately $0.4 million and $0.6 million, respectively. Applying fair value accounting to these debt securities more accurately represents the Company's investment strategy due to the fact that excess cash is currently being invested for the purpose of funding future operations. In addition, the Company holds certificates of deposit totaling $20.7 million as of March 31,2023, and December 31, 2022, and are included in short-term investments - other in the unaudited condensed consolidated balance sheets. Interest income is recognized as earned using an effective yield method giving effect to the amortization of premium and accretion of discount and is based on the economic life of the securities. Interest income is included in Interest and other income, net in the unaudited condensed consolidated statements of operations.

Revenue Recognition

 

The Company commenced recognizingrecognizes revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”), starting and, as a result, follows the January five-step model when recognizing revenue: 1) identifying a contract; 2018.2) identifying the performance obligations; 3) determining the transaction price; 4) allocating the price to performance obligations; and 5) recognizing revenue when the performance obligations have been fulfilled.

12

Arimoclomol Early Access Program

 

Arrangements with Multiple-Performance Obligations

From time to time, the Company enters into arrangements for research and development, manufacturing and/or commercialization services. Such arrangements may require the Company to deliver various rights, services, including intellectual property rights/licenses, research and development services, and/or commercialization services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, royalty payments, consulting fees and/or profit sharing.

In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefitNet revenue includes revenue from the good or service either on its own or together with other resources that are readily available and (ii)sale of arimoclomol for the good or service is separately identifiable from other promises in the contract. The considerationtreatment of NPC under the arrangementremunerated early access compassionate use program in France (“French nATU”). An early access compassionate use program is then allocateda program giving specific patients access to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basisdrug, which is not available.

The consideration allocatedyet approved for commercial sale. Only drugs targeting serious or rare indications and for which there is currently no appropriate treatment are considered for early access compassionate use programs. Further, to each distinctbe considered for the early access compassionate use program, the drug must have proven efficacy and safety and must either be undergoing price negotiations or seeking marketing approval. In accordance with ASC 606, the Company recognizes revenue when fulfilling its performance obligation is recognized as revenueunder the Arimoclomol Early Access Program ("Arimoclomol EAP") by transferring control of promised goods or services to its customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining when the customer obtains control of the related goods product, the Company considers certain indicators, including whether the Company has a present right to payment from the customer, whether title and/or services is transferred. Consideration associated with at-risk substantive performance milestonessignificant risks and rewards of ownership have transferred to the customer and whether the customer acceptance has been received. Revenue is recognized asnet of sales deductions, including discounts, rebates, applicable distributor fees, and revenue-based taxes. Under the French nATU, the manufacturer can set its own price for the drug products until a price agreement with the authorities is in place. Any excess in the price charged the manufacturer compared to the price agreed with the health authorities once the drug product is approved in France must be repaid. The repayment is considered in the clawback liability (rebate). An estimate of net revenue when it is probable that a significant reversaland clawback liability are recognized using the ‘expected value’ method. Accounting for net revenue and clawback liability requires determination of the cumulative revenue recognized willmost appropriate method for the expected final transaction price, which depends on the terms and conditions in the contracts with the French Health Authorities and is subject to price negotiations with the French Health Authorities, following marketing approval. This estimate also requires assumptions with respect to inputs into the method, including current pricing of comparable marketed products within the rare disease area in France. Management has considered the expected final sales price as well as the price of similar drug products. The Company is operating within a rare disease therapeutic area where there is unmet treatment need and hence a limited number of comparable commercialized drugs products. The limited available relevant market information for directly comparable commercialized drugs within rare disease increases the uncertainty in management's estimate. For the notthree occur. Should there be royalties, months ended March 31, 2023, the Company utilizesrecognized revenue related to the salesArimoclomol EAP in France of $2.0million, which is net of a clawback liability of $1.3 million and usage-based royalty exception in arrangements that resultedother gross to net adjustments. As part of the Arimoclomol Purchase Agreement the Company assumed an estimated reserve liability of $5.2 million related to revenue generated from the licenseArimoclomol EAP in France. The total estimate reserve liability as of intellectual property, recognizing revenues generated from royalties or profit sharingMarch 31,2023, including the additional clawback liability for the three months ended March 31,2023, was $10.5million. The total reserve liability as of December 31, 2022, was $9.0 million. As of March 31, 2023, and December 31, 2022, this estimated reserve liability is recorded as discount and rebate liabilities in the underlying sales occur.unaudited condensed consolidated balance sheets and is separated into current and long-term based upon the timing of the expected payment to the French regulators.

 

Licensing Agreements

 

The Company enters into licensing agreements with licensees that fall under the scope of ASC 606.

 

The terms of the Company’s licensing agreements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; and (iii) royalties on net sales of licensed products. Each of these payments may result in licensing revenues.

 

As part of the accounting for these agreements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. Generally, the estimation of the stand-alone selling price may include such estimates as, independent evidence of market price, forecasted revenues or costs, development timelines, discount rates, and probability of regulatory success. The Company evaluates each performance obligation to determine if they can be satisfied at a point in time or over time, and it measures the services delivered to the licensee which are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

 

Up-front Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.

 

Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within its or the licensee’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative licensing revenues and earnings in the period of adjustment.

 

1213

 

KP415AZSTARYS License Agreement

 

In September 2019, the Company entered into a Collaboration and License Agreement (the “KP415“AZSTARYS License Agreement”) with Commave Therapeutics SA ("Commave"), an affiliate of Gurnet Point Capital (“Commave”("GPC"). Under the KP415AZSTARYS License Agreement, the Company granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize the Company’s product candidates containing SDX and d-methylphenidate (“d-MPH”),d-MPH, including AZSTARYS,KP484, and, at the option of Commave, KP879,KP922 or any other product candidate developed by the Companycandidates containing SDX and developed to treat ADHD or any other CNS disorder (the “Additional Product Candidates” and, collectively withcentral nervous system ("CNS") disease. Corium, Inc. ("Corium") was tasked by Commave, to lead all commercialization activities for AZSTARYS and KP484,under the “Licensed Product Candidates”).AZSTARYS License Agreement. Pursuant to the KP415AZSTARYS License Agreement, Commave (i) paid the Company an upfront payment of $10.0 million; (ii) agreed to pay milestone payments of up to $63.0 million upon the occurrence of specified regulatory milestones related to AZSTARYS, and KP484; (iii) agreed to pay additional fixed payments of up to $420.0 million upon the achievement of specified U.S. sales milestones;milestones, and (iv) has agreed to pay the Company quarterly, tiered royalty payments ranging frombased on a percentage in the high single digits to the mid-twentiesrange of Net Sales (as defined in the KP415 License Agreement) in the United States and a percentage in the low to mid-single digitspercentages of Net Sales in each country outside the United States, in each case subject to specified reductions under certain conditions as described in the KP415 License Agreement.net sales. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the royalty term for the applicable product.

 

In April 2021, the Company entered into Amendment No. 1 to the KP415 AmendmentAZSTARYS License Agreement (the "KP415"AZSTARYS Amendment"). Pursuant to the KP415AZSTARYS Amendment, the Company and Commave agreed to modify the compensation terms of the KP415AZSTARYS License Agreement. Pursuant to the KP415 Amendment, Commave paid the Company $10.0 million in connection with the entry into the KP415 Amendment as a result of the regulatory approval ofThe AZSTARYS in the United States which occurred on March 2, 2021. Commave also paid the Company $10.0 million following the receipt of the scheduling determination of the compound SDX by the U.S. Drug Enforcement Agency (the "DEA"), which occurred on May 7, 2021. In addition, the KP415 Amendment increased the total remaining future regulatory and sales milestone payments related to AZSTARYS to up to an aggregate of $590.0 million in payments upon the occurrence of specified regulatory milestones related to AZSTARYS and upon the achievement of specified U.S. net sales milestones. Further, under the KP415 Amendment, Commave agreed to pay the Company quarterly, tiered royalty payments that are calculated from a base royalty rate percentage in the high single digits to the mid-twenties of net sales in the United States, subject to adjustment based on annual net sales, and a percentage in the low to mid-single digits of Net Sales in each country outside the United States, in each case subject to specified reductions under certain conditions, including with respect to the final approval label, as described in the KP415 License Agreement. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the royalty term for the applicable product.

Pursuant to the KP415 Amendment, Commave and the Company also agreed to modify Commave’s right of first refusal ("ROFR") such that the Company’s product candidate, KP922, is no longer subject to Commave’ ROFR to acquire, license or commercialize any Additional Product Candidate. Commave’s ROFR shall only apply to any Additional Product Candidate which contains SDX, with such ROFR expiring upon the acceptance of an NDA for such Additional Product Candidate containing SDX.

 

Commave also agreed to be responsible for and reimburse the Company for all of the development, commercialization and regulatory expenses incurred on the licensed products, subject to certain limitations as set forth in the KP415AZSTARYS License Agreement. As part of this agreement, the Company is obligated to perform consulting services on behalf of Commave related to the licensed products. For these consulting services, Commave has agreed to pay the Company a set rate per hour on any consulting services performed on behalf of Commave for the benefit of the licensed products.

 

In accordance with the terms of the Company’s March 20, 2012 Termination Agreement with Aquestive Therapeutics, (formerly known as MonoSol Rx, LLC), Aquestive Therapeutics has the right to receive an amount equal to 10% of any royalty or milestone payments made to the Company related to AZSTARYS, KP484,KP879 or KP1077 under the KP415AZSTARYS License Agreement.

 

The KP415AZSTARYS License Agreement is within the scope of ASC 606, as the transaction represents a contract with a customer where the participants function in a customer / vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated under the KP415AZSTARYS License Agreement. Using the concepts of ASC 606, the Company identified the grant of the exclusive, worldwide license and the performance of consulting services, which includes the reimbursement of out-of-pocket third-party research and development costs, as its only two performance obligations at inception. The Company further determined that the transaction price, at inception, under the agreement was $10.0 million upfront payment plus the fair value of the Development Costs (as defined in the KP415AZSTARYS License Agreement) which was allocated among the performance obligations based on their respective related stand-alone selling price.

The consideration allocated to the grant of the exclusive, worldwide license was $10.0 million, which reflects the standalone selling price. The Company utilized the adjusted market assessment approach to determine this standalone selling price which included analyzing prospective offers received from various entities throughout our licensing negotiation process as well as the consideration paid to other competitors in the market for a similar type of transaction. The Company determined that the intellectual property licensed under the KP415 License Agreement represented functional intellectual property and it has significant standalone functionality and therefore should be recognized at a point in time as opposed to over time. The revenue related to the grant of the exclusive, worldwide license was recognized at a point in time at the inception of the KP415 License Agreement.

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Under the KP415 License Agreement, Commave was granted an exclusive right to first negotiation whereby upon completion of a Phase 1 proof-of-concept study, the Company and Commave may negotiate the economic terms under which certain Additional Products may be included as a Product (both as defined in the KP415 License Agreement) under the KP415 License Agreement (the “Additional Product Option”). In addition to the Additional Product Option, Commave was also granted a ROFR to acquire, license and/or commercialize any of the Additional Product Candidates should they choose not to exercise the Additional Product Option. Should Commave choose to exercise the Additional Product Option on any Additional Product Candidates, Commave and the Company shall negotiate in good faith regarding the economic terms of such Additional Product Candidate. Further, should Commave exercise the ROFR on any Additional Product Candidate, the economic terms of the agreement shall be the same as those offered to the third-party. Under ASC 606 an option to acquire additional goods or services gives rise to a performance obligation if the option provides a material right to the customer. The Company concluded that the above-described Additional Product Option and ROFR do not constitute material rights to the customer as Commave would acquire the goods or services at a to be negotiated price, which the Company expects to approximate fair value and therefore Commave would not receive a material discount on these goods or services compared to market rates.

 

The Company is entitled to additional payments from Commave conditioned upon the achievement of specified regulatory milestones related to AZSTARYS and KP484 and the achievement of certain U.S. sales milestones. Further, Commave will pay the Company quarterly, tiered royalty payments ranging frombased on a range of percentage in the high single digits to mid-twenties of Net Sales (as defined in the KP415AZSTARYS License Agreement) in the United States and a percentage in the low to mid-single digits of Net Sales in each country outside of the U.S., in each case subject to specified reductions under certain conditions as described in the KP415 License Agreement.. The Company concluded that these regulatory milestones, sales milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these milestone payments. At the end of each reporting period, the Company updates its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal.

Per the KP415 Amendment, the Company earned a regulatory milestone payment of $10.0 million following the FDA’s approval of the AZSTARYS NDA, in March 2021, as well as $10.0 million following the DEA's scheduling of SDX in May 2021. Since the FDA approved the NDA for AZSTARYS and the DEA scheduled SDX, the constraints were removed and revenue recognized. The associated revenue was allocated among the two performance obligations identified at contract inception. Since both performance obligations were satisfied as of the end of each respective quarter of 2021, the full $10.0 million for each milestone was recognized as revenue in the statements of operations for the first quarter and second quarter of 2021, respectively. In accordance with ASC 340-40,Contracts with Customers, the Company recognized $1.0 million, respectively, of royalty costs due to payment to Aquestive related to the regulatory milestones earned and recorded it in the item titled royalty and direct contract acquisition costs in the unaudited condensed statements of operations for first and second quarter of 2021.

For the three and sixmonths ended June 30, March 31, 2023 and 2022,the Company recognized $0.6 million and $0.1 million of revenue under the KP415AZSTARYS License Agreement, of $0.1 million and $0.2 million, respectively, primarily related to royalties. For the three and six months ended June 30, 2021, the Company recognized revenue under the KP415 License Agreement of $10.0 million and $20.0 million, respectively, primarily related to licensing and collaboration revenue as a result of regulatory milestones met during the periods.respectively. There was 0no deferred revenue related to this agreement as of June 30, 2022,March 31, 2023, or December 31, 2021.2022.

 

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Consulting Arrangements

 

The Company enters into consulting arrangements with third parties that fall under the scope of ASC 606.  These arrangements may require the Company to deliver various rights, services, including research and development services, regulatory services and/or commercialization support services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of consulting fees and reimbursements of out-of-pocket third-party research and development, regulatory and commercial costs.

 

Corium Consulting Agreement

 

In July 2020, the Company entered into a consultation services arrangement (the “Corium Consulting Agreement”) with Corium Inc. (“Corium”) under which Corium engaged the Company to guide the product development and regulatory activities for certain current and potential future products in Corium’s portfolio, as well as continue supporting preparation for the potential commercial launch of AZSTARYS (together, “Corium Consulting Services”). Corium is a portfolio company of Gurnet Point CapitalGPC and was tasked by Commave to lead all commercialization activities for AZSTARYS under the KP415AZSTARYS License Agreement, as discussed above.

 

Under the Corium Consulting Agreement, the Company was entitled to receive payments from Corium of up to $15.6 million, $13.6 million of which was earnedpaid in monthlyquarterly installments through March 31, 20222022. and paid in arrears. The remaining $2.0 million was conditioned upon the approval by the FDA of the NDA for Corium's product candidate, ADLARITY, whichADLARITY. This $2.0 million was approved by the FDAearned in the first quarter of 2022. Corium also agreed to be responsible for and reimburse the Company for all development, commercialization and regulatory expenses incurred as part of the performance of the Corium Consulting Services.

The Corium Consulting Agreement is within the scope of ASC 606, as the transaction represents a contract with a customer where the participants function in a customer / vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated under the Corium Consulting Agreement. Using the concepts of ASC 606, theThe Company identified the performance of consulting services, which includes the reimbursement to the Company of third-party pass-through costs, as its only performance obligation at inception. The Company further determined that the transaction price, at inception, under the agreement was $13.6 million which is the fair value of the consulting services, including the reimbursement of third-party pass-through costs. The Company concluded that the regulatory milestone contains a significant uncertainty associated with a future event. As such, this milestone is constrained at contract inception and is not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these milestone payments. At the end of each reporting period, the Company updates its assessment of whether the milestone is constrained by considering both the likelihood and magnitude of the potential revenue reversal.

 

The Company determined that the performance of consulting services, including reimbursement of third-party pass-through costs, is a performance obligation that is satisfied over time as the services are performed and the reimbursable costs are paid. As such, the revenue related to the performance obligation will bewas recognized as the consulting services arewere performed and the services associated with the reimbursable third-party pass-through costs arewere incurred and paid by the Company, in accordance with the practical expedient allowed under ASC 606 regarding an entity’s right to consideration from a customer in an amount that corresponds directly to the value to the customer of the entity’s performance completed to date. As of March 31, 2022, the Company had recognized approximately all of the consulting services and third-party pass-through costs under the Corium Consulting Agreement.

 

For the three months ended June 30, 2021,March 31, 2023, and 2022,the Company recognized $0.2 million and $3.5 million of revenue, respectively, under the Corium Consulting AgreementAgreement. As of $1.6 million, and 0 revenue was recognized under the Corium Consulting Agreement for the three months ended June 30, 2022. For the six months ended June 30, 2022,March 31, 2023, and 2021, the Company recognized revenue under the Corium Consulting Agreement of $3.9 million, which included the $2.0 million milestone payment discussed above, and $3.2 million, respectively. As of June 30,December 31, 2022, the Company had 0no deferred revenue related to this agreement. As ofThe Corium Consulting Agreement expired on DecemberMarch 31, 2021, 2023.the Company had deferred revenue related to this agreement of $0.4 million.

 

Other Consulting Arrangements

Foreign currency

 

ForAssets and liabilities are translated into the three months ended June 30, 2022, and 2021,reporting currency using the Company recognized revenue under other consulting arrangements of $0.3 million and $0.3 million, respectively. Forexchange rates in effect on the six months ended June 30, 2022, and 2021, the Company recognized revenue under other consulting arrangements of $0.3 million and $0.8 million, respectively. There was deferred revenue from other consulting arrangements as of June 30, 2022, of less than $0.1 million, and 0 deferred revenue from other consulting arrangements as of December 31, 2021.

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Arimoclomol Early Access Program

The Company recognizes revenue when fulfilling its performance obligation under the Arimoclomol Early Access Program ("Arimoclomol EAP") by transferring control of promised goods or services to its customer, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. Revenue is recognized net of sales deductions, including discounts, rebates, applicable distributor fees, and revenue-based taxes. The Company recognizes revenue in accordance with ASC 606 and, as a result, follows the five-step model when recognizing revenue: 1) identifying a contract; 2) identifying the performance obligations; 3) determining the transaction price; 4) allocating the price to the performance obligations; and 5) recognizing revenue when the performance obligations have been fulfilled.

Net revenue comprises revenue from the sale of arimoclomolunaudited consolidated condensed balance sheet dates. Equity accounts are translated at historical rates, except for the treatment of Niemann-Pick Disease Type C ("NPC") underchange in retained earnings during the remunerated early access compassionate use program (“nATU”) in France. An early access compassionate use program is a program giving specific patients access to a drug,year, which is not yet approved for commercial sale.

Only drugs targeting serious or rare indicationsthe result of the income statement translation process. Revenue and for which there is currently no appropriate treatmentexpense accounts are considered for early access compassionate use programs. Further, to be considered fortranslated using the early access compassionate use program,weighted average exchange rate during the drug must have proven efficacy and safety and must either be undergoing price negotiations or seeking marketing approval.

Revenue is recognized when the drug products are sold to the customer, i.e., at the time when control over the drug product is transferred to the third-party customer. Under the French nATU, the manufacturer can set its own price for the drug products until a price agreementperiod. The cumulative translation adjustments associated with the authorities isnet assets of foreign subsidiaries are recorded in place. Any excessaccumulated other comprehensive income/loss in the price charged by the manufacturer compared to the price agreed with the health authorities once the drug product is approved in France must be repaid. The repayment is considered in the clawback liability.

All sales and distributions of arimoclomol are included in the service agreement with Clinigen Health Limited, who keep goods on a consignment stock until it is transferred to the third-party customer (early access patient sites).

An estimate of net revenue and clawback liability are recognized using the ‘expected value’ method.

Accounting for net revenue and clawback liability requires determination of the most appropriate method for the expected final transaction price, which depends on the terms and conditions in the contracts with the French Health Authorities, and is subject to price negotiations with the French Health Authorities, following a market approval. This estimate also requires assumptions with respect to inputs into the method, including current pricing of comparable marketed products within the rare disease area in France. Management has considered the expected final sales price as well as the price of similar drug products.

Management has based their initial sales prices on comparable drug products for arimoclomol, and the estimate of the clawback liability on the basis of the average cost of treatment which the authorities are expected to cover.

In the estimate for clawback liability, management applied relevant available market data. Management’s assumptions are based on available relevant market information regarding average treatment cost of the most comparable drugs possible in the rare disease area in Europe. The Company is operating within a rare disease therapeutic area where there is unmet treatment need and hence a limited number of comparable commercialized drugs products. The limited available relevant market information for directly comparable commercialized drugs within rare disease increases the uncertainty in management's estimate.

The Company records revenues from product sales when there is a transfer of control of the product from the Company to the customer. The Company typically determines transfer of control based on when the product is shipped or delivered and title passes to the customer. In determining when the customer obtains control of the product, the Company considers certain indicators, including whether the Company has a present right to payment from the customer, whether title and/or significant risks and rewards of ownership have transferred to the customer and whether customer acceptance has been received. For the three and six months ended June 30, 2022, the Company recognized revenue related to the Arimoclomol EAP in France of $0.9 million, which is net of a clawback liability of $0.5 million during the same periods. 

As part of the Arimoclomol Purchase Agreement the Company assumed an estimated reserve liability of $5.2 million related to revenue generated from the Arimoclomol EAP in France. The total estimate reserve liability as of June 30, 2022, including the additional clawback liability for the three months ended June 30, 2022, was $5.7 million. As of June 30, 2022, this estimated reserve liability is recorded as discount and rebate liabilities in theaccompanying unaudited condensed consolidated balance sheet and is separated into current and long-term based upon the timingstatements of the expected payment to the French regulators.stockholders’ equity.

 

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Accounts and Other Receivables

 

Accounts and other receivables consist of receivables under the KP415AZSTARYS License Agreement and Arimoclomol EAP, as well as receivables related to consulting arrangements, income tax receivables and other receivables due to the Company. Receivables under the KP415AZSTARYS License Agreement are recorded for amounts due to the Company related to reimbursable third-party costs and royalties on product sales. Receivables under the Arimoclomol EAP are recorded for product sales under the program in France.French nATU. These receivables, as well as the receivables related to consulting arrangements, are evaluated to determine if any reserve or allowance should be established at each reporting date. As of June 30,March 31, 2022,2023, the Company had receivables related to the Arimoclomol EAP of $1.4$5.3 million, KP415AZSTARYS License Agreement of $0.1$0.6 million, consulting arrangements of $0.3 million,$0.2 million, income tax receivables of $0.7 $1.0 million, and other receivables of $0.3$0.7 million. As of December 31, 2021,2022, the Company had receivables related to the Arimoclomol EAP of $6.3 million, Corium Consulting Agreement of $1.2 million, KP415$0.2 million, AZSTARYS License Agreement of $0.1$0.5 million, income tax receivables of $0.1 $0.9 million and other consulting arrangementsreceivables of $0.1 million.$0.4 million. As of June 30, 2022,March 31, 2023, and December 31, 2021,2022, 0no reserve or allowance for doubtful accounts hashad been established.

 

Application of New or Revised Accounting Standards—Adopted

From time to time, the Financial Accounting Standards Board (the “FASB”) or other standard-setting bodies issue accounting standards that are adopted by the Company as of the specified effective date.

In August 2020, the FASB issued ASU 2020-06,DebtDebt with Conversion and Other Options(Subtopic470-20)and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic815-40);Accounting for Convertible Instruments and Contracts in an Entitys Own Equity (“ASU 2020-06”), which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15,2021, and interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The adoption of ASU 2020-06 did not have a material impact on the Company’s unaudited condensed financial statements and disclosures.

In May 2021, the FASB issued ASU 2021-04,Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40); Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, a consensus of the FASB Emerging Issues Task Force (“ASU 2021-04”), which aims to clarify and reduce diversity in issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. This update applies to all entities that issue freestanding written call options that are classified in equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15,2021, and interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The adoption of ASU 2021-04 did not have a material impact on the Company’s unaudited condensed financial statements and disclosures.

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C.

Debt Obligations

As of June 30, 2022, and December 31, 2021, the Company had 0 convertible notes outstanding.

Deerfield Facility Agreement

In  June 2014, the Company entered into a $60 million multi-tranche credit facility (the “Deerfield Facility Agreement”) with Deerfield Private Design Fund III, LP (“Deerfield”). At the time the Company entered into the Deerfield Facility Agreement, the Company borrowed the first tranche, which consisted of a term loan of $15 million (the “Term Note”) and a senior secured loan of $10 million (the “Deerfield Convertible Note”). Deerfield was able to convert any portion of the outstanding principal and any accrued but unpaid interest on the Deerfield Convertible Note into shares of the Company’s common stock at an initial conversion price of $5.85 per share (the “Deerfield Note Put Option”). After giving effect to the Reverse Stock Split effected in December 2020, the conversion price became $93.60.

The Deerfield Convertible Note originally bore interest at 9.75% per annum but was subsequently reduced to 6.75%. Interest accrued on the outstanding balance under the Deerfield Convertible Note was due quarterly in arrears. The Company originally had to repay one-third of the outstanding principal amount of the Deerfield Convertible Note on the fourth and fifth anniversaries of the Deerfield Facility Agreement ( June 2018 and June 2019). In June 2018, Deerfield agreed to convert approximately $3.3 million of the principal amount then due, plus approximately $0.2 million of accrued interest, into 37,410 shares of our common stock (as discussed below in the section entitled “Facility Agreement Waiver and Fifth Amendment to Senior Secured Convertible Note”). In September 2019, the Company entered into an amendment with Deerfield in order to (i) reduce the interest rate applicable under the Deerfield Facility Agreement from 9.75% to 6.75%, (ii) provide for “payment in kind” of interest on the Loans (as defined in the Deerfield Facility Agreement), and (iii) defer the Loan payments due pursuant to the Deerfield Facility Agreement until June 1,2020 (as discussed below in the section entitled “2021 Note Exchange Effected in September 2019”). In December 2019, the Company entered into another amendment with Deerfield in order to (i) defer the Loan payments due pursuant to the Deerfield Facility Agreement until March 31,2021, and (ii) allow for the entries of additional debt and debt holders under the Deerfield Facility Agreement (as discussed below in the section entitled “2021 Note Exchange Effected in December 2019”). The Company was also obligated to repay principal of the Deerfield Convertible Note in the amount of approximately $7.0 million plus any capitalized interest to date on March 31,2021. Prepayment of the outstanding balance was not allowed without written consent of Deerfield.

Pursuant to the Deerfield Facility Agreement, the Company issued to Deerfield a warrant to purchase 14,423,076 shares of Series D Preferred at an initial exercise price of $0.78 per share, which is exercisable until  June 2,2024 (the “Deerfield Warrant”). Upon completion of the Company’s initial public offering, the Deerfield Warrant automatically converted into a warrant to purchase 1,923,077 shares of the Company’s common stock at an exercise price of $5.85 per share. After giving effect to the Reverse Stock Split effected in December 2020, the shares issuable upon conversion of the warrant became 120,192 shares of common stock, and the exercise price of the Deerfield Warrant became $93.60 per share, which in January 2021 and June 2021 was further adjusted to $46.25 and $38.34 per share, respectively, in connection with the Company entering into the January 2021 and June 2021 Inducement Transactions (as defined in Note F) each of which triggered the anti-dilution provisions of the Deerfield Warrant. This warrant qualifies as a participating security under ASC Topic 260, Earnings per Share, and is treated as such in the net loss per share calculation (Note I). If a Major Transaction occurs (as defined in the Deerfield Facility Agreement) Deerfield  may require the Company to redeem the Deerfield Warrant for a cash amount equal to the Black-Scholes value of the portion of the Deerfield Warrant to be redeemed (the “Warrant Put Option”).

The Company recorded the fair value of the shares of Series D Preferred to debt issuance costs on the date of issuance. The Company also recorded the fair value of the Deerfield Warrant and the embedded Warrant Put Option to debt discount on the date of issuance. The debt issuance costs and debt discount were amortized over the term of the related debt and the expense was recorded as interest expense related to amortization of debt issuance costs and discount in the statements of operations. In the first quarter of 2021, the debt was extinguished, through a series of debt payments and a conversion of debt principal and interest to Series B-2 Preferred Stock. As a result of the debt extinguishment, the associated discount and debt issuance costs were written off and recorded as a loss on extinguishment.

Pursuant to the Deerfield Facility Agreement, the Company was not able to enter into specified transactions, including a debt financing in the aggregate value of $750,000 or more, other than permitted indebtedness under the Deerfield Facility Agreement, a merger, an asset sale or any other change of control transaction or any joint venture, partnership or other profit-sharing arrangement, without the prior approval of the Required Lenders (as defined in the Deerfield Facility Agreement). Additionally, if the Company were to enter into a major transaction, including a merger, consolidation, sale of substantially all of its assets or other change of control transaction, Deerfield would have had the ability to demand that prior to consummation of such transaction the Company repay all outstanding principal and accrued interest of any notes issued under the Deerfield Facility Agreement. Under each warrant issued pursuant to the Deerfield Facility Agreement, Deerfield has the right to demand that the Company redeem the warrant for a cash amount equal to the Black-Scholes value of a portion of the warrant upon the occurrence of specified events, including a merger, an asset sale or any other change of control transaction.

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Issuance of 5.50% Senior Convertible Notes and Third Amendment to Senior Secured Convertible Note and Warrant

In  February 2016, the Company issued $86.3 million aggregate principal amount of its 5.50% Senior Convertible Notes due 2021 (the “2021 Notes”) to Cowen and RBC Capital Markets, LLC, as representatives of the several initial purchasers (the “Initial Purchasers”), who subsequently resold the 2021 Notes to qualified institutional buyers (the “Note Offering”) in reliance on the exemption from registration provided by Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The 2021 Notes were issued pursuant to an indenture, dated as of  February 9,2016 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”). Interest on the 2021 Notes was payable semi-annually in cash in arrears on  February 1 and August 1 of each year, beginning on August 1, 2016, at a rate of 5.50% per year. The 2021 Notes had an original maturity of  February 1,2021 unless earlier converted or repurchased.

The net proceeds from the Note Offering were approximately $82.8 million, after deducting the Initial Purchasers’ discount and estimated offering expenses. Concurrent with the Note Offering, the Company used approximately $18.6 million of the net proceeds from the Note Offering to repay in full the Term Note, plus all accrued but unpaid interest, a make-whole interest payment and a prepayment premium on the Term Note.

The 2021 Notes were not redeemable prior to the maturity date, and 0 sinking fund was provided for the 2021 Notes. The 2021 Notes were convertible at an initial conversion rate of 58.4454 shares of the Company’s common stock per $1,000 principal amount of the 2021 Notes, subject to adjustment under the Indenture, which is equal to an initial conversion price of approximately $17.11 per share of common stock. After giving effect to the Reverse Stock Split effected in December 2020, the conversion rate of the 2021 Notes would have been approximately 3.6528 shares of the Company’s common stock per $1,000 principal amount of the 2021 Notes, which is equal to a conversion price of approximately $273.76 per share.

If the Company underwent a “fundamental change” (as defined in the Indenture), holders could have required that the Company repurchase for cash all or any portion of their 2021 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture included customary terms and covenants, including certain events of default after which the 2021 Notes may have become due and payable immediately.

As described in more detail below, in multiple exchanges occurring in December 2019 and January 2020, all outstanding 2021 Notes were exchanged by the holders thereof for either shares of our common stock or senior secured convertible promissory notes issued under the terms of the Deerfield Facility Agreement.

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2021 Note Exchange Effected in December 2019

In December 2019, the Company entered into the  December 2019 Exchange Agreement and Amendment to Facility Agreement, Senior Secured Convertible Notes and Warrants (the “December 2019 Exchange Agreement”) with the Deerfield Lenders and Delaware Street Capital Master Fund, L.P. (“DSC” and, collectively with the Deerfield Lenders, the “December 2019 Holders”). Under the December 2019 Exchange Agreement, the Company issued senior secured convertible promissory notes under the Deerfield Facility Agreement in the aggregate principal amount of  approximately $71.4 million (the “December 2019 Notes”), in exchange for the cancellation of an aggregate of approximately $71.4 million principal amount and accrued interest of the Company’s 2021 Notes. Upon entering into the December 2019 Exchange Agreement, the Company agreed to pay the December 2019 Holders, in the aggregate, an interest payment of approximately $0.7 million which represents 50% of the accrued interest, as of December 18,2019, on the 2021 Notes owned by the December 2019 Holders. The remainder of such interest was included in the principal amount of the December 2019 Notes.

The December 2019 Notes bore interest at 6.75% per annum. The December 2019 Notes were convertible into shares of the Company’s common stock at an initial conversion price of $17.11 per share (which represented the conversion price of the 2021 Notes), subject to adjustment in accordance with the terms of the December 2019 Notes. After giving effect to the Reverse Stock Split effected in December 2020, the conversion price of the December 2019 Notes would have been $273.76 per share. The Company subsequently amended the December 2019 Notes to provide that such notes would have been convertible into shares of the Company’s common stock at a conversion price of $93.60 per share (which represented the conversion price of the Deerfield Convertible Note). The conversion price of the December 2019 Notes would have been adjusted downward if the Company issued or sold any shares of common stock, convertible securities, warrants or options at a sale or exercise price per share less than the greater of the December 2019 Notes’ conversion price or the closing sale price of the Company’s common stock on the last trading date immediately prior to such issuance, or, in the case of a firm commitment underwritten offering, on the date of execution of the underwriting agreement between the Company and the underwriters for such offering. However, if the Company effected an “at the market offering” as defined in Rule 415 of the Securities Act, of its common stock, the conversion price of the December 2019 Notes would have been adjusted downward pursuant to this anti-dilution adjustment only if such sales were made at a price less than $93.60 per share, provided that this anti-dilution adjustment would not have applied to any sales made under (x) the 2020 ELOC Agreement, (y) the ATM Agreement, or (z) the September 2019 Exchange Agreement (as amended). Notwithstanding anything to the contrary in the December 2019 Notes, the anti-dilution adjustment of such notes would not have resulted in the conversion price of the December 2019 Notes being less than $9.328 per share. The December 2019 Notes were convertible at any time at the option of the holders thereof, provided that a holder of a December 2019 Note was prohibited from converting such note into shares of the Company’s common stock if, as a result of such conversion, such holder (together with certain affiliates and “group” members) would have beneficially owned more than 4.985% of the total number of shares of common stock then issued and outstanding. However, the December 2019 Note issued to DSC, due to the fact DSC was a beneficial owner of more than 4.985% of the total number of shares of the Company’s common stock then issued and outstanding, had a beneficial ownership cap equal to 19.985% of the total number of shares of the Company’s common stock then issued and outstanding. Pursuant to the December 2019 Notes, the December 2019 Holders had the option to demand repayment of all outstanding principal, and any unpaid interest accrued thereon, in connection with a Major Transaction (as defined in the December 2019 Notes), which included, among others, any acquisition or other change of control of the Company; a liquidation, bankruptcy or other dissolution of the Company; or if at any time after March 31,2021, shares of the Company’s common stock are not listed on an Eligible Market (as defined in the December 2019 Notes). The December 2019 Notes were subject to specified events of default, the occurrence of which would have entitled the December 2019 Holders to immediately demand repayment of all outstanding principal and accrued interest on the December 2019 Notes. Such events of default included, among others, failure to make any payment under the December 2019 Notes when due, failure to observe or perform any covenant under the Deerfield Facility Agreement (as defined below) or the other transaction documents related thereto (subject to a standard cure period), the failure of the Company to be able to pay debts as they come due, the commencement of bankruptcy or insolvency proceedings against the Company, a material judgement levied against the Company and a material default by the Company under the Deerfield Warrant, the December 2019 Notes or the Deerfield Convertible Note.

The December 2019 Exchange Agreement amended the Deerfield Facility Agreement in order to, among other things, (i) provide for the Deerfield Facility Agreement to govern the December 2019 Notes received by the December 2019 Holders pursuant to the December 2019 Exchange Agreement, (ii) extend the maturity of the Deerfield Convertible Note from February 14,2020 and June 1,2020, as applicable, to March 31,2021, (iii) defer interest payments on the Deerfield Convertible Note until March 31,2021 (which such interest shall accrue as “payment-in-kind” interest), (iv) designate DSC as a Lender under (and as defined in the Deerfield Facility Agreement), (v) name Deerfield as the “Collateral Agent” for all Lenders and (vi) modify the terms and conditions under which the Company may issue additional pari passu and subordinated indebtedness under the Deerfield Facility Agreement (subject to certain conditions specified in the Deerfield Facility Agreement).

The December 2019 Exchange Agreement also amended and restated the Deerfield Convertible Note to conform the definitions of “Eligible Market” and “Major Transactions” to the definition in the December 2019 Notes, to remove provisions that were only applicable prior to the Company’s initial public offering and to make certain other changes to conform to the December 2019 Notes. The conversion price for the Deerfield Convertible Note remained $93.60 per share, subject to adjustment on the same basis as the December 2019 Notes.

The December 2019 Exchange Agreement also amended the Deerfield Warrant to conform the definitions of “Eligible Market” and “Major Transaction” in the Deerfield Warrant with the definitions of such terms in the December 2019 Notes.

The December 2019 Exchange Agreement contained customary representations, warranties and covenants made by the Company and the December 2019 Holders, including a covenant of the Company to, upon request, use commercially reasonable efforts to use its technology to discover a product based upon a compound that may be identified by the Deerfield Lenders in a manner that is reasonably acceptable to the Deerfield Lenders, or one of their affiliates, with the terms of such discovery plan, including the Company’s compensation thereunder, to be mutually agreed to by the parties.

In connection with entering into the December 2019 Exchange Agreement, on December 18,2019, the Company amended and restated that certain Guaranty and Security Agreement, dated June 2,2014, by and between the Company and the other parties thereto (the “GSA”) to, among other things, (i) provide that all of the notes will be secured by the liens securing the indebtedness under the Deerfield Facility Agreement, and (ii) name Deerfield as the “Collateral Agent” under the GSA.

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In connection with entering into the December 2019 Exchange Agreement, the Company also entered into an amendment (the “September 2019 Exchange Agreement Amendment”) to the September 2019 Exchange Agreement to, among other things, (i) amend and restate Annex I of the September 2019 Exchange Agreement to allow the Deerfield Lenders to effect optional exchanges of the December 2019 Notes and the Deerfield Convertible Note under the terms of the September 2019 Exchange Agreement; (ii) amend the common stock exchange price under the September 2019 Exchange Agreement to be a per share price equal to the greater of (x) $0.60, subject to adjustment to reflect stock splits and similar events, or (y) the average of the volume-weighted average prices of the Company’s common stock on each of the 15 trading days immediately preceding such exchange, (iii) provide that no more than 28,439,015 of shares of the Company’s common stock shall be issued pursuant to optional exchanges under the September 2019 Exchange Agreement (whether by common stock exchange or upon conversion of Series B-2 Shares (as defined in the September 2019 Exchange Agreement Amendment)), subject to adjustment to reflect stock splits and similar events and (iv) eliminate limitations regarding the timing and aggregate amount of principal which may be exchanged under the September 2019 Exchange Agreement. These changes in the September 2019 Exchange Agreement Amendment significantly modified the Optional Exchange Principal Amount, as such after giving effect to the September Exchange Agreement Amendment the Optional Exchange Principal Amount ceases to exist the new optional exchanges are referred to as the Deerfield Optional Conversion Feature. After giving effect to the Reverse Stock Split effected in December 2020, the exchange price of the Deerfield Optional Conversion Feature would have been $9.60 per share or the average of the volume-weighted average price of the common stock on the principal securities exchange or trading market on which the common stock is then trading on each of the 15 trading days immediately preceding such exchange and the shares of the Company’s common stock issued pursuant to the optional exchanges would have been 1,777,437 shares of common stock.

In connection with entering into the September 2019 Amendment, the Company filed an amendment to the Series B-2 Certificate of Designation (the “Series B-2 Certificate of Designation Amendment”) with the Secretary of State of the State Delaware. The Series B-2 Certificate of Designation Amendment provides that each share of the Company’s Series B-2 preferred stock is convertible into shares of the Company’s common stock at a per share price equal to the common stock exchange price under the September 2019 Exchange Agreement, which equals the greater of (i) $9.60 (subject to adjustment to reflect stock splits and similar events), or (ii) the average of the volume-weighted average prices of the Company’s common stock on each of the 15 trading days immediately preceding such exchange.

As of September 30, 2020, the Deerfield Lenders had converted all $17.1 million of principal under the December 2019 Notes into all 1,777,437 shares of common stock available under the Deerfield Optional Conversion Feature.

The Company determined the changes to the Deerfield Convertible Note met the definition of a troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors, as the Company was experiencing financial difficulties and Deerfield granted a concession. The amendments to the terms of the Deerfield Convertible Note resulted in no gain on restructuring because the total cash outflows required under the amended Deerfield Convertible Note exceeded the carrying value of the original Deerfield Convertible Note immediately prior to amendment. Prospectively, the Deerfield Convertible Note will continue to be carried net of the associated discount and debt issuance costs which will be amortized and recorded as interest expense using a modified effective interest rate based on the amendments.

The changes to the 2021 Notes, under the December 2019 Exchange Agreement, referred to after as the December 2019 Notes, were accounted for as a debt modification, prospectively, the December 2019 Notes will be carried net of the associated discount and debt issuance costs which will be amortized and recorded as interest expense using a modified effective interest rate based on the amendments.

2021 Note Exchange Effected in January 2020

In January 2020, the Company entered into the January 2020 Exchange Agreement (the “January 2020 Exchange Agreement”) with M. Kingdon Offshore Master Fund, LP (“Kingdon”). Under the January 2020 Exchange Agreement, the Company issued a senior secured convertible note in the aggregate principal amount of approximately $3.0 million (the “January 2020 Note”) in exchange for the cancellation of an aggregate of $3.0 million principal amount and accrued interest of the 2021 Note then owned by Kingdon. Upon entering into the January 2020 Exchange Agreement, the Company agreed to pay Kingdon an interest payment of approximately $37,000, which represents 50% of the accrued and unpaid interest, as of January 13,2020, on Kingdon’s 2021 Note. The remainder of such interest was included in the principal amount of the January 2020 Note.

The January 2020 Note was issued with substantially the same terms and conditions as the December 2019 Notes (as amended by the amendment described in more detail below).

In connection with entering into the January 2020 Exchange Agreement, the Company entered into an Amendment to Facility Agreement and December 2019 Notes and Consent (the “December 2019 Note Amendment”) with the December 2019 Holders that, among other things, (i) amended the December 2019 Notes to (a) reduce the Conversion Price (as defined in the December 2019 Notes) from $17.11 to $5.85 per share and (b) increased the Floor Price (as defined in the December 2019 Notes) from $0.38 to $0.583 per share, and (ii) amended the Deerfield Facility Agreement to (x) provide for Kingdon to join the Deerfield Facility Agreement as a Lender (as defined in the Deerfield Facility Agreement) and (y) provide that the 2020 Note and shall constitute a “Senior Secured Convertible Note” (as defined in the Deerfield Facility Agreement) for purposes of the Deerfield Facility Agreement and other Transaction Documents (as defined in the Deerfield Facility Agreement). After giving effect to the Reverse Stock Split effected in December 2020, the Conversion Price became $93.60 per share and the Floor Price became $9.328 per share.

The changes to the 2021 Note, under the January 2020 Exchange Agreement, referred to after as the January 2020 Note, were accounted for as a debt modification, prospectively, the January 2020 Note will be carried net of the associated discount and debt issuance costs which will be amortized and recorded as interest expense using a modified effective interest rate based on the amendments.

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December 2020 Exchange Agreement and Amendment to Facility Agreement, Notes and Investors Rights Agreement

In December 2020, the Company entered into a December 2020 Exchange Agreement and Amendment to Facility Agreement, Notes and Investors’ Rights Agreement, as amended (the “December 2020 Exchange Agreement”) with the Deerfield Lenders, DSC and Kingdon (collectively, the “Facility Agreement Note Holders”). Under the December 2020 Exchange Agreement, the Company and the Facility Agreement Note Holders agreed that (a) the Company will make a cash pre-payment of a portion of principal amount of the Deerfield Convertible Note, the December 2019 Notes and the January 2020 Note (collectively, the “Facility Agreement Notes”) to the Facility Agreement Note Holders (the “Debt Payment”) equal to approximately $30.3 million, plus accrued interest if such payment is made on or after January 1, 2021, and (b) subject to the satisfaction or waiver of certain conditions specified in the December 2020 Exchange Agreement, including the making of the Debt Payment, issue shares of its Series B-2 Preferred Stock and warrants exercisable for shares of its common stock (the “Exchange Warrants”), in exchange for the cancellation of a portion of the principal amount of the Facility Agreement Notes owned by the Facility Agreement Note Holders in an aggregate amount equal to the Debt Payment, plus the Q4 PIK Interest Payment (as defined in the December 2020 Exchange Agreement) (such transaction, the “December 2020 Exchange”).

The December 2020 Exchange Agreement amended the Facility Agreement Notes to provide that the failure of the Company’s common stock to remain listed on an eligible securities market will not constitute a “Major Transaction” unless such failure occurs after March 31, 2023.

Subject to the satisfaction or waiver of certain conditions specified in the December 2020 Exchange Agreement, including the making of the Debt Payment and the consummation of the exchange, the December 2020 Exchange Agreement amended that certain Facility Agreement dated as of June 2, 2014, as amended (the “Facility Agreement”), by and among the Company and the Facility Agreement Note Holders in order to, among other things, (i) extend the maturity date of the Facility Agreement Notes to March 31, 2023, (ii) provide for cash payments of interest on the Loans (as defined in the Facility Agreement) for the periods following July 1, 2021, and (iii) provide for specified prepayment terms on the Loans.

The December 2020 Exchange Agreement amended that certain Amended and Restated Investors’ Rights Agreement, dated as of February 19, 2015 (the “IRA”), by and among the Company, Deerfield and the other parties signatory thereto in order to, among other things, add Deerfield Special Situations Fund, L.P. as a party thereto and to give effect to the issuance of the Exchange Warrants and the Company’s registration obligations under the December 2020 Exchange Agreement (as described in more detail below).

The Exchange Warrants issued pursuant to the December 2020 Exchange Agreement were exercisable for a number of shares of the Company’s common stock equal to 75% of the shares of common stock issuable upon conversion of the Series B-2 Preferred Stock issued in the Exchange (without regard for any beneficial ownership limitations included therein). The Exercise Warrants were subject to substantially the same terms and conditions as the warrants issued to the public in the public offering of the Company’s securities contemplated pursuant to a registration statement on Form S-1 (File No.333-250945) (the “Public Offering”), with an exercise price equal to the exercise price per share of the warrants issued in the Public Offering and provided that the Facility Agreement Note Holders will be limited from exercising such Exchange Warrants if, as a result of such exercise, such holders (together with certain affiliates and “group” members of such holders) would beneficially own more than 4.985% of the total number of shares of the Company’s common stock then issued and outstanding.

In anticipation of the Public Offering, and to meet the Nasdaq Listing Requirements, the Company agreed in December 2020 to restructure the December 2019 Notes and the January 2020 Note in the aggregate principal amount of $60.8 million and the Deerfield Note in the principal amount of $7.5 million (collectively the "the Facility Notes"). The total outstanding principal and accrued interest under the Facility Notes was $69.4 million as of December 31,2020.

Under the terms of the December 2020 Exchange Agreement, the Company, on January 12, 2021, in connection with the closing of the Public Offering:

Exchanged $31.5 million of the outstanding principal and accrued interest on the Facility Notes for (i) 31,476.98412 shares of Series B-2 Preferred Stock, and (ii) Exchange Warrants exercisable for 3,632,019 shares of the Company's common stock, and

Made a payment of $30.3 million (the "Debt Payment"), in partial repayment of the remaining outstanding principal and accrued interest of the Facility Notes.

Following the completion of these transactions, the aggregate balance of principal and accrued interest remaining outstanding under the Facility Notes was approximately $7.6 million. With respect to this remaining outstanding balance under the Facility Notes, the December 2020 Exchange Agreement amended the terms of that debt to provide that:

The maturity date was changed to March 31, 2023, and the debt was prepayable upon specified conditions, and

Interest would accrue at the rate of 6.75% per annum, payable quarterly, would be added to principal until June 30, 2021, and then be payable in cash thereafter.

The changes to the Facility Notes, under the December 2020 Exchange Agreement, were accounted for as a debt extinguishment as the cash flows immediately after the December 2020 Exchange Agreement were substantially different from the cash flows immediately prior to the December 2020 Exchange Agreement and while the Company was experiencing financial difficulties it was determined that the lender did not grant a concession. As such, a loss of extinguishment related to the extinguishment of the old notes was recorded in the unaudited condensed statement of operations for the three months ended March 31, 2021, and additional debt issuance costs related the new notes were capitalized and amortized using the effective interest method through the Payoff of Facility Agreement Notes (discussed below).

The transactions contemplated under the December 2020 Exchange Agreement, including the obligation to pre-pay any portion of the Facility Agreement Notes or to complete the Exchange and the effectiveness of the amendments to the Facility Agreement, the Notes and the IRA, were subject to specified conditions of closing, including certain closing of the Public Offering, the filing of the Restated Series B-2 Certificate of Designation (as defined below) and the approval for listing of the Company’s common stock, including the shares issuable upon conversion of the Series B-2 Preferred Stock and exercise of the Exchange Warrants, on the Nasdaq Capital Market.

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As a condition to closing of the December 2020 Exchange Agreement, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B-2 Convertible Preferred Stock (the “Restated Series B-2 Certificate of Designation”) with the Secretary of State of the State Delaware, setting forth the preferences, rights and limitations of the Series B-2 Preferred Stock.

Each share of Series B-2 Preferred Stock had an aggregate stated value of $1,000 and was convertible into shares of the Company’s common stock at a per share price equal to the price per share to the public of the Company’s common stock in the Public Offering (subject to adjustment to reflect stock splits and similar events).

The Series B-2 Preferred Stock was convertible at any time on or after the PDUFA Date (as defined in the Restated Series B-2 Certificate of Designation) at the option of the holders thereof; provided that the holders thereof will be prohibited from converting shares of Series B-2 Preferred Stock into shares of the Company’s common stock if, as a result of such conversion, such holders (together with certain affiliates and “group” members of such Holders) would beneficially own more than 4.985% of the total number of shares of the Company’s common stock then issued and outstanding. The Series B-2 Preferred Stock is not redeemable. In the event of the Company’s liquidation, dissolution or winding up or a change in control of the Company (each, a “Liquidation Event”), the holders of Series B-2 Preferred Stock will receive, prior to any distribution or payment on our common stock, an amount equal to the greater of (i) $1,000 per share (in the case of a change in control, transaction consideration with such value), or (ii) the amount (in the case of a change in control, in the form of the transaction consideration) per share each such holder would have been entitled to receive if every share of Series B-2 Preferred Stock had been converted into common stock immediately prior to such Liquidation Event, in each case, plus any declared but unpaid dividends thereon. With respect to rights upon liquidation, the Series B-2 Preferred Stock ranks senior to the common stock, on parity with any Parity Securities (as defined in the Restated Series B-2 Certificate of Designation) and junior to existing and future indebtedness. Except as otherwise required by law (or with respect to approval of certain actions involving the Company’s organizational documents that adversely affect the holders of Series B-2 Preferred Stock and other specified matters regarding the rights, preferences and privileges of the Series B-2 Preferred Stock), the Series B-2 Preferred Stock did not have voting rights. The Series B-2 Preferred Stock is not subject to any price-based anti-dilution protections and does not provide for any accruing dividends but provides that holders of Series B-2 Preferred Stock will participate in any dividends on the Company’s common stock on an as-converted basis (without giving effect to the limitation on conversion described above). The Restated Series B-2 Certificate of Designation also provides for partial liquidated damages in the event that the Company fails to timely convert shares of Series B-2 Preferred Stock into common stock in accordance with the Restated Series B-2 Certificate of Designation.

Payoff of Facility Agreement Notes and Termination of Facility Agreement

On February 8, 2021, the Company entered into a payoff letter with the Facility Agreement Note Holders, pursuant to which the Company agreed to pay off and thereby terminate the Facility Agreement.

Pursuant to the payoff letter, the Company paid a total of $8.0 million to the Facility Agreement Note Holders, representing the principal balance, accrued interest outstanding and a prepayment fee in repayment of the Company’s outstanding obligations under the Facility Agreement.

Pursuant to the payoff letter, all outstanding indebtedness and obligations of the Company owing to the Facility Agreement Note Holders under the Facility Agreement have been paid in full. The Facility Agreement and the notes thereunder, as well as the security interests in the assets of the Company securing the Facility Agreement and note obligations, have been terminated. The Facility Agreement Note Holders will retain the warrants previously issued to them by the Company.

The Company determined the payoff letter met the liability derecognition threshold under ASC 405-20,Liabilities - Extinguishment of Liabilities, as the Company repaid the debt (and has been relieved of the related obligation) without entering into new debt with the Facility Agreement Note Holders and there is no other continuing debt with the Facility Agreement Note Holders. The payoff letter resulted in a loss on extinguishment of debt which was shown within other (expense) income in the unaudited condensed statements of operations for the three months ended March 31, 2021.

PPP Loan

On April 23,2020, the Company received proceeds of $0.8 million from the PPP Loan under the PPP of the CARES Act, a portion of which may be forgiven, which the Company used to retain current employees, maintain payroll and make lease and utility payments. In May 2021, the Company received notice from the U.S. Small Business Administration that the principal and interest due under its PPP Loan had been forgiven in full.

 

Line of Credit

 

On May 31, 2022, the Company and Ameris Bank, as lender, entered into a $20.0 million revolving loan agreement (the “Line of Credit”). Proceeds of the revolving facility provided by the Line of Credit are to be used for general corporate purposes. Loans under the Line of Credit bear interest at the Secured Overnight Financing Rate ("SOFR") plus 1.60%, with a SOFR floor of 0.00%.

 

The revolving facility under the Line of Credit is secured by a perfected security interest in deposit accounts. The revolving facility under the Line of Credit is subject to customary affirmative and negative covenants.

 

The latest maturity date of the loans under the Line of Credit iswas May 31, 2025. The Line of Credit containscontained customary events of default that could leadhave led to an acceleration of the loans, including cross-default, bankruptcy and payment defaults. As of June 30,December 31, 2022, the Company hashad drawn $12.8 million from the Line of Credit to finance the transactions under the Arimoclomol Purchase Agreement, and this amount iswas supported by a $12.8 million certificate of deposit which iswas shown as long-term investments - others in the unaudited condensed consolidated balance sheets. sheet as of December 31, 2022. The remaining $7.2 million under the Line of Credit iswas in a separate interest-bearing certificate of deposit and is also recorded as long-term investments - other in the unaudited condensed consolidated balance sheetsheets as of June 30,December 31, 2022. These certificates of deposit are pledged as collateral against the Line of Credit and cannotcould not be redeemed so long as the $20.0 million remainsremained available under the Line of Credit. The total value of the certificates of deposit held with Ameris BanksBank must meet or exceed the amount available to borrow under the Line of Credit so long as the Line of Credit remains active. On January 31, 2023, the Company repaid the $12.8 million outstanding under the Line of Credit in full and closed the Line of Credit. In conjunction with closing the Line of Credit, the maturity dates of the certificates of deposit were modified to May 2023. As such, the certificates of deposit are classified as short-term investments - other in the unaudited condensed consolidated balance sheet as of March 31, 2023. No amounts are outstanding under the Line of Credit as of March 31, 2023.

On January 26, 2023, the Company and Wells Fargo, as lender, entered into a revolving margin account agreement under which the Company initially borrowed $12.8 million. The Company's investments are used as collateral for the loan and the amount the Company is able to borrow is limited to 80-90% of its outstanding investment balance held with Wells Fargo. The margin account bears interest at the Prime rate minus 225 basis-points. As of March 31, 2023, $12.9 million was outstanding under the margin account.

 

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D.Commitments and Contingencies

 

From time to time, the Company is involved in various legal proceedings arising in the normal course of business. For some matters, a liability is not probable, or the amount cannot be reasonably estimated and, therefore, an accrual has not been made. However, for such matters when it is probable that the Company has incurred a liability and can reasonably estimate the amount, the Company accrues and discloses such estimates.

During the first quarter of 2023, the Company and KVK-Tech, Inc. ("KVK") began discussing a possible termination of the Collaboration and License Agreement (the “Agreement”) that the parties entered into on October 25, 2018. Under the terms of the Agreement, each party has grounds to terminate the Agreement. While negotiations are on-going, in April 2023, the Company determined that is probable that the Agreement will be terminated and accrued an estimated settlement to KVK of $0.9 million, which is included in research and development in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2023. As ofJune 30,December 31, 2022, and December 31, 2021, 0no accruals have been made related to commitments and contingencies.

 

 
E.Preferred Stock and Warrants

Authorized, Issued, and Outstanding Preferred Stock

As of June 30, 2022, and December 31, 2021, the Company had 10,000,000 shares of authorized, unallocated and unissued preferred stock.

In June 2021, the Company filed with the Secretary of State of the State of Delaware: (i) a Certificate of Elimination of Series A Convertible Preferred Stock, eliminating from the Company’s Certificate of Incorporation the 9,578 shares designated as Series A Convertible Preferred Stock; (ii) a Certificate of Elimination of Series B-1 Convertible Preferred Stock, eliminating from the Company’s Certificate of Incorporation the 1,576 shares designated as Series B-1 Convertible Preferred Stock; and (iii) a Certificate of Elimination of Series B-2 Convertible Preferred Stock, eliminating from the Company’s Certificate of Incorporation the 31,480 shares designated as Series B-2 Convertible Preferred Stock. As of June 30, 2022, and December 31, 2021, 0 shares of preferred stock were designated, issued or outstanding.

Series B-2 Preferred Stock

Pursuant to the December 2020 Exchange Agreement, on January 12,2021, the Company issued to the Facility Note Holders an aggregate of 31,476.98412 shares of its Series B-2 Preferred Stock and warrants exercisable for an aggregate of 3,632,019 shares of the Company’s common stock (the “Exchange Warrants”).

The Series B-2 Preferred Stock was convertible into an aggregate of 4,842,690 shares of the Company’s common stock upon issuance at a conversion price equal to $6.4999. No fractional shares of common stock will be issued in connection with the conversion of the Series B-2 Preferred Stock. Instead, for any such fractional share that would have otherwise been issued upon conversion of a share of Series B-2 Preferred Stock, the Company will round such fraction up to the next whole share.

Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of theSeriesB-2ConvertiblePreferred Stock

On January 11,2021, as a condition to closing of the transactions contemplated by the December 2020 Exchange Agreement, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B-2 Convertible Preferred Stock (the “Series B-2 Certificate of Designation”) with the Secretary of State of the State Delaware, setting forth the preferences, rights and limitations of the Series B-2 Preferred Stock.

Immediately following, the closing of the Public Offering, pursuant to the terms of the December 2020 Exchange Agreement, the Company:

Exchanged approximately $31.5 million (the "Exchange") of the outstanding principal and accrued interest on the Facility Notes for (i) the Series B-2 Preferred Stock and (ii) the Exchange Warrants; and

made a payment of approximately $30.3 million (the “Debt Payment”) in partial repayment of the remaining outstanding principal and accrued interest on the Facility Notes.

Upon the closing of the Exchange and related Debt Payment, the amendments to the Facility Agreement, the Notes and the Investors’ Rights Agreement, dated as of February 19,2015, by and among the Company, Deerfield and the other parties signatory thereto, contemplated by the December 2020 Exchange Agreement that were conditional upon, among other things, the closing of the Public Offering, the filing of the Series B-2 Certificate of Designation and/or the approval for listing of the Company’s common stock, including the shares issuable upon conversion of the Series B-2 Preferred Stock and exercise of the Exchange Warrants, on the Nasdaq Capital Market, became effective on January 12,2021.

In March 2021, all shares of Series B-2 Preferred Stock converted into 4,842,699 shares of common stock. 

24

F.Common Stock and Warrants

 

Authorized, Issued, and Outstanding Common Shares

 

As of June 30, 2022March 31, 2023, and December 31, 20212022, the Company had authorized 250,000,000 shares of common stock.stock of 250,000,000 shares. Of the authorized shares, 35,399,267shares, 35,457,496 and 35,325,80135,450,257 shares of common stock were issued as of June 30, 2022,March 31, 2023, and December 31, 2021,2022, respectively, and 34,489,314 and 35,005,640 33,881,804 and 34,540,304 respectively shares of common stock were outstanding as of June 30, 2022March 31, 2023, and December 31, 20212022, respectively.

 

As ofJune 30, 2022March 31, 2023 and December 31, 20212022, the Company had reserved authorized shares of common stock for future issuance as follows:

 

 June 30, 2022  December 31, 2021  March 31, 2023  December 31, 2022 

Outstanding awards under equity incentive plans

 2,529,569  1,273,879  6,024,889 2,456,407 

Outstanding common stock warrants

 4,252,600  4,252,600  4,252,490 4,252,600 

Possible future issuances under equity incentive plans

 4,354,470  4,209,935  3,731,263 4,421,508 

Possible future issuances under employee stock purchase plans

  1,445,213   1,500,000   1,417,365   1,417,365 

Total common shares reserved for future issuance

  12,581,852   11,236,414   15,426,007   12,547,880 

 

Common Stock Activity

 

The following table summarizes common stock activity for the sixthree months ended June 30, 2022March 31, 2023:

 

  Shares of Common Stock 

Balance as of January 1, 20222023

  35,005,64034,540,304 

Common stock issued as compensation to third-parties

  7,6497,129 

Common stock repurchased as a result of the Stock Repurchase Plan

  (589,792665,739)

Balance as of March 31, 2022

34,423,497

Common stock issued as compensation to third-parties

11,030

Common stock issued as a result of the Employee Stock Purchase Planstock warrants exercised

  54,787110 

Balance as of June 30, 2022March 31, 2023

  34,489,31433,881,804 

 

Authorized, Issued, and Outstanding Preferred Stock

As of March 31, 2023, and December 31, 2022, the Company had 10,000,000 shares of authorized preferred stock, none of which were designated, issued, or outstanding.    

2517

 

Warrants

 

OnWarrants to Purchase Common Stock

In June 2,2014, pursuant to the terms of the Deerfield Facility Agreement, the Company issued theentered into a multi-tranche credit facility (the "Deerfield Facility Agreement") with Deerfield Warrant to purchase 14,423,076 shares of Series D Preferred (Note C)Private Design Fund III, LP (“Deerfield”). The Company recorded the fair valueissued to Deerfield a warrant to purchase 120,192 shares of the Deerfield Warrant as a debt discount and a warrant liability. The Deerfield Warrant, if unexercised, expires on the earlier ofCompany's common stock, which is exercisable at $38.34 per share until June 2, 2024, or uponand Deerfield assigned this warrant to OTA LLC in December of 2022 (the “OTA Warrant”). This warrant qualifies as a liquidation event. Upon completionparticipating security under ASC Topic 260,Earnings perShare, and is treated as such in the net loss per share calculation (Note H). If a Major Transaction occurs (as defined in the Deerfield Facility Agreement), OTA may require the Company to redeem the OTA Warrant for a cash amount equal to the Black-Scholes value of the Company’s initial public offering (the “IPO”), the Deerfield Warrant automatically converted into a warrant to purchase 1,923,077 sharesportion of the Company’s common stock at an exercise price of $5.85 per share. After giving effectOTA Warrant to the Reverse Stock Split effected in December 2020, the exercise price of the Deerfield Warrant became $93.60 and the shares of the Company’s common stock issuable upon exercise of the Deerfield Warrant became 120,192 shares of common stock. As a result of the January 2021 Inducement Transaction (discussed below) the anti-dilution provisions within the Deerfield Warrant were triggered and the exercise price was reduced from $93.60 per share to $46.25 per share. In addition, as a result of the June 2021 Inducement Transaction (discussed below) the anti-dilution provision within the Deerfield Warrant were triggered and the exercise price was reduced from $46.25 per share to $38.34 per share. The Company amortized the debt discount over the term of the Deerfield Convertible Note and the expense was recorded as interest expense related to amortization of debt issuance costs and discount in the statements of operations. The Deerfield Convertible Note was extinguished in February 2021 and the remaining debt discount was written off and recognized as a loss on extinguishment of debt.

be redeemed (the “Warrant Put Option”). The Company determined that the DeerfieldOTA Warrant should be recorded as a liability and stated at fair value at each reporting period upon inception. As stated above, upon completion of the IPO, the Deerfield Warrant automatically converted into warrants to purchase the Company’s common stock. The Deerfield Warrant remains classified as a liability and is recorded at fair value at each reporting period since it can be settled in cash.period. Changes to the fair value of the warrant liability are recorded through the unaudited condensed statements of operations as a fair value adjustment (Note H)G).

 

In connection with the APADAZ License Agreement, in October 2018, theThe Company issued to KVK a warrant to purchase up to 500,00031,250 shares of common stock of the Company at an exercise price of $2.30$36.80 per share which reflected the closing price of the Company’s common stock on the Nasdaq Stock Market on the execution date of the APADAZ License Agreement (the “KVK Warrant”). The KVK Warrant is initially not exercisable for any shares of common stock. Upon the achievement of each of four specified milestones under the KVK Warrant, the KVK Warrant will become exercisable for an additional 125,000 shares, up to an aggregate of 500,000 shares of the Company’s common stock.exercisable. The exercise price and the number and type of shares underlying the KVK Warrant are subject to adjustment in the event of specified events, including a reclassification of the Company’s common stock, a subdivision or combination of the Company’s common stock, or in the event of specified dividend payments. The KVK Warrant is exercisable until October 24, 2023.2023.The Upon exercise, the aggregate exercise price may be paid, at KVK’s election, in cash or on a net issuance basis, based upon the fair market value of the Company’s common stock at the time of exercise. After giving effect to the reverse stock split effected in December 2020, the exercise price of the KVK Warrant became $36.80 and the shares of common stock issuable upon exercise of the KVK Warrant became 31,250 shares of common stock.

The Company determined that, since KVK qualifies as a customer under ASC 606, the KVK Warrant should be recorded as a contract asset and recognized as contra-revenue as the Company recognizes revenue from the APADAZ License Agreement. In addition, the Company determined that the KVK Warrant qualifies as a derivative under ASC 815 and should be recorded as a liability and stated at fair value each reporting period. The Company calculates the fair value of the KVK Warrant using a probability-weighted Black-Scholes option pricing model. Changes in fair value resulting from changes in the inputs to the Black Scholes model are accounted for as changes in the fair value of the derivative under ASC 815 and are recorded as fair value adjustment related to derivative and warrant liability in the unaudited condensed consolidated statements of operations.  Changes in the number of shares that are expected to be issued are treated as changes in variable consideration under ASC 606 and are recorded as a change in contract asset on the unaudited condensed balance sheets. As of June 30, 2022, and December 31, 2021, a contract asset of $0.4 million is recorded in other long-term assets on the unaudited condensed consolidated balance sheets related to the KVK Warrant.

Pre-FundedWarrants

 

On January 12, 2021, pursuant to the terms of the Underwriting Agreement, the Company issued pre-funded warrants to purchase 926,844 shares of the Company’s common stock to specified investors in the Public Offering. Each pre-funded warrant had an initial exercise price per share equal to $0.0001. The pre-funded warrants were immediately exercisable. The pre-funded warrants were exercisable, at the option of each holder, in whole or in part, by delivering to the Company a duly executed exercise notice accompanied by payment in full for the number of shares of common stock purchased upon such exercise. In lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the aggregate exercise price, the holder was able to elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the pre-funded warrants. In January 2021, all pre-funded warrants were exercised for 926,841 shares of common stock and gross proceeds of approximately $72. 

26

Warrants to Purchase Common Stock

On January 12,2021, pursuant to the terms of the Underwriting Agreement and December 2020 Exchange Agreement, the Company issued warrants to purchase 12,078,361 shares of the Company’s common stock (collectively, the “Offering Warrants”) in the Public Offering and in connection with the transactions contemplated under the December 2020 Exchange Agreement.Offering. The Offering Warrants were immediately exercisable and expire on the fifth anniversary of their issuance date, at an exercise price per share of common stock equal to $6.50 per share. The Offering Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to the Company a duly executed exercise notice, provided that payment in full for the number of shares of the Company’s common stock purchased upon such exercise is delivered to the Company in accordance with the terms of the Offering Warrants. In lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Offering Warrants. A holder (together with its affiliates) may not exercise any portion of the Offering Warrant to the extent that the holder and its affiliates and any other person or entities with which such holder would constitute a Section 13(d) “group” would own more than 4.99% of the Company’s outstanding common stock immediately after exercise. Except as otherwise provided in the Offering Warrants or by virtue of such holder’s ownership of shares of the Company’s common stock, the holders of the Offering Warrants do not have the rights or privileges of holders of common stock with respect to the shares of common stock underlying the Offering Warrants, including any voting rights, until they exercise their Offering Warrants. The Offering Warrants provide that holders have the right to participate in distributions or dividends paid on the Company’s common stock. In the event of a fundamental transaction, as described in the Offering Warrants and generally including any reorganization, recapitalization or reclassification of the Company’s common stock, the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into another person, the acquisition of more than 50% of the Company’s outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the Company’s outstanding common stock, the holders of the Offering Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Offering Warrants immediately prior to such fundamental transaction. In addition, in the event of a fundamental transaction which is approved by the Company’s board of directors, the holders of the warrants have the right to require the Company or a successor entity to redeem the Offering Warrants for cash in the amount of the Black Scholes value of the unexercised portion of the Offering Warrants on the date of the consummation of the fundamental transaction. In the event of a fundamental transaction which is not approved by the Company’s board of directors, the holders of the Offering Warrants have the right to require the Company or a successor entity to redeem the Offering Warrants in the amount of the Black Scholes value of the unexercised portion of the Offering Warrants on the date of the consummation of the fundamental transaction payable in the form of consideration paid to the holders of common stock in such fundamental transaction. The Offering Warrants meet the equity classification requirements and thus are recorded in additional paid-in capital on the unaudited condensed consolidated balance sheets. As of June 30, 2022,March 31, 3,461,858 Offering2023, 3,461,968 Offering Warrants have been exercised for 3,030,881 sharesfor 3,030,991 shares of common stock and gross proceeds of approximately $16.9 million. These amounts are exclusive of the Offering Warrants exercised as part of the January 2021 Inducement Transaction discussed below.

Underwriter Warrant

 

On January 12, 2021, pursuant to the terms of the Underwriting Agreement, the Company issued to the Underwriter a warrant to Roth Capital Partners ("Roth") to purchase 806,932 shares of the Company’s common stock (the “Underwriter Warrant”). The Underwriter Warrant is subject to substantially the same terms and conditions as the Warrants, provided that the exercise price for the Underwriter Warrant is $8.125 per share. If the Underwriter exercises any additional portion of its over-allotment option, then the Company shall issue the Underwriter an additional Underwriter Warrant exercisable for a number of shares of common stock equal to 5.0% of the number of shares of common stock issued in such over-allotment exercise (including the shares of common stock issuable upon the exercise of any Warrants issued in connection therewith). In connection with the closing of the Underwriter'sRoth's partial exercise of its over-allotment option, on February 3, 2021, the UnderwriterRoth was issued an additional warrant to purchase 18,702 shares of common stock. As of June 30, 2022,March 31, 2023, 400,000 Underwriter Warrantsof these warrants have been exercised for 400,000 shares of common stock and gross proceeds of approximately $3.3 million.

 

2718

 

January 2021 Warrant Exercise Inducement Letters and Issuance of Warrants

 

On January 26, 2021, the Company entered into warrant exercise inducement offer letters (“January “January 2021 Inducement Transaction”) with certain holders of warrants issued in the Public Offering discussed above (the "Existing Warrants") (collectively, the “Exercising Holders”) pursuant to which such holders agreed to exercise for cash their Existing Warrants to purchase 6,620,358 shares of the Company’s common stock in exchange for the Company’s agreement to issue new warrants (the “January 2021 Inducement Warrants”) on substantially the same terms as the Existing Warrants, except as set forth in the following sentence, to purchase up to 7,944,430 shares of the Company’s common stock which is equal to 120% of the number of shares of the Company’s common stock issued upon exercise of the Existing Warrants. The purchase price of the(the "January 2021 Inducement Warrants was $0.125 per share underlying each January 2021 Inducement Warrant, and the January 2021 Inducement Warrants have an exercise price of $6.36 per share. The Company received aggregate gross proceeds of approximately $44.0 million from the exercise of the Existing Warrants by the Exercising Holders and the sale of the January 2021 Inducement Warrants. The Company engaged Roth as its exclusive placement agent in connection with these transactions and paid Roth a fee equal to 6% of gross proceeds from the exercise of the Existing Warrants by the Exercising Holders and the sale of the January 2021 Inducement Warrants. As a result of this transaction the anti-dilution provisions contained with the Deerfield Warrant were triggered and the exercise price of the Deerfield Warrant was reduced from $93.60 per share to $46.25 per share.

Warrants"). The January 2021 Inducement Warrants were immediately exercisable and expire on the fifth anniversary of their issuance date, at an exercise price per share of common stock equal to $6.36 per share. The January 2021 Inducement Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to the Company a duly executed exercise notice, provided that payment in full for the number of shares of the Company’s common stock purchased upon such exercise is delivered to the Company in accordance with the terms of the January 2021 Inducement Warrants. In lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the warrants. A holder (together with its affiliates) may not exercise any portion of the January 2021 Inducement Warrant to the extent that the holder and its affiliates and any other person or entities with which such holder would constitute a Section 13(d) “group” would own more than 4.99% (or, upon election by a holder prior to the issuance of its January 2021 Inducement Warrants, 9.99%) of the Company’s outstanding common stock immediately after exercise. Except as otherwise provided in the January 2021 Inducement Warrants or by virtue of such holder’s ownership of shares of the Company’s common stock, the holders of the January 2021 Inducement Warrants do not have the rights or privileges of holders of common stock with respect to the shares of common stock underlying the January 2021 Inducement Warrants, including any voting rights, until they exercise their January 2021 Inducement Warrants. The January 2021 Inducement Warrants provide that holders have the right to participate in distributions or dividends paid on the Company’s common stock. In the event of a fundamental transaction, as described in the January 2021 Inducement Warrants and generally including any reorganization, recapitalization or reclassification of the Company’s common stock, the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into another person, the acquisition of more than 50% of the Company’s outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the Company’s outstanding common stock, the holders of the January 2021 Inducement Warrants will be entitled to receive upon exercise of the January 2021 Inducement Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the January 2021 Inducement Warrants immediately prior to such fundamental transaction. In addition, in the event of a fundamental transaction which is approved by the Company’s board of directors, the holders of the January 2021 Inducement Warrants have the right to require the Company or a successor entity to redeem the January 2021 Inducement Warrants for cash in the amount of the Black Scholes value of the unexercised portion of the January 2021 Inducement Warrants on the date of the consummation of the fundamental transaction. In the event of a fundamental transaction which is not approved by the Company’s board of directors, the holders of the  January 2021 Inducement Warrants have the right to require the Company or a successor entity to redeem the January 2021 Inducement Warrants in the amount of the Black Scholes value of the unexercised portion of the January 2021 Inducement Warrants on the date of the consummation of the fundamental transaction payable in the form of consideration paid to the holders of common stock in such fundamental transaction. As of June 30, 2022,March 31, 2023, 1,676,921 January 2021 Inducement Warrants have been exercised for 1,676,921 shares of common stock and gross proceeds of approximately $10.7 million. These amounts are exclusive of the January 2021 Inducement Warrants exercised as part of the June 2021 Inducement Transaction discussed below.

 

In accordance with the January 2021 Inducement Transaction we recognized a deemed dividend of $37.4 million which is the difference between the grant date fair value of the January 2021 Inducement Warrants and the purchase price of the January 2021 Inducement Warrants. This deemed dividend is added to net loss to arrive at net loss attributable to common stockholders on the statements of operations. 

28

June 2021 Warrant Exercise Inducement Letters and Issuance of Warrants

 

On June 18, 2021, the Company entered into warrant exercise inducement offer letters ( “June 2021 Inducement Transaction”) with certain holders of warrants issued in the January 2021 Inducement Transaction discussed above (the "January 2021 Inducement Warrants") (collectively, the “June 2021 Exercising Holders”) pursuant to which such holders agreed to exercise for cash their January 2021 Inducement Warrants to purchase 6,117,509 shares of the Company’s common stock in exchange for the Company’s agreement to issue new warrants to purchase up to 1,529,379 shares of the Company's common stock (the “June 2021 Inducement Warrants”) on substantially the same terms as the January 2021 Inducement Warrants, except as set forth in the following sentence, to purchase up to 1,529,379 shares of the Company’s common stock, which is equal to 25% of the number of shares of the Company’s common stock issued upon exercise of the January 2021 Inducement Warrants. The purchase price of the June 2021 Inducement Warrants was $0.125 per share underlying each June 2021 Inducement Warrant, and the June 2021 Inducement Warrants have an exercise price of $16.50 per share. The Company received aggregate gross proceeds of approximately $39.1 million from the exercise of the January 2021 Inducement Warrants by the June 2021 Exercising Holders and the sale of the June 2021 Inducement Warrants. The Company engaged Roth as its exclusive placement agent in connection with these transactions and paid Roth a fee equal to 6% of gross proceeds from the exercise of the January 2021 Inducement Warrants by the June 2021 Exercising Holders and the sale of the June 2021 Inducement Warrants. As a result of this transaction the anti-dilution provisions contained with the Deerfield Warrant were triggered and the exercise price of the Deerfield Warrant was reduced from $46.25 per share to $38.34 per share.

The June 2021 Inducement Warrants were immediately exercisable and expire on December 31, 2026, at an exercise price per share of common stock equal to $16.50 per share. The June 2021 Inducement Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to the Company a duly executed exercise notice, provided that payment in full for the number of shares of the Company’s common stock purchased upon such exercise is delivered to the Company in accordance with the terms of the June 2021 Inducement Warrants. In lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the warrants. A holder (together with its affiliates) may not exercise any portion of the June 2021 Inducement Warrant to the extent that the holder and its affiliates and any other person or entities with which such holder would constitute a Section 13(d) “group” would own more than 4.99% (or, upon election by a holder prior to the issuance of its June 2021 Inducement Warrants, 9.99%) of the Company’s outstanding common stock immediately after exercise. Except as otherwise provided in the June 2021 Inducement Warrants or by virtue of such holder’s ownership of shares of the Company’s common stock, the holders of the June 2021 Inducement Warrants do not have the rights or privileges of holders of common stock with respect to the shares of common stock underlying the June 2021 Inducement Warrants, including any voting rights, until they exercise their June 2021 Inducement Warrants. The June 2021 Inducement Warrants provide that holders have the right to participate in distributions or dividends paid on the Company’s common stock. In the event of a fundamental transaction, as described in the June 2021 Inducement Warrants and generally including any reorganization, recapitalization or reclassification of the Company’s common stock, the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into another person, the acquisition of more than 50% of the Company’s outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the Company’s outstanding common stock, the holders of the June 2021 Inducement Warrants will be entitled to receive upon exercise of the June 2021 Inducement Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the June 2021 Inducement Warrants immediately prior to such fundamental transaction. In addition, in the event of a fundamental transaction which is approved by the Company’s board of directors, the holders of the June 2021 Inducement Warrants have the right to require the Company or a successor entity to redeem the June 2021 Inducement Warrants for cash in the amount of the Black Scholes value of the unexercised portion of the June 2021 Inducement Warrants on the date of the consummation of the fundamental transaction. In the event of a fundamental transaction which is not approved by the Company’s board of directors, the holders of the  June 2021 Inducement Warrants have the right to require the Company or a successor entity to redeem the June 2021 Inducement Warrants in the amount of the Black Scholes value of the unexercised portion of the June 2021 Inducement Warrants on the date of the consummation of the fundamental transaction payable in the form of consideration paid to the holders of common stock in such fundamental transaction. As of June 30, 2022,March 31, 2023, 0no June 2021 Inducement Warrants have been exercised.

In accordance with the June 2021 Inducement Transaction we recognized a deemed dividend of $16.9 million which is the difference between the grant date fair value of the June 2021 Inducement Warrants and the purchase price of the June 2021 Inducement Warrants. This deemed dividend is added to net loss to arrive at net loss attributable to common stockholders on the unaudited condensed consolidated statements of operations. 

29

 
G.F.Stock-Based Compensation

 

The Company maintains a stock-based compensation plan (the “Incentive Stock Plan”) that governs stock awards made to employees and directors prior to completion of the IPO.  

 

In November 2014, the Board of Directors of the Company ("the Board"), and in April 2015, the Company’s stockholders, approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), which became effective in April 2015. The 2014 Plan provides for the grant of stock options, other forms of equity compensation, and performance cash awards. In June 2021, the Company's stockholders approved an Amended and Restated 2014 Equity Incentive Plan (the "A&R 2014 Plan"), following its adoption by the Board in April 2021, which among other things added 4,900,000 shares to the maximum number of shares of common stock to be issued under the plan and extended the annual automatic increases (discussed further below) until January 1, 2031 and eliminated individual grant limits that applied under the 2014 Plan to awards that were intended to comply with the exemption for "performance-based compensation" under Code Section 162(m). The maximum number of shares of common stock that may be issued under the A&R 2014 Plan is 6,889,8858,271,497 as of June 30, 2022.March 31, 2023. The number of shares of common stock reserved for issuance under the A&R 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2016, and ending on and including January 1, 2031, by 4% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Board. Pursuant to the terms of the 2014 Plan, on January 1, 2022,2023, the common stock reserved for issuance under the 2014 Plan automatically increased by 1,400,2251,381,612 shares.

 

During the three and sixmonths ended June 30, 2022,March 31, 2023,and 2021,2022, 0no stock options were exercised.

 

In June 2021, the Company's stockholders approved an Employee Stock Purchase Plan (the "ESPP"), following its adoption by the Board in April 2021. The maximum number of shares of common stock that may be issued under the ESPP is 1,500,000. The first offering period under the ESPP began on October 1, 2021, and the first purchase date occurred on May 31, 2022. As of June 30, 2022, March 31, 2023,54,787 shares 82,635 shares have been issued under the ESPP.

 

In January 2023, the Board approved the 2023 Employment Inducement Award Plan (the "2023" Plan"). The maximum number of shares of common stock that may be issued under the 2023 Plan is 1,500,000.

Stock-based compensation expense recorded under the Incentive Stock Plan, 2014 Plan, A&R 2014 Plan and ESPP is included in the following line items in the accompanying unaudited condensed consolidated statements of operations (in thousands):

  

 

Three months ended June 30,

  

Six months ended June 30,

  

Three months ended March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Research and development

 $422  $133  $733  $429  $572 $311 

General and administrative

  1,088   185   1,695   564 

Selling, general and administrative

  19   607 

Total stock-based compensation expense

 $1,510  $318  $2,428  $993  $591  $918 

 

There was $0.4 million of stock-based compensation expense related to performance-based awards recognized during the three and six months ended June 30, 2022, and $0.4 million of stock-based compensation expense related to performance-based awards recognized during the six months ended June 30, 2021. There was 0no stock-based compensation expense related to performance-based awards recognized during the three months ended June 30, 2021.March 31, 2023, or 2022.

As a result of the modification of certain stock options in connection with the Transition Agreement, as further discussed in Note J, the Company recaptured $0.9 million in stock-compensation expense and recognized $0.4 million in severance expense for the three months ended March 31, 2023. 

 

3019

 
 
H.G.Fair Value of Financial Instruments

 

The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:

 

 

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; 

 

Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

 

The carrying amounts of certain financial instruments, including cash and cash equivalents, investments and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes the conclusions reached regarding fair value measurements as of June 30, 2022,March 31, 2023, and December 31, 20212022 (in thousands):

 

 

Balance as of

June 30, 2022

  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3)  Balance as of March 31, 2023  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Deerfield Warrant liability

 $52  $0  $0  $52 

Embedded Warrant Put Option

 4  0  0  4 

KVK Warrant liability

  1   0   1   0 

OTA Warrant liability

 $3  $  $  $3 

Total liabilities

 $57  $0  $1  $56  $3  $  $  $3 
                 

Securities:

  

U.S. government-sponsored agency securities

 $7,266  $0  $7,266  $0  $7,290 $ $7,290 $ 

Corporate notes and commercial paper

 304  0  304  0 

Certificates of deposit

 20,473  20,473  0  0 

U.S. Treasury securities

  9,691   9,691   0   0   27,113   27,113       

Total assets

 $37,734  $30,164  $7,570  $0  $34,403  $27,113  $7,290  $ 

  Balance as of December 31, 2022  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

OTA Warrant liability

 $1  $  $  $1 

Total liabilities

 $1  $  $  $1 
                 

Securities:

                

U.S. government-sponsored agency securities

 $7,189  $  $7,189  $ 

U.S. Treasury securities

  9,711   9,711       

Total assets

 $16,900  $9,711  $7,189  $ 

 

3120

 
  Balance as of December 31, 2021  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Deerfield Warrant liability

 $288  $0  $0  $288 

Embedded Warrant Put Option

  18   0   0   18 

KVK Warrant liability

  24   0   24   0 

Total liabilities

 $330  $0  $24  $306 
                 

Securities:

                

U.S. government-sponsored agency securities

 $4,997  $0  $4,997  $0 

Certificates of deposit

  490   490   0   0 

U.S. Treasury securities

  9,935   9,935   0   0 

Total assets

 $15,422  $10,425  $4,997  $0 

The Company’s DeerfieldOTA Warrant liability, embedded Warrant Put Option and securities are measured at fair value on a recurring basis. As of June 30, 2022,March 31, 2023, and December 31, 2021,2022, the DeerfieldOTA Warrant liability and the embedded Warrant Put Option are reported on the unaudited condensed consolidated balance sheets in derivative and warrant liability. As of June 30, 2022,March 31, 2023, and December 31, 2021,2022, the securities are reported on the unaudited condensed consolidated balance sheets in short-term and long-term investments.securities at fair value. The Company used a Monte Carlo simulation to value the DeerfieldOTA Warrant liability and embedded Warrant Put Option for all periods presented.presented herein. Significant unobservable inputs used in measuring the fair value of these financial instruments included the Company’s estimated enterprise value, an estimate of the timing of a liquidity or fundamental change event and a present value discount rate. Changes in the fair value of the DeerfieldOTA Warrant liability and embedded Warrant Put Option are reflected in the unaudited condensed consolidated statements of operations for the three and sixmonths ended June 30, 2022,March 31, 2023, and 2021,2022, as a fair value adjustment related to derivative and warrant liability.

 

The derivative liability for the DeerfieldOTA Warrant was $52,000 was $3,000 and $288,000$1,000 at June 30, 2022,March 31, 2023, and December 31, 2021,2022, respectively. The derivative liability for the embedded Warrant Put Option was $4,000 and $18,000 at $0 at June 30, 2022,March 31, 2023, and December 31, 2021,2022. respectively. 10% increase in the enterprise value would result in ana negligible increase of $12,000 in the estimated fair value of the DeerfieldOTA Warrant liability and an increase of $1,000 in the estimated fair value of the embedded Warrant Put Option liability. In addition, the Company assumed a weighted-average probability of a liquidity event occurring of approximately 25%48% with an estimated probability-weighted value of approximately $30.0$38.5 million and a weighted-average probability of a fundamental change event occurring of approximately 28%30% with an estimated probability-weighted value of approximately $380 million,$463.8 million, respectively, with estimated timing in each scenario of the secondfourth quarter of 2023.

 

The Company’s KVK Warrant liability is measured at fair value on a recurring basis. As of June 30, 2022,March 31, 2023, and December 31, 2021,2022, the KVK Warrant liability is reported on the unaudited condensed consolidated balance sheets in derivative and warrant liability. The Company estimates the fair value of the KVK Warrant using a probability-weighted Black-Scholes option-pricing model, which requires the use of subjective assumptions, including the expected term of the warrant, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the warrant. The expected term represents the period of time the warrant is expected to be outstanding. For the KVK Warrant, the Company used an expected term equal to the contractual term of the warrant. Expected volatility is based on the Company's historical volatility since the IPO. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends. Changes in the fair value of the KVK Warrant liability are reflected in the unaudited condensed consolidated statements of operations for the three and sixmonths ended June 30, 2022,March 31, 2023, and 2021,2022, as a fair value adjustment related to derivative and warrant liability.

 

A reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):

 

 

Three months ended June 30,

  

Six months ended June 30,

  

Three months ended March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Balance as of beginning of period

 $84  $292  $306  $255  $1  $306 

Adjustment to fair value

  (28)  374   (250)  411   2   (305)

Balance as of end of period

 $56  $666  $56  $666  $3  $1 

 

3221

 
 
I.H.Net Loss Per Share

 

During the three months ended June 30, 2022, and the six months ended June 30, 2022 and 2021,For all periods presented herein, the Company did not use the two-class method to compute net loss attributable to common stockholders per share of common stock, even though it had issued securities, other than common stock, that contractually entitled the holders to participate in dividends and earnings, because these holders are not obligated to participate in a loss. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings.

 

Under the two-class method, for periods with net income attributable to common stockholders, basic net income attributable to common stockholders per share of common stock is computed by dividing the undistributed net income attributable to shares of common stockholders by the weighted average number of shares of common stock outstanding during the period. Undistributed net income attributable to shares of common stockholders is computed by subtracting from net income the portion of current period earnings that participating securities would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed and subtracting the actual or deemed dividends declared. No such adjustment to earnings is made during periods with a net loss as the holders of the participating securities have no obligation to fund losses. Diluted net income attributable to common stockholders per share of common stock is computed under the two-class method by using the weighted average number of shares of common stock outstanding plus the potential dilutive effects of stock options, warrants and other outstanding convertible securities. In addition to analyzing under the two-class method, the Company analyzes the potential dilutive effect of stock options and warrants, under the treasury-stock method and other outstanding convertible securities under the if-converted method when calculating diluted income (loss) attributable to common stockholders per share of common stock, in which it is assumed that the stock options, warrants and other outstanding convertible securities convert into common stock at the beginning of the period or date of issuance, if the stock option, warrant or other outstanding convertible security was issued during the period. The Company reports the more dilutive of the approaches (two-class or treasury-stock/if-converted) as its diluted net income (loss) attributable to common stockholders per share of common stock during the period.

 

As noted above, for the three months ended June 30, 2022, and the six months ended June 30, 2022 and 2021,all periods presented herein, the Company did not utilize the two-class approach as the Company was in a net loss position and the holders of the participating securities have no obligation to fund losses. The Company did analyze diluted net loss attributable to common stockholders per share of common stock under the treasury-stock/if-converted method and noted that all outstanding stock options and warrants were anti-dilutive for the periods presented. For all periodperiods presented, basic net loss attributable to common stockholders per share of common stock was the same as diluted net loss attributable to common stockholders per share of common stock. 

 

The following securities, presented on a common stock equivalent basis, have been excluded from the calculation of weighted average number of shares of common stock outstanding because their effect is anti-dilutive:

 

  

Three months ended March 31,

 
  

2023

  

2022

 

Awards under equity incentive plans

  6,024,889   2,186,769 

Common stock warrants

  4,252,490   4,252,600 

Total securities excluded from the calculation of weighted average number of shares of common stock outstanding

  10,277,379   6,439,369 

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Awards under equity incentive plans

  2,529,569   414,869   2,529,569   414,869 

Common stock warrants

  4,252,600   4,584,889   4,252,600   4,584,889 

Total securities excluded from the calculation of weighted average number of shares of common stock outstanding

  6,782,169   4,999,758   6,782,169   4,999,758 

33

A reconciliation from net loss to basic and diluted net loss attributable to common stockholders per share of common stock for the three and sixmonths ended June 30, 2022,March 31,2023,and 2021,2022, is as follows (in thousands):

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Basic and diluted net loss per share of common stock:

                
                 

Net (loss) income

 $(24,042) $6,203  $(25,906) $(4,093)

Less: Dividends declared or accumulated

  0   (16,898)  0   (54,342)

Net (loss) income attributable to shares of common stockholders, basic and diluted

 $(24,042) $(10,695) $(25,906) $(58,435)

Less: Net income attributable to participating securities

  0   (838)  0   0 

Undistributed net loss attributable to common stockholders, basic and diluted

 $(24,042) $(11,533) $(25,906) $(58,435)

Weighted average number of shares of common stock outstanding, basic and diluted

  34,447   29,175   34,477   24,187 

Basic and diluted net loss attributable to common stockholders per share of common stock

 $(0.70) $(0.40) $(0.75) $(2.42)
                 
  

Three months ended March 31,

 
  

2023

  

2022

 

Net loss per share of common stock:

        
         

Net loss

 $(11,767) $(1,864)

Less: Dividends declared or accumulated

      

Undistributed net loss attributable to shares of common stockholders, basic and diluted

 $(11,767) $(1,864)

Weighted average number of shares of common stock outstanding, basic and diluted

  34,467   34,507 

Basic and diluted net loss attributable to common stockholders per share of common stock

 $(0.34) $(0.05)

 

3422

 
 
J.I.Leases

 

The Company has operating and finance leases for office space, laboratory facilities and various laboratory equipment, furniture and office equipment and leasehold improvements. The Company determines if an arrangement is a lease at contract inception. Lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. The Company does not separate lease and non-lease components. Leases with a term of 12 months or less at commencement are not recorded on the unaudited condensed consolidated balance sheets. Lease expense for these arrangements is recognized on a straight-line bases over the lease term. The Company's leases have remaining lease terms of less than 1 year to approximately 43 years, some of which include options to extend the leases for up to 5 years, and some which include options to terminate the leases within 1 year.

 

Effective June 1, 2021, the Company agreed to sublease office space in Florida, comprised of one of the two contiguous suites, under a non-cancelable operating lease, which expires in February 2026.

 

The components of lease expense were as follows (in thousands): 

 

 

Three months ended June 30,

  

Six months ended June 30,

  

Three months ended March 31,

 

Lease Cost

 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Finance lease cost:

  

Amortization of right-of-use assets

 $32  $32  $64  $64  $32  $32 

Interest on lease liabilities

  0   3   1   7      1 

Total finance lease cost

 32  35  65  71  32  33 

Operating lease cost

 99  92  190  183  113  91 

Short-term lease cost

 52  49  102  99  55  50 

Variable lease cost

 13  8  26  21  13  13 

Less: sublease income

  (39)  (13)  (78)  (13)  (39)  (39)

Total lease costs

 $157  $171  $305  $361  $174  $148 

 

Supplemental cash flow information related to leases was as follows (in thousands):

 

 

Six months ended June 30,

  

Three months ended March 31,

 
 

2022

  

2021

  

2023

  

2022

 

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from finance leases

 $1  $7  $ $1 

Financing cash flows from finance leases

 11  133  2 10 

Operating cash flows from operating leases

 241  228  142 117 

Operating cash flows from short-term leases

 102  99  55 50 

Operating cash flows from variable lease costs

 26  21  13 13 
  

Right-of-use assets obtained in exchange for lease liabilities:

  

Finance leases

 $0  $0  $  $ 

Operating leases

 146  0     

 

3523

 

Supplemental balance sheet information related to leases was as follows (in thousands, except weighted average remaining lease term and weighted average discount rate):

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Finance Leases

        

Property and equipment, at cost

 $1,031  $1,031  $1,031 $1,031 

less: accumulated depreciation and amortization

  (715)  (651)  (812)  (780)

Property and equipment, net

 $316  $380  $219  $251 
  

Other current liabilities

 $7  $15  $5 $6 

Other long-term liabilities

  3   6       

Total finance lease liabilities

 $10  $21  $5  $6 
  

Operating Leases

        

Operating lease right-of-use assets

 $1,165  $1,141  $898  $988 

Total operating lease right-of-use assets

 $1,165  $1,141  $898  $988 
  

Current portion of operating lease liabilities

 $469  $356  $470 $480 

Operating lease liabilities, less current portion

  1,082   1,232   736   843 

Total operating lease liabilities

 $1,551  $1,588  $1,206  $1,323 
  

Weighted Average Remaining Lease Term

        

Finance leases (years)

 2  1 

Operating leases (years)

 3  4 

Finance leases

 1 year 1 year 

Operating leases

 3 years 3 years 
  

Weighted Average Discount Rate

        

Finance leases

 14.3% 12.0% 14.3% 14.3%

Operating leases

 7.2% 7.5% 7.4% 7.3%

 

Maturities of lease liabilities were as follows (in thousands):

 

 

Finance

 

Operating

  

Finance

 

Operating

 

Year Ending December 31,

 

Leases

  

Leases

  

Leases

  

Leases

 

2022 (excluding the six months ended June 30, 2022)

 $4  $279 

2023

 6  563 

2023 (excluding the three months ended March 31, 2023)

 $5 $419 

2024

 0  488   488 

2025

 0  390   390 

2026

  0   30   30 

2027

      

Total lease payments

 10  1,750  5  1,327 

Less: future interest expense

  0   (199)  0   (121)

Lease liabilities

 $10  $1,551  $5  $1,206 

 

3624

 
J.Significant Events

On January 6, 2023, the Board appointed Richard W. Pascoe to serve as the Company’s Chief Executive Officer, effective immediately. Concurrently with his appointment as Chief Executive Officer, Mr. Pascoe stepped down as the Company’s Executive Chairman. Mr. Pascoe continued to serve as a member of the Board until April 25, 2023. Mr. Pascoe was designated as the Company’s principal executive officer, succeeding Travis C. Mickle, Ph.D., the Company’s President and former Chief Executive Officer, in such role. On January 6, 2023, Dr. Mickle resigned from his role (i) as Chief Executive Officer, effective immediately, and (ii) as President and as a member of the Board, in each case, effective as of the date of the Company’s 2023 Annual Meeting of Stockholders, which was held on April 25, 2023. Additionally, on January 6, 2023, the Board appointed Matthew R. Plooster, a member of the Board, as the Chairman of the Board.

In connection with Mr. Pascoe’s appointment as the Company’s Chief Executive Officer, the Company and Mr. Pascoe entered into an amendment to the employment agreement, dated November 5, 2021, by and between the Company and Mr. Pascoe (the “Amendment”). Pursuant to the Amendment, Mr. Pascoe became entitled to receive an option under the A&R 2014 Plan to purchase 700,000 shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on January 9, 2023. The option will vest in four equal annual installments, with the first such installment occurring on January 6, 2024 (subject to Mr. Pascoe’s continued service to the Company through the applicable vesting date).

In connection with the management transition, the Company entered into (i) a transition agreement with Dr. Mickle (the “Transition Agreement”) and (ii) a consulting agreement with Dr. Mickle (the “Consulting Agreement”). Pursuant to the terms of the Transition Agreement, subject to his timely delivering a release of claims in the Company’s favor, Dr. Mickle will receive severance payments and benefits consisting of (i) continued payment of his base salary for 18 months following the date on which Dr. Mickle’s employment with the Company ends (the “Separation Date”), (ii) up to 18 months of continued medical, dental and vision coverage pursuant to COBRA and (iii) a one-time, lump sum bonus payment equal to a pro rata amount of his annual performance-based target bonus for the year in which the Separation Date occurs. In addition, immediately prior to the Separation Date, all outstanding options to purchase the Company’s common stock held by Dr. Mickle will be vested in full, and such accelerated vested options may be exercised through the later of (i) the 18-month anniversary of the date of the Transition Agreement and (ii) the date of the termination of the Consulting Agreement. Pursuant to the terms of the Consulting Agreement, Dr. Mickle has agreed to provide consulting services until the first anniversary of the Company’s 2023 Annual Meeting of Stockholders, which was held on April 25, 2023. In exchange for such services, Dr. Mickle will receive consulting fees of $40,000 per month. In addition, Dr. Mickle was granted, under the A&R 2014 Plan, 547,945 performance-based restricted stock units, which will vest in full upon the timely achievement of a clinical and development milestone, subject to forfeiture upon certain disqualifying events. The severance benefits consisted of personnel and other related charges of approximately $1.0 million and stock compensation expense of approximately $0.4 million related to the acceleration of vesting on unvested shares subject to certain stock options and the extension of the exercise period for certain stock options. These severance benefits are presented in selling, general and administrative expenses in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2023. As of March 31, 2023, the Company had accrued severance expense recorded within accounts payable and accrued expenses of $1.0 million. 

At the Company's 2023 Annual Meeting of Stockholders (the "Annual Meeting"), which was held on April 25, 2023, each of John B. Bode, Douglas W. Calder, and Corey Watton was elected as a director of the Company and each of Richard W. Pascoe, Christopher A. Posner, and David S. Tierney ceased serving on the Company's Board of Directors. After the Annual Meeting, the Company's Board of Directors accepted the resignation of Richard W. Pascoe from his role as Chief Executive Officer on May 5, 2023, effective June 1, 2023, and appointed Tamara A. Favorito as the Chair of the Board of Directors. In addition, on May 3, 2023, Matthew R. Plooster and Joseph B. Saluri indicated to the Board of Directors that they do not intend to stand for re-election at the Company's 2024 Annual Meeting of Stockholders, and that they intend to step down from the Board of Directors as soon as replacements are found. In May 2023, the Board of Directors appointed Christal M. M. Mickle, Co-Founder and Chief Development Officer, to serve as interim President and Chief Executive Officer effective on June 1, 2023.  The Board also intends to begin a search to identify a new Chief Executive Officer, as well as new Board members to replace Mr. Plooster and Mr. Saluri.

K.Subsequent Events

The Company evaluated events and transactions occurring subsequent to March 31, 2023, through May 15,2023, the date the accompanying unaudited condensed consolidated financial statements were issued. During this period, other than the contingency discussed in Note D and the significant events disclosed in Note J, there were no subsequent events that required recognition in the accompanying unaudited condensed consolidated financial statements, nor were there any additional non-recognized subsequent events that required disclosure.

25

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q and Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022,7, 2023, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a specialty pharmaceuticalrare disease company focused on the discoverymelding science, data and patient need to create transformational therapies for diseases with limited or no treatment options. With unique, data-driven clinical, regulatory, and commercialization strategies, we are overcoming complex drug development challenges to bring much needed therapies to patients. We have a diverse portfolio of treatmentsproducts and product candidates, which includes a combination of both a clinical stage pipeline and commercial stage assets. The Company’s pipeline includes arimoclomol, an orally-delivered, first in-class investigational product candidate being developed for central nervous system,Niemann-Pick disease Type C, or CNS,NPC, which has been granted orphan drug designation, Fast-Track designation, Breakthrough Therapy designation and rare pediatric disease indications that allow us to target high-value areas with significant unmet needs. Our core competency isdesignation for the discovery and developmenttreatment of proprietary prodrugs to treat serious medical conditions through our proprietary Ligand Activated Therapy, or LAT®, platform technology. We utilize our proprietary LAT platform technology to generate improved prodrug versions of drugs approvedNPC by the U.S. Food and Drug Administration, or FDA, as well as to generate prodrug versionsand orphan medicinal product designation for the treatment of existing compounds that may have applications for new disease indications. Our prodrugNPC by the European Medicines Agency, or EMA. KP1077 is our lead clinical development product candidate pipelinewhich is currently focused on the high need areas ofbeing developed as a treatment for idiopathic hypersomnia, or IH, a rare neurological sleep disorder, and other CNS/rare diseases. Ournarcolepsy. KP1077 is comprised solely of serdexmethylphenidate, or SDX, our proprietary prodrug of d-methylphenidate, or d-MPH. The FDA has granted KP1077 orphan drug designation for the treatment of IH, and the U.S. Drug Enforcement Agency, or DEA, has classified SDX as a Schedule IV controlled substance based on evidence suggesting SDX has a lower potential for abuse when compared to d-MPH, a Schedule II controlled substance.

We have specialized expertise and a track record of success in advancing promising therapies that face complex clinical and regulatory challenges with an approach that balances science and data with patient need. The FDA has approved product, AZSTARYS®AZSTARYS®formerly referred to as KP415, a new once-daily treatment for attention deficit hyperactivity disorder, or ADHD, in patients age six years and older containscontaining our prodrug, serdexmethylphenidate,SDX, and d-MPH. In September 2019, we entered into a collaboration and license agreement, or SDX.the AZSTARYS is being commercialized in the United States by Corium, Inc.License Agreement, with Commave Therapeutics S.A. (formerly known as Boston Pharmaceutical S.A.), or Corium,Commave, an affiliate of Gurnet Point Capital, L.P., which was Under the AZSTARYS License Agreement, we granted to Commave an exclusive, worldwide license, to develop, manufacture, and commercialize AZSTARYS and any of our product candidates containing SDX and used to treat ADHD or any other CNS disease. Commave has tasked by Commave Therapeutics SA (formerly known as Boston Pharmaceuticals S.A.)Corium, Inc., or Commave,Corium, an affiliate of Gurnet Point Capital, L.P., to lead all commercialization activities for AZSTARYS in the U.S. under the KP415AZSTARYS License Agreement (as defined below). Our lead clinical developmentAgreement. Corium commercially launched AZSTARYS in the U.S. during the third quarter of 2021. In December 2021, Commave sublicensed commercialization rights for AZSTARYS in greater China to Shanghai Ark Biopharmaceutical Ltd. The FDA has also approved APADAZ®, an immediate-release combination product candidate, KP1077, is based on SDX,containing benzhydrocodone, our prodrug of d-methlyphenidate, or d-MPH,hydrocodone, and is in developmentacetaminophen, for the treatmentshort-term (no more than 14 days) management of IHacute pain severe enough to require opioid analgesic and narcolepsy. Our prodrug product candidate for which alternative treatments are inadequate. In October 2018, we entered into a collaboration and license agreement, or the treatment of stimulant use disorder,APADAZ License Agreement, with KVK-Tech, Inc., or SUD, is KP879. KVK, under which we granted to KVK the exclusive license to manufacture and commercialize APADAZ in the U.S.

 

Our strategic focus on CNS/primary mission is to deliver life-changing treatments to people with rare disease indicationsconditions, their families, and caregivers who desperately need better options. This mission guides our business development efforts to expand our pipeline with the goal of developingthrough both internal development and through our business development activities to collaborate, partner, and potentially commercializing innovative therapies for patients living with CNS/rare neurological disorders.acquire additional assets. We intend to target assets that will allow us to leverage the expertise and infrastructure that we have successfully built at KemPharm in order to mitigate risk and enhance our probability of success. In addition, we are considering external opportunities within neurology and neurodegenerative diseases, psychiatric disorders, and other rare diseases, along with adjacent or related therapeutic categories. We are seeking assets that are undergoing Phase 2 clinical trials or Phase 3 clinical trials, subject to our specific evaluation criteria, that we can in-license or acquire. If we are successful, expanding our development pipeline could be accretive to our value proposition by potentially adding new clinical data catalysts and have the potential to create incremental long-term value for shareholders.stockholders. In addition, we believe that a multi-channel development program with several product candidates addressing various CNS/rare disease indications will diversify risk and potentially create an impactful portfolio of commercial-stage products in the future.

 

For example, in May 2022, we, through our newly formed wholly-owned subsidiary, Zevra Denmark A/S (formerly known as KemPharm Denmark A/S prior to February 21, 2023, or KemPharm DK,Zevra DK), entered into an Asset Purchase Agreement, or the Arimoclomol Purchase Agreement, with Orphazyme A/S in restructuring, a Danish public limited liability company, or Orphazyme. The transactions agreed to under the Arimoclomol Purchase Agreement closed on May 31, 2022. Under the terms of the Arimoclomol Purchase Agreement, KemPharmZevra DK purchased all of the assets and operations of Orphazyme related to arimoclomol and settled all of Orphazyme’s actual outstanding liabilities to its creditors with a cash payment of $12.8 million. In addition, KemPharmZevra DK agreed to assume an estimated reserve liability of $5.2 million related to revenue generated from Orphazyme’s Early Access Program in France, or the Arimoclomol EAP.

 

Our most advanced product candidate, arimoclomol, is being developed for the treatment of NPC, a lysosomal storage disease, or LSD. NPC is a rare neurodegenerative disease characterized by an inability of the body to transport cholesterol and lipids inside of cells. Symptoms of NPC include a progressive impairment of mobility, cognition, speech, and swallowing, often culminating in premature death. The incidence of NPC is estimated to be one in 100,000 live births. We estimate that approximately 1,500 individuals have been diagnosed, of which approximately 300 are in the United States and approximately 1,200 are in Europe. However, diagnostic challenges may affect the number of potential patients, and we believe that the availability of treatment options could increase awareness of the disease and assist in identifying more cases. Therapies to treat NPC are desperately needed, and for this reason, arimoclomol is currently being made available to NPC patients in the United States, France, Germany, and other European Union countries under various early access programs, or EAPs.

26

On September 16, 2020, the previous sponsor of the arimoclomol program, Orphazyme, submitted a new drug application, or NDA, seeking approval for arimoclomol to treat NPC. In June 2021, the FDA issued a complete response letter, or CRL, which means the FDA determined that it could not approve the NDA in its present form. Our aim is to prepare and resubmit an NDA that presents meaningful evidence of safety and efficacy of arimoclomol for its intended use. To that end, we are continuing to work diligently to characterize the substantial data generated since the CRL, including the recently completed four-year open-label safety trial which was recently presented at the 19th WorldSymposiumTM in February 2023. Results from this analysis, based on up to four years of continuous treatment, suggest that arimoclomol may reduce the long-term progression of NPC. Upon fulfilling the randomized double-blinded portion of the phase 2/3 clinical trial, both placebo- and arimoclomol-treated patients were given the option to continue into the four-year (48 month) open-label-extension, or OLE, phase of the study with arimoclomol treatment provided in addition to their current standard of care. Progression of NPC disease through the DB and OLE phases was assessed utilizing the five-domain NPC Clinical Severity Scale (5DNPCCSS) and compared with an estimated progression calculated from the combination of untreated patients from the NPC-001 observational trial and placebo patients from the NPC-002 Phase 2/3 trial. We are also investigating correlations between relevant 5DNPCCSS domains and corresponding Scale for the Assessment and Rating of Ataxia, or SARA, test items to potentially provide further supportive evidence for 5DNPCCSS validity as a tool for evaluating NPC progression. The SARA test evaluates impairment related to cerebellar ataxia, which was a secondary endpoint in the Phase 2/3 clinical trial of arimoclomol in NPC (NPC progression based on the 5DNPCCSS was the primary endpoint). Based on a comparative analysis of both measurements, it was determined that individual 5DNPCCSS domains and relevant performance-based SARA test items showed strong associations and alignment between the two instruments for all analysis methods used. These results provide further support that the evaluated 5DNPCCSS domains are appropriately standardized to allow for reliable and reproducible scoring of disease severity in NPC. We plan to include these data as part of the updated NDA for arimoclomol, which is expected to be resubmitted to the FDA as early as the third quarter of 2023.

We also intend to advance our pipeline of prodrug product candidates for the treatment of IH and other CNS/rare diseases, and we reported top-line data from a Phase 1 proof-of-concept study of SDX in the fourth quarter of 2021 and final data for the Phase 1 proof-of-concept study of SDX in the first quarter of 2022. The proof-of-concept study was a dose-escalation study to evaluate the pharmacokinetics, pharmacodynamic stimulant effects, and safety of single oral doses of SDX in subjects with a history of high-dose stimulant use. In the trial, 240 mg and 360 mg doses of SDX were observed to be well-tolerated and produced d-MPH exposure that appeared to increase proportionally with dose. Mean d-MPH plasma concentrations showed a gradual increase after SDX administration, reaching a broad peak from eight to twelve hours post-dose, followed by a shallow decline thereafter. Increased wakefulness, alertness, hypervigilance, and insomnia effects were reported by study participants, which we believe suggests that SDX produced targeted pharmacodynamic effects that have the potential to benefit patients with IH and other sleep disorders. On November 18, 2022, we announced that the FDA has granted the Orphan Drug Designation to SDX for the treatment of IH.

In January 2022, we announced that we have selected KP1077 for the treatment of IH and narcolepsy as our nextlead clinical development candidate. KP1077 utilizes SDX, our prodrug of d-MPH, as its active pharmaceutical ingredient. During the first quarter of 2022, we initiated a Phase 1 clinical trial comparing the cardiovascular safety of SDX to immediate-release and long-acting formulations of RITALIN®, a commonly prescribed CNS stimulant. In addition, on May 5,September 2022, we announced thattopline data from our exploratory Phase 1 clinical trial, which showed the potential for higher dose formulations of SDX to be safe and well tolerated while avoiding the potential for greater cardiovascular safety risk compared to immediate-release and long-acting formulations of Ritalin. Based on the data, we submitted an investigational new drug, or IND, application withhave identified initial dosing strengths for the U.S. Food and Drug Administration, or FDA, seeking permission to commence a clinical program to evaluate KP1077 in IH. Upon clearance of the IND, we plan to initiate aplanned Phase 2 clinical trial of KP1077 which we believe have the potential to be well-tolerated while providing higher overall exposures to d-MPH compared to other methylphenidate products that are often used off-label as a treatment for IH. In addition, on December 21, 2022, we announced the initiation of a Phase 2 clinical trial evaluating KP1077. The Phase 2 clinical trial is a double-blind, placebo-controlled, randomized-withdrawal, dose-optimizing, multi-center study evaluating the efficacy and safety of KP1077 for the treatment of IH. We expect to enroll approximately 48 adult patients with IH in IH,more than 30 centers in the United States,States. Part 1 of the trial will consist of a five-week open-label titration phase during which patients will be optimized to one of four doses of SDX (80, 160, 240, or 320 mg/day). Part 2 of the trial will entail a two-week randomized, double-blind, withdrawal phase, during which two-thirds of the trial participants will continue to receive their optimized dose while the remaining one-third will receive placebo. Participants will be further assigned into two evenly divided cohorts. The first cohort will receive a single daily dose just before bedtime, and the second cohort will receive half the daily dose shortly after awakening and half the daily dose prior to bedtime. Interim efficacy and safety data for the Phase 2 trial is expected as early as the second halfthird quarter of 2022, with2023. In May 2023, we announced that our Investigational New Drug (IND) application for KP1077 for the treatment of narcolepsy was accepted by the FDA to begin a secondPhase 1 clinical trial of KP1077 in narcolepsy. We plan to initiate the first of several Phase 1 clinical trials of KP1077 in narcolepsy anticipatedas early as the end of 2023. These trials are expected to begin soon aftersupport both the initiation of thenarcolepsy and IH clinical trial.development programs.

 

In May 2021, we announced that SDX, our proprietary prodrug of d-MPH and the primary active pharmaceutical ingredient, or API, in AZSTARYS, was classified as a Schedule IV controlled substance by the U.S. Drug Enforcement Administration, or DEA. AZSTARYS is classified as a Schedule II controlled substance as itits formulation includes a 70:30 mixture of SDX (Schedule IV) and d-MPH (Schedule II), respectively.

 

In March 2021, we announced that the FDA approved the New Drug Application, or NDA, for AZSTARYS, a once-daily product for the treatment of ADHD in patients ranging from six years and older. Commave has licensed the commercial rights for AZSTARYS as provided by the KP415 License Agreement, and has tasked Corium with leading all commercialization activities for AZSTARYS in the United States. Corium commercially launched AZSTARYS in the United States during the third quarter of 2021.  In December 2021, Commave sublicensed commercialization rights for AZSTARYS in greater China to Shanghai Ark Biopharmaceutical Ltd.

37

We employ our proprietary LAT platform technology to discover and develop prodrugs that are new molecules that may potentially improve one or more of the attributes of approved drugs, such as enhanced bioavailability, extended duration of action, increased safety and reduced susceptibility to abuse. A prodrug is a precursor chemical compound of a drug that is inactive or less than fully active, which is then converted in the body to the active form of the drug through a normal metabolic process. Where possible, we seek, to develop prodrugs that will be eligible for approval under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or the FFDCA, otherwise known as a 505(b)(2) NDA, which allows us to submit an NDA that relies on the FDA’s previous findings of safety and effectiveness for one or more approved products, if we demonstrate such reliance is scientifically appropriate.

We intend to advance our pipeline of prodrug product candidates for the treatment of IH and other CNS/rare diseases, and we reported top-line data from a Phase 1 proof-of-concept study for KP879 in the fourth quarter of 2021 and final data for the Phase 1 proof-of-concept study for KP879 in the first quarter of 2022. The higher-dose SDX Phase 1 clinical trial was a dose-escalation study to determine the pharmacokinetics, pharmacodynamic stimulant effects, and safety of single oral doses of SDX in subjects with a history of high-dose stimulant use. The full data set, which builds upon top-line data previously reported in the fourth quarter of 2021, affirmed that 240 mg and 360 mg doses of SDX were well-tolerated and produced d-MPH exposure that appeared to increase proportionally with dose. Mean d-MPH plasma concentrations demonstrated a gradual increase after SDX administration, reaching a broad peak from eight to twelve hours post-dose, followed by a shallow decline thereafter. Increased wakefulness, alertness, hypervigilance, and insomnia effects were reported by study participants, which suggests that SDX produced targeted pharmacodynamic effects that could benefit patients with IH and other sleep disorders. 

We plan to employ our LAT platform technology and development expertise to develop additional product candidates that address significant unmet medical needs in therapeutic indications which have few existing product options. We believe our product candidates may be eligible for composition-of-matter patent protection and we intend to use the 505(b)(2) NDA pathway when available, which we believe has the potential to reduce drug development time and expense.

We have historically had minimal positive net cash flows from operations. Our cash flows used in operations for the six months ended June 30, 2022, and 2021, were ($7.7) million and $14.0 million, respectively. However, the positive net cash flows from operations for the six months ended June 30, 2021, were primarily due to an adjustment to reconcile net loss to net cash used in operations of approximately $16.1 million related to a loss on extinguishment of debt during the period.

We expect to continue to incur significant expenses and minimal positive net cash flows from operations or negative net cash flows from operations for the foreseeable future, and those expenses and losses may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will fluctuate substantially as we:

continue our ongoing preclinical studies, clinical trials and our product development activities for our pipeline of product candidates;

seek regulatory approvals for any product candidates that successfully complete clinical trials;

continue research and preclinical development and initiate clinical trials of our product candidates;

seek to discover and develop additional product candidates either internally or in partnership with other pharmaceutical companies;

adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products;

maintain, expand and protect our intellectual property portfolio; and

incur additional legal, accounting and other expenses in operating as a public company.

3827

 

Our Product Candidates and Approved Products

 

We have employed our proprietary LAT platform technology to create a portfolio of approved products that we believe will offer, and product candidates that we believe have the potential to offer, significant improvements over currently available FDA-approved drugs. We also strive to acquire product candidates that we feel compliment our portfolio, for example, in May 2022, we purchased all of the assets and operations of Orphazyme related to arimoclomol. 

 

A selection of our product candidates and approved products are summarized in the table below:

 

Selected KemPharmZevra Partnered and Other Development Assets

 

Parent Drug (Effect Profile)

Product Candidate / Product

(Indication) - Indication

 

(Status)Product Candidate 

 

Development Status

 

Next Milestone(s)

Arimoclomol (ER) - NPC Arimoclomol NDA Preparation NDA Submission -resubmission as early as Q1Q3 2023
(NPC)
Methylphenidate (ER) - IH KP1077*KP1077IH* 

Clinical - Phase 2

 

Initiation of Pivotal Phase 2 Trial ongoing - interim results as early as H2 2022Q3 2023

(IH)
Methylphenidate (ER) - Narcolepsy Types I and II KP1077*KP1077N* Clinical - Phase 1/2 Initiation of Pivotal Phase 21 Trial - as early as H2 2022
(Narcolepsy Types I and II)initiation prior to year-end
Methylphenidate (ER)KP879Clinical - Phase 2External funding and collaborations
(SUD)
Methylphenidate (ER)ADHD AZSTARYS FDA ApprovedApproved/Partnered Tracking Payor Contracts and TRx's
(ADHD)(Partnered)
Hydrocodone/APAP (IR)APADAZFDA Approved

Tracking Payor Contracts and TRx's

(Pain)(Partnered)
       
* This product candidate is subject to a right of first negotiation upon completion of a Phase 1 proof-of-concept study in favor of Commave under the terms of the KP415AZSTARYS License Agreement, but is not currently licensed to Commave, thereunder.
These anticipated milestones are based on information currently available to us. Our current plans and expectations are subject to a number of uncertainties, risks, and other important factors that could materially impact our plans, including risks which are not solely within our control. See Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022.7, 2023.

 

3928

Third-Party Agreements

KP415License Agreement

In September 2019, we entered into a collaboration and license agreement, or the KP415 License Agreement, with Commave. Under the KP415 License Agreement, we granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize our product candidates containing SDX and d-MPH, including AZSTARYS, KP484, and, at the option of Commave, KP879, KP922 or any other product candidate developed by us containing SDX and developed to treat ADHD or any other central nervous system disorder, or the Additional Product Candidates and, collectively with AZSTARYS and KP484, the Licensed Product Candidates.

Under the terms of the KP415 License Agreement, we granted Commave an exclusive, worldwide license to commercialize and develop the Licensed Product Candidates; provided that such license shall apply to an Additional Product Candidate only if Commave exercises its option under the KP415 License Agreement related thereto. If Commave exercises its option related to any Additional Product Candidate under the KP415 License Agreement, the parties are obligated to negotiate in good faith regarding the economic terms of such Additional Product Candidate. We also granted to Commave a right of first refusal to acquire, license or commercialize any Additional Product Candidate, with such right of first refusal expiring upon the acceptance of a new drug application for such Additional Product Candidate. We also granted Commave a right of first negotiation and a right of first refusal, subject to specified exceptions, for any assignment of our rights under the KP415 License Agreement.

Pursuant to the KP415 License Agreement, Commave paid us an upfront payment of $10.0 million and agreed to pay up to $63.0 million in milestone payments upon the occurrence of specified regulatory milestones related to AZSTARYS, including FDA approval and specified conditions with respect to the final approval label, and KP484. In addition, Commave agreed to make additional payments upon the achievement of specified U.S. sales milestones of up to $420.0 million in the aggregate. Further, Commave will pay us quarterly, tiered royalty payments ranging from a percentage in the high single digits to the mid-twenties of Net Sales (as defined in the KP415 License Agreement) in the United States and a percentage in the low to mid-single digits of Net Sales in each country outside the United States, in each case subject to specified reductions under certain conditions as described in the KP415 License Agreement. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the Royalty Term (as defined in the KP415 License Agreement) for the applicable product.

In April 2021, we entered into Amendment No. 1 to the KP415 License Agreement, or the KP415 Amendment. Pursuant to the KP415 Amendment, we agreed to modify the compensation terms of the KP415 License Agreement. In addition, the KP415 Amendment increased the total remaining future regulatory and sales milestone payments related to AZSTARYS up to an aggregate of $590.0 million in payments upon the occurrence of specified regulatory milestones related to AZSTARYS and upon the achievement of specified U.S. net sales milestones. Further, Commave agreed to pay us quarterly, tiered royalty payments ranging from a percentage in the high single digits to the mid-twenties of Net Sales (as defined in the KP415 License Agreement) in the United States and a percentage in the low to mid-single digits of Net Sales in each country outside the United States, in each case subject to specified reductions under certain conditions, including with respect to the final approval label, as described in the KP415 License Agreement. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the royalty term for the applicable product.

Pursuant to the KP415 Amendment, we also agreed to modify Commave’s right of first refusal such that our product candidate, KP922, is no longer subject to Commave’ right of first refusal to acquire, license or commercialize any Additional Product Candidate. Commave’s right of first refusal shall only apply to any Additional Product Candidate which contains SDX, with such right of first refusal expiring upon the acceptance of an NDA for such Additional Product Candidate containing SDX.

Commave agreed to be responsible for and reimburse us for all of development, commercialization and regulatory expenses for the Licensed Product Candidates, subject to certain limitations as set forth in the KP415 License Agreement.

40

The KP415 License Agreement will continue on a product-by-product basis (i) until expiration of the royalty term for the applicable Licensed Product Candidate in the United States and (ii) perpetually for all other countries. Commave may terminate the KP415 License Agreement at its convenience upon prior written notice prior to regulatory approval of any Licensed Product Candidate or upon prior written notice after regulatory approval of any Licensed Product Candidate. We may terminate the KP415 License Agreement in full if Commave, any of its sublicensees or any of its or their affiliate challenges the validity of any Licensed Patent (as defined in the KP415 License Agreement) and such challenge is not required under a court order or subpoena and is not a defense against a claim, action or proceeding asserted by us. Either party may terminate the KP415 License Agreement (i) upon a material breach of the KP415 License Agreement by the other party, subject to a cure period, or (ii) if the other party encounters bankruptcy or insolvency. Upon a Serious Material Breach (as defined in the KP415 License Agreement) by us, subject to a cure period, Commave may choose not to terminate the KP415 License Agreement and instead reduce the milestone and royalty payments owed to us. Upon termination, all licenses and other rights granted by us to Commave pursuant to the KP415 License Agreement would revert to us. During the term of the KP415 License Agreement, we may not develop or commercialize any Competing Product (as defined in the KP415 License Agreement).

 

Other Third-Party Agreements

 

Under our March 2012 termination agreement with Aquestive, Aquestive has the right to receive a royalty amount equal to 10% of any value generated by AZSTARYS KP484, KP879 or KP1077, and any product candidates containing SDX, including royalty payments on any license of AZSTARYS, KP484, KP879 or KP1077, the sale of AZSTARYS, KP484, KP879 or KP1077 to a third party, the commercialization of AZSTARYS, KP484, KP879 or KP1077 and the portion of any consideration that is attributable to the value of AZSTARYS, KP484, KP879 or KP1077 and paid to us or our stockholders in a change of control transaction.SDX. 

 

In July 2020, we entered into the Corium Consulting Agreement under which Corium and Commave, respectively, engaged us to guide the product development and regulatory activities for certain current and potential future products in their portfolio, as well as continue supporting preparation for the potential commercial launch of AZSTARYS. Under the Corium Consulting Agreement, we wereare entitled to receive payments from Corium of up to $15.6 million, $13.6 million of which was earnedpaid in monthlyquarterly installments through March 31, 2022 and paid in arrears.2022. The remaining $2.0 million was conditioned upon the approval by the FDA of the NDA for Corium's product candidate, ADLARITY, whichADLARITY. This $2.0 million was approvedearned in the first quarter of 2022. Corium also agreed to be responsible for and reimburse us for all development, commercialization and regulatory expenses incurred as part of the performance of the consulting services.

 

41

Results of Operations

 

Comparison of the three months ended June 30,March 31, 2023 and 2022 and 2021 (in thousands):

 

  

Three months ended June 30,

  

Period-to-

 
  

2022

  

2021

  

Period Change

 

Revenue, net

 $1,300  $11,986  $(10,686)

Operating expenses:

            

Cost of revenue

  51   1,000   (949)

Research and development

  4,795   2,848   1,947 

General and administrative

  3,558   2,305   1,253 

Acquired in-process research and development

  17,663      17,663 

Total operating expenses

  26,067   6,153   19,914 

(Loss) income from operations

  (24,767)  5,833   (30,600)

Other (expense) income:

            

Gain on extinguishment of debt

     789   (789)

Interest expense related to amortization of debt issuance costs and discount

         

Interest expense on principal

  (36)  (16)  (20)

Fair value adjustment related to derivative and warrant liability

  32   (394)  426 

Interest and other income (expense), net

  14   (9)  23 

Total other income

  10   370   (360)

(Loss) income before income taxes

  (24,757)  6,203   (30,960)

Income tax benefit

  715      715 

Net (loss) income

 $(24,042) $6,203  $(30,245)

Deemed dividend

     (16,898)  16,898 

Net loss attributable to common stockholders

 $(24,042) $(10,695) $(13,347)
  

Three months ended March 31,

  

Period-to-

 
  

2023

  

2022

  

Period Change

 

Revenue, net

 $2,879  $3,965  $(1,086)

Operating expenses:

            

Cost of revenue

  125   8   117 

Research and development

  8,844   3,082   5,762 

Selling, general and administrative

  6,834   2,734   4,100 

Total operating expenses

  15,803   5,824   9,979 

Loss from operations

  (12,924)  (1,859)  (11,065)

Other (expense) income:

            

Interest expense

  (182)  (5)  (177)

Fair value adjustment related to derivative and warrant liability

  (2)  241   (243)

Fair value adjustment related to investments

  196   (352)  548 

Interest and other income, net

  1,042   107   935 

Total other (expense) income

  1,054   (9)  1,063 

Loss before income taxes

  (11,870)  (1,868)  (10,002)

Income tax benefit

  103   4   99 

Net loss

 $(11,767) $(1,864) $(9,903)

Net loss attributable to common stockholders

 $(11,767) $(1,864) $(9,903)

 

Net Loss Attributable to Common Stockholders

 

Net loss attributable to common stockholders for the three months ended June 30, 2022,March 31, 2023, was $24.0 $11.8 million compared to net loss attributable to common stockholders of $10.7$1.9 million for the three months ended June 30, 2021,March 31, 2022, a change of $13.3 $9.9 million. The change was primarily attributable to a change in (loss) incomeloss from operations of $30.6 million and a gain on extinguishment of debt of $0.8 million in 2021 that did not recur in 2022,$11.1million; partially offset by a deemed dividend, recognized as a result of the June 2021 Inducement Transaction, totaling $16.9 million which did not recur in 2022, a change in fair value adjustment related to derivative and warrant liabilityother (expense) income of $0.4 million, and an income tax benefit of $0.7 million.$1.1 million. 

 

Revenue

 

Revenue for the three months ended June 30, 2022,March 31, 2023, was $1.3 $2.9 million, a decrease of $10.7 million$1.1 million compared to revenue of $12.0$4.0 million for the three months ended June 30, 2021.March 31, 2022. The decrease was primarily attributable to a decrease in revenue from the KP415 License Agreement of approximately $10.0$3.2 million and a decrease in revenue from the Corium Consulting Agreement, of approximately $1.9 million, partially offset by an increase in revenue fromof $2.1 million under the Arimoclomol EAP of $0.9 million and other consulting agreements of approximately $0.3 million.EAP.

 

Cost of Revenue

 

Cost of revenue for the three months ended June 30, 2022,March 31, 2023, was $0.1 million, an increase of $0.1 million, a decrease of $0.9 million compared to $8,000 cost of revenue of $1.0 million for the three months ended June 30, 2021.March 31, 2022. The decreaseincrease was primarily attributable to a decrease in royalty payments to Aquestive related to revenue from the KP415 License Agreement due to the regulatory milestone revenue earned in the second quarter of 2021, partially offset by royalties payable to Aquestive for the KP415 License Agreement royalty revenue in the second quarter of 2022 and cost of goods sold under the Arimoclomol EAP.

 

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Research and Development

 

Research and development expenses increased by $1.9 $5.7 million, from $2.8$3.1 million for the three months ended June 30, 2021,March 31, 2022, to $4.8$8.8 million for the three months ended June 30, 2022.March 31, 2023. This increase was primarily attributable to an increase in third-party research and development costs of $1.1 of $3.7 million, an increase in personnel-related costs of $0.6 $1.7 million and an increase in other research and development costs of $0.2$0.3 million.

 

Selling, General and Administrative

 

GeneralSelling, general and administrative expenses increased by $1.3 million,by $4.1 million, from $2.3$2.7 million for the three months ended June 30, 2021,March 31, 2022, to $3.6 million$6.8 million for the three months ended June 30, 2022.March 31, 2023. This increase was primarily attributable to an increase in personnel-related costs of $1.3 $1.2 million, an increase in professional fees of $2.8 million and an increase in other selling, general and administrative costs of $0.1 million.

 

Acquired In-Process Research and DevelopmentOther (Expense) Income

 

Acquired in-process research and development expense increasedOther (expense) income changed by $17.7$1.1 million, from $0$9,000 of expense for the three months ended June 30, 2021,March 31, 2022, to $17.7$1.1 million of income for the three months ended June 30, 2022. This increase was due to one-time acquired in-process research and development expense as a result of the transactions under Arimoclomol Purchase Agreement

Other Income

Other income decreased by $360,000, from $370,000 for the three months ended June 30, 2021, to $10,000 for the three months ended June 30, 2022.March 31, 2023. This period-to-period decrease in incomechange was primarily attributable to a gain on extinguishmentchange in net interest expense and other items of debt$0.8 million and a change in fair value adjustment related to investments of $789,000 during the second quarter of 2021,$0.5 million; partially offset by a change in fair value adjustment related to derivative and warrant liability of $426,000 and a change in net interest expense and other items of $3,000.

Comparison of the six months endedJune 30, 2022 and 2021 (in thousands):

  

Six months ended June 30,

  

Period-to-

 
  

2022

  

2021

  

Period Change

 

Revenue, net

 $5,265  $24,103  $(18,838)

Operating expenses:

            

Cost of revenue

  59   2,000   (1,941)

Research and development

  7,877   5,113   2,764 

General and administrative

  6,292   4,197   2,095 

Acquired in-process research and development

  17,663      17,663 

Total operating expenses

  31,891   11,310   20,581 

(Loss) income from operations

  (26,626)  12,793   (39,419)

Other (expense) income:

            

Loss on extinguishment of debt

     (16,096)  16,096 

Interest expense related to amortization of debt issuance costs and discount

     (150)  150 

Interest expense on principal

  (41)  (215)  174 

Fair value adjustment related to derivative and warrant liability

  273   (424)  697 

Interest and other (expense) income, net

  (231)  (1)  (230)

Total other income (expense)

  1   (16,886)  16,887 

Loss before income taxes

  (26,625)  (4,093)  (22,532)

Income tax benefit

  719      719 

Net loss

 $(25,906) $(4,093) $(21,813)

Deemed dividend

     (54,342)  54,342 

Net loss attributable to common stockholders

 $(25,906) $(58,435) $32,529 

Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders for the six months ended June 30, 2022, was $25.9 million compared to net loss attributable to common stockholders of $58.4 million for the six months ended June 30, 2021, a change of $32.5 million. The change was primarily attributable to a deemed dividend, recognized as a result of the January 2021 Inducement Transaction and June 2021 Inducement Transaction, totaling $54.3 million which did not recur in 2022, a net loss on extinguishment of debt of $16.1 million in 2021 that did not recur in 2022, a change in fair value adjustment related to derivative and warrant liability of $0.7 million, an income tax benefit of $0.7 million and a change in net interest expense and other items of $0.1 million, partially offset by a change in (loss) income from operations of $39.4 million. 

Revenue

Revenue for the six months ended June 30, 2022, was $5.3 million, a decrease of $18.8 million compared to revenue of $24.1 million for the six months ended June 30, 2021. The decrease was primarily attributable to a decrease in revenue from the KP415 License Agreement of approximately $19.9 million; partially offset by an increase in revenue from the Arimoclomol EAP of $0.9 million and other consulting arrangements of $0.2 million.

Cost of Revenue

Cost of revenue for the six months ended June 30, 2022, was $0.1 million, a decrease of  approximately $1.9 million compared to cost of revenue of $2.0 million for the six months ended June 30, 2021. The decrease was primarily attributable to a decrease in royalty payments to Aquestive related to revenue from the KP415 License Agreement due to the regulatory milestone revenue earned in the first and second quarters of 2021, partially offset by royalties payable to Aquestive for the KP415 License Agreement royalty revenue and cost of goods sold under the Arimoclomol EAP.

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Research and Development

Research and development expenses increased by $2.8 million, from $5.1 million for the six months ended June 30, 2021, to $7.9 million for the six months ended June 30, 2022. This increase was primarily attributable to an increase in third-party research and development costs of $1.7 million, an increase in personnel-related costs of $0.8 million and an increase in other research and development expense of $0.3 million.

General and Administrative

General and administrative expenses increased by $2.1 million, from $4.2 million for the six months ended June 30, 2021, to $6.3 million for the six months ended June 30, 2022. This increase was primarily attributable to an increase in personnel-related costs of $1.7 million and other general and administrative costs of $0.4 million.

Acquired In-Process Research and Development

Acquired in-process research and development expense increased by $17.7 million, from $0 for the six months ended June 30, 2021, to $17.7 million for the six months ended June 30, 2022. This increase was due to one-time acquired in-process research and development expense as a result of the transactions under Arimoclomol Purchase Agreement.

Other Income (Expense)

Other income (expense) changed by $16.9 million, from $16.9 million of expense for the six months ended June 30, 2021, to $1,000 for the six months ended June 30, 2022. This period-to-period change was primarily attributable to a net loss on extinguishment of debt of $16.1 million during 2021 which did not recur in 2022, a change in fair value adjustment related to derivative and warrant liability of $0.7 million and a change in net interest expense and other items of $0.1 million.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Through June 30, 2022,March 31, 2023, we have funded our research and development and operating activities primarily through the issuance of debt, private placements of redeemable convertible preferred stock and the sale of common stock in our initial public offering, at-the-market offering, underwritten public offerings, through our purchase agreements with Lincoln Park Capital LLC, or Lincoln Park, and from revenue received under the KP415Arimoclomol EAP, AZSTARYS License Agreement, the Corium Consulting Agreement and other consulting arrangements and the Arimoclomol EAP.arrangements. As of June 30, 2022,March 31, 2023, we had cash, cash equivalents and investments of $114.5 million.$95.3 million.

 

To date, we have generated revenue from the KP415Arimoclomol EAP, AZSTARYS License Agreement, reimbursement of out-of-pocket third-party costs, and the performance of consulting services and product sales under the Arimoclomol EAP.

In May 2022, we, through our newly formed wholly-owned subsidiary, KemPharm Denmark A/S, or KemPharm DK, entered into an Asset Purchase Agreement, or the Arimoclomol Purchase Agreement, with Orphazyme A/S in restructuring, a Danish public limited liability company, or Orphazyme. The transactions agreed to under the Arimoclomol Purchase Agreement closed on May 31, 2022. Under the terms of the Arimoclomol Purchase Agreement, KemPharm DK purchased all of the assets and operations of Orphazyme related to arimoclomol and settled all of Orphazyme’s actual outstanding liabilities to its creditors with a cash payment of $12.8 million. In addition, KemPharm DK agreed to assume an estimated reserve liability of $5.2 million related to revenue generated from Orphazyme’s Early Access Program in France.services.

 

In July 2020, we entered into the Corium Consulting Agreement under which Corium and Commave, respectively, engaged us to guide the product development and regulatory activities for certain current and potential future products in their portfolio, as well as continue supporting preparation for the potential commercial launch of AZSTARYS. Under the Corium Consulting Agreement, we wereare entitled to receive payments from Corium of up to $15.6 million, $13.6 million of which was earnedpaid in monthlyquarterly installments through March 31, 2022, and paid in arrears.2022. The remaining $2.0 million was conditioned upon the approval by the FDA of the NDA for Corium's product candidate, ADLARITY, whichADLARITY. This $2.0 million was approvedearned in the first quarter of 2022. Corium also agreed to be responsible for and reimburse us for all development, commercialization and regulatory expenses incurred as part of the performance of the consulting services.

 

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We have historically had minimal positiverecurring negative net operating cash flows from operations and we anticipate that we may continue to incur negative net cash flows or minimal positive net cash flows from operations for at least the next several years. We expect that our sources of revenue will be through payments arising from our license agreements with Commave and KVK,Corium, through the Arimoclomol EAP or through potential consulting arrangements product sales under the Arimoclomol EAP and any other future arrangements related to one of our product candidates.

 

In January 2021, we completed the Public Offering. The aggregate gross proceeds to us from the Public Offering, including from the exercises by the underwriter of its over-allotment option, totaled $52.4 million, before deducting underwriting discounts and commissions and offering expenses payable by us. In January 2022, we filed an amendment to the registration statement on Form S-1 (File No. 333-250945) on Form S-3 covering the issuance of the shares of our common stock issuable upon the exercise of the warrants issued in the Public Offering and remaining unexercised as of the date of the amendment, which was declared effective on February 1, 2022.

In January 2021, we entered into the January 2021 Inducement Letters. We received aggregate gross proceeds of $44.0 million from the exercise of the Existing Warrants by the Exercising Holders and the sale of the January 2021 Inducement Warrants.

In April 2020, we received proceeds of $0.8 million from a loan, or the PPP Loan, under the Paycheck Protection Program, or the PPP, of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which we used to retain current employees, maintain payroll and make lease and utility payments. In May 2021, we received notice from the U.S. Small Business Administration that our PPP Loan was forgiven in full, including all principal and interest.

In June 2021, we entered into the June 2021 Inducement Letters. We received aggregate gross proceeds of $39.1 million for the exercise of the select January 2021 Inducement Warrants by the select warrant holders and the sale of the June 2021 Inducement Warrants.

In July 2021, we entered into the Equity Distribution Agreement with JMP and RBCCM under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering price of up to $75.0 million through JMP and RBCCM as its sales agents. The issuance and sale, if any, of our common stock the Equity Distribution Agreement will be made pursuant to a registration statement on Form S-3. JMP and RBCCM may sell the common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended. JMP and RBCCM will use commercially reasonable efforts to sell the common stock from time to time, based upon instructions from us (including any price, time or size limits or other customary parameters or conditions we may impose). We will pay JMP and RBCCM a commission equal to 3.0% in the aggregate of the gross sales proceeds of any common stock sold through JMP and RBCCM under the Equity Distribution Agreement. We filed a registration statement on Form S-3 covering the sale of the shares of our common stock up to $350.0 million, $75.0 million of which was allocated to the sales of the shares of common stock issuable under the Equity Distribution Agreement, whichAgreement. The Form S-3 was declared effective on July 12, 2021. As of June 30, 2022,March 31, 2023, no shares have been issued or sold under the Equity Distribution Agreement.

 

Share Repurchase Program

 

On December 20, 2021, we initiated a share repurchase program, or the Share Repurchase Program, pursuant to which we may repurchase up to $50 million of shares of our common stock through December 31, 2023. Capital allocation to the Share Repurchase Program will be based on a variety of factors, including our business results, the receipt of royalties and sales milestones under the KP415AZSTARYS License Agreement, and potentially other sources of non-dilutive capital that may become available to us. Repurchases will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to a variety of factors, including the market price of our common stock, general market and economic conditions and applicable legal requirements. The exact number of shares to be repurchased by us is not guaranteed and the program may be suspended, modified, or discontinued at any time without prior notice. As of June 30, 2022,During the three months ended March 31, 2023, we have repurchased 909,953665,739 shares of our common stock for approximately $7.5$3.4 million under the Share Repurchase Program.

45

Convertible Debt

As of June 30, 2022,March 31, 2023, we had no convertible notes outstanding. During the first quarterrepurchased an aggregate of 2021 we repaid in full the convertible notes and terminated the Deerfield Facility Agreement.

Deerfield Facility Agreement 1,575,692 

In June 2014, we entered into the Deerfield Facility Agreement as a $60.0 million multi-tranche credit facility with Deerfield. At the time we entered into the Deerfield Facility Agreement, we borrowed the first tranche, which consisted of a $15.0 million term note and the $10.0 million convertible note, or the Deerfield Convertible Note.

The Deerfield Convertible Note originally bore interest at 9.75% per annum but was subsequently reduced to 6.75%. Interest accrued on the outstanding balance under the Deerfield Convertible Note was due quarterly in arrears. We originally had to repay one-third of the outstanding principal amount of the Deerfield Convertible Note on the fourth and fifth anniversaries of the Deerfield Facility Agreement (June 2018 and June 2019). In June 2018, Deerfield agreed to convert approximately $3.3 million of the principal amount then due, plus approximately $0.2 million of accrued interest, into 37,410 shares of our common stock. In September 2019, we entered into an amendment with Deerfield in order to (i) reduce the interest rate applicable under the Deerfield Facility Agreement from 9.75% to 6.75%, (ii) provide for “payment in kind” of interest on the Loans (as defined in the Deerfield Facility Agreement), and (iii) defer the Loan payments due pursuant to the Deerfield Facility Agreement until June 1, 2020. In December 2019, we entered into another amendment with Deerfield in order to (i) defer the Loan payments due pursuant to the Deerfield Facility Agreement until March 31, 2021, and (ii) allow for the entries of additional debt and debt holders under the Deerfield Facility Agreement (as discussed in more detail below).

Pursuant to the Deerfield Facility Agreement, we issued to Deerfield 1,923,077 shares of our Series D redeemable convertible preferred stock, or Series D Preferred, as consideration for the loans provided to us thereunder. Upon closing of our initial public offering, these shares of Series D Preferred reclassified into 256,410 shares of our common stock (effected for the 16-for-1 reverse stock split in December 2020, this became 16,025 shares of our common stock).

We also issued to Deerfield the Deerfield Warrant to purchase 14,423,076 shares of our Series D Preferred at an initial exercise price of $0.78 per share. Upon closing of our initial public offering, this warrant converted into a warrant exercisable for 1,923,077 shares of our common stock at an exercise price of $5.85 per share (effected for the 16-for-1 reverse stock split in December 2020, this became a warrant exercisable for 120,192 shares of our common stock at an exercise price of $93.60 per share). Upon the closing of the January 2021 Inducement Transaction, in accordance with the anti-dilution provisions contained within the Deerfield Warrant, the exercise price of the Deerfield Warrant was reduced to $46.25 per share. Further, upon closing of the June 2021 Inducement Transaction, in accordance with the anti-dilution provisions contained within the Deerfield Warrant, the exercise price of the Deerfield Warrant was reduced to $38.34 per share.

approximately $112021 Notes.0 m

In February 2016, we issued our 5.50% Senior Convertible Notes due 2021, or the 2021 Notes, in aggregate principal amount of $86.3 million. The 2021 Notes were originally issued to Cowen and Company and RBCCM LLC as representatives of the several initial purchasers, who subsequently resold the 2021 Notes to qualified institutional buyers in reliance on the exemption from registration provided by Rule 144Aillion under the Securities Act.

The 2021 Notes were issued pursuant to an indenture, dated as of February 9, 2016, between us and U.S. Bank National Association, as trustee. Interest on the 2021 Notes was payable semi-annually in cash in arrears on February 1 and August 1 of each year, beginning on August 1, 2016, at a rate of 5.50% per year. The 2021 Notes matured on February 1, 2021, unless earlier converted or repurchased.

In multiple exchanges occurring in October 2018, December 2019 and January 2020, all outstanding 2021 Notes were exchanged by the holders thereof for either shares of our common stock or the December 2019 Notes and January 2020 Note issued under the terms of the Deerfield Facility Agreement.

46

2021 Note Exchange Effected in January 2020

In January 2020, we entered into a January 2020 Exchange Agreement, or the January 2020 Exchange Agreement, with M. Kingdon Offshore Master Fund, LP, or Kingdon. Under the January 2020 Exchange Agreement, we issued the January 2020 Note as a senior secured convertible note in the aggregate principal amount of approximately $3.0 million in exchange for the cancellation of an aggregate of approximately $3.0 million of principal amount and accrued interest of the 2021 Note then owned by Kingdon. Upon entering into the January 2020 Exchange Agreement, we agreed to pay Kingdon an interest payment of approximately $37,000, which represents 50% of the accrued and unpaid interest, as of January 13, 2020, on Kingdon’s 2021 Note. The remainder of such interest was included in the principal amount of the January 2020 Note.

The January 2020 Note was issued with substantially the same terms and conditions as the December 2019 Notes (as amended by the amendment described in more detail below).

In connection with entering into the January 2020 Exchange Agreement, we entered into an Amendment to Facility Agreement and December 2019 Notes and Consent, or the December 2019 Note Amendment, with the December 2019 Holders that, among other things, (i) amended the December 2019 Notes to (a) reduce the Conversion Price (as defined in the December 2019 Notes) from $273.76 to $93.60 per share, (b) increased the Floor Price (as defined in the December 2019 Notes) from $6.08 to $9.328 per share, and (ii) amended Deerfield Facility Agreement to (x) provide for Kingdon to join the Deerfield Facility Agreement as a Lender (as defined in the Deerfield Facility Agreement) and (y) provide that the 2020 Note and shall constitute a “Senior Secured Convertible Note” (as defined in the Deerfield Facility Agreement) for purposes of the Deerfield Facility Agreement and other Transaction Documents (as defined in the Deerfield Facility Agreement). As a result of the December 2019 Note Amendment, the December 2019 Notes were convertible, by their terms, into an aggregate of 11,753,016 shares of our common stock, assuming a conversion date of January 13, 2020 (effected for the 16-for-1 reverse stock split in December 2020, this became 734,562 shares of our common stock).

Debt Restructuring

In December 2020, we entered into the December 2020 Exchange Agreement, which was amended on December 24, 2020. Pursuant to the December 2020 Exchange Agreement, (a) we made the Debt Payment as a cash pre-payment of a portion of principal amount of the Senior Secured Notes and the Deerfield Note to the Deerfield Lenders, DSC and Kingdon, or, collectively, the Holders,  in an aggregate amount equal to approximately $30.3 million; and (b) we issued 31,476.98412 shares of our Series B-2 Preferred Stock and warrants exercisable for 3,632,019 shares of our common stock, or the Exchange Warrants, in exchange for the cancellation of a portion of the principal amount of the Senior Secured Notes and Deerfield Note owned by the Holders, with such transaction referred to as the Exchange. Immediately following the completion of the Exchange and Debt Payment, the aggregate balance of principal and accrued interest remaining outstanding under the Facility Notes was approximately $7.6 million.

The December 2020 Exchange Agreement amended the Senior Secured Notes to provide that the failure of our common stock to remain listed on an eligible securities market will not constitute a “Major Transaction” unless such failure occurs after March 31, 2023.

The December 2020 Exchange Agreement amended the Deerfield Facility Agreement in order to, among other things, (i) extend the maturity date of the Senior Secured Notes and the Deerfield Note to March 31, 2023, (ii) provide for cash payments of interest on the Loans (as defined in the Deerfield Facility Agreement) for the periods following July 1, 2021, and (iii) provide for specified prepayment terms on the Loans.

The December 2020 Exchange Agreement amended that certain Amended and Restated Investors’ Rights Agreement, dated as of February 19, 2015, or the IRA, by and among us, Deerfield and the other parties signatory thereto in order to, among other things, add Deerfield Special Situations Fund, L.P. as a party thereto and to give effect to the issuance of the Exchange Warrants and our registration obligations under the December 2020 Exchange Agreement (as described in more detail below).

The Exercise Warrants are subject to substantially the same terms and conditions as the Existing Warrants, with an exercise price equal to the exercise price per share of the Existing Warrants and will provide that the Holders will be limited from exercising such Exchange Warrants if, as a result of such exercise, such holders (together with certain affiliates and “group” members of such holders) would beneficially own more than 4.985% of the total number of shares of our common stock then issued and outstanding.

47

Pursuant to the terms of the December 2020 Exchange Agreement, we also filed a registration statement to register for resale under the Securities Act the shares of common stock issuable upon conversion of the shares of Series B-2 Preferred Stock and exercise of the Exchange Warrants. 

In connection with the December 2020 Exchange Agreement, we filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B-2 Convertible Preferred Stock, or the Amended and Restated Series B-2 Certificate of Designation, with the Secretary of State of the State of Delaware, setting forth the preferences, rights and limitations of the Series B-2 Preferred Stock.

The shares of Series B-2 Preferred Stock were convertible into an aggregate of 4,842,690 shares of our common stock. Each share of Series B-2 Preferred Stock had an aggregate stated value of $1,000 and was convertible into shares of our common stock at a per share price equal to $6.4999 (subject to adjustment to reflect stock splits and similar events).

In March 2021, all shares of Series B-2 Preferred Stock converted into common stock. 

In June 2021, we filed with the Secretary of State of the State of Delaware a Certificate of Elimination of Series B-2 Convertible Preferred Stock, eliminating from our Certificate of Incorporation the 31,480 shares designated as Series B-2 Convertible Preferred Stock.

December 2020 Exchange Agreement Amendment

On January 12, 2021, in connection with the transactions contemplated by the December 2020 Exchange Agreement, we entered into an Amendment to Senior Secured Convertible Notes and Amendment to Warrant, or the January 2021 Amendment, with the Deerfield Holders. The January 2021 Amendment modified certain specified terms of (i) the Facility Notes and (ii) the Deerfield Warrant to, among other things, exclude the transactions contemplated by the December 2020 Exchange Agreement and issuance of securities pursuant to the Underwriting Agreement from the anti-dilution provisions of the Facility Notes and the Deerfield Warrant.

Series B-2 Preferred Stock

On January 11, 2021, as a condition to the closing of the transactions contemplated by the December 2020 Exchange Agreement, we filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B-2 Convertible Preferred Stock, or the Series B-2 Certificate of Designation, with the Secretary of State of the State of Delaware, setting forth the preferences, rights and limitations of the Series B-2 Preferred Stock.

Payoff of Facility Agreement Notes and Termination of Facility Agreement

On February 8, 2021, we entered into a payoff letter with the Facility Agreement Note Holders, pursuant to which we agreed to pay off and thereby terminate the Facility Agreement.

Pursuant to the payoff letter, we paid a total of $8.0 million to the Facility Agreement Note Holders, representing the principal balance, accrued interest outstanding and a prepayment fee in repayment of our outstanding obligations under the Facility Agreement.

Pursuant to the payoff letter, all outstanding indebtedness and obligations owed by us to the Facility Agreement Note Holders under the Facility Agreement have been paid in full. The Facility Agreement and the notes thereunder, as well as the security interests in the assets of us securing the Facility Agreement and note obligations, have been terminated. The Facility Agreement Note Holders will retain the warrants previously issued to them. Share Repurchase Program.

 

Line of Credit

 

InOn May 31, 2022, we and Ameris Bank, as lender, entered into a $20.0 million revolving loan agreement, with Ameris Bank, as lender, or the Line of Credit. Proceeds of the revolving facility provided by the Line of Credit are to be used for general corporate purposes. Loans under the Line of Credit bear interest at the Secured Overnight Financing Rate, ("SOFR")or SOFR, plus 1.60%, with a SOFR floor of 0.00%

 

The revolving facility under the Line of Credit is secured by a perfected security interest in deposit accounts. The revolving facility under the Line of Credit is subject to customary affirmative and negative covenants.

 

The latest maturity date of the loans under the Line of Credit is May 31, 2025. The Line of Credit contains customary events of default that could lead to an acceleration of the loans, including cross-default, bankruptcy and payment defaults. As of June 30,December 31, 2022, we havehad drawn $12.8 million from the Line of Credit to finance the transactions under the Arimoclomol Purchase Agreement, and this amount iswas supported by a $12.8 million certificate of deposit which iswas shown as long-term investments - other in the unaudited condensed consolidated balance sheets.sheet as of December 31, 2022. The remaining $7.2 million available under the Line of Credit iswas secured by a separate interest-bearing certificate of deposit and iswas also recorded as long-term investments - other in the unaudited condensed consolidated balance sheetssheet as of June 30,December 31, 2022. These certificates of deposit arewere pledged as collateral against the Line of Credit and could not be redeemed so long as the $20.0 million remained available under the Line of Credit. The total value of the certificates of deposit held with Ameris Bank must meet or exceed the amount available to borrow under the Line of Credit so long as the Line of Credit remains active. On January 31, 2023, we repaid the $12.8 million outstanding under the Line of Credit in full, and subsequently closed the Line of Credit during the first quarter of 2023. 

On January 26, 2023, the Company and Wells Fargo, as lender, entered into a margin account agreement under which the Company initially borrowed $12.8 million. The margin account bears interest at the Prime Rate minus 225 basis-points. As of March 31, 2023, $12.9million was outstanding under the margin account.

 

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Cash Flows

 

The following table summarizes our cash flows for the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 (in thousands):

 

  

Six months ended June 30,

 
  

2022

  

2021

 

Net cash (used in) provided by operating activities

 $(7,657) $14,017 

Net cash used in investing activities

  (36,928)  (81)

Net cash provided by financing activities

  9,018   114,037 

Net (decrease) increase in cash and cash equivalents

 $(35,567) $127,973 
  

Three months ended March 31,

 
  

2023

  

2022

 

Net cash used in operating activities

 $(4,045) $(3,553)

Net cash used in investing activities

  (17,555)  (3,848)

Net cash used in financing activities

  (3,750)  (4,733)

Effect of exchange rates on cash and cash equivalents

  65    

Net decrease in cash and cash equivalents

 $(25,285) $(12,134)

 

Operating Activities

 

For the sixthree months ended June 30,March 31, 2023, net cash used in operating activities of $4.0 million consisted of a net loss of $11.8 million, partially offset by $0.6 million in adjustments for non-cash items and $7.1 million in changes in working capital. Net loss was primarily attributable to our spending on research and development programs and operating costs, partially offset by revenue received under the AZSTARYS License Agreement, Arimoclomol EAP and the Corium Consulting Agreement. The changes in working capital consisted of $0.7 million related to a change in prepaid expenses and other assets, $0.5 million related to a change in accounts and other receivables, $1.5 million related to a change in discount and rebate liabilities, $3.9 million related to a change in accounts payable and accrued expenses, $0.1 million related to a change in operating lease right-of-use assets, $0.1 million related to a change in inventories and $0.4 million related to a change in other liabilities, partially offset by $0.1 million related to a change in operating lease liabilities. The adjustments for non-cash items primarily consisted of stock-based compensation expense of $0.6 million, non-cash severance expense of $0.4 million and $0.1 million related to depreciation, amortization and other items, partially offset by a change in the fair value adjustment related to investments of $0.2 million and a gain on foreign currency exchange rates of $0.2 million. 

For the three months ended March 31, 2022, net cash used in operating activities of $7.7$3.6 million consisted of a net loss of $25.9$1.9 million and $2.4$2.8 million in changes in working capital, partially offset by $20.7$1.1 million in adjustments for non-cash items. Net loss was primarily attributable to our spending on research and development programs and operating costs, partially offset by revenue received under the KP415AZSTARYS License Agreement Arimoclomol EAP and the Corium Consulting Agreement. The changes in working capital consisted of $1.9 million related to a change in prepaid expenses and other assets, $1.3$1.8 million related to a change in accounts and other receivables, $0.5 million related to a change in accounts payable and $0.3accrued expenses, $0.1 million related to a change in operating lease liabilities and $0.8 million related to a change in other liabilities, partially offset by $0.6$0.3 million related to a change in accounts payableprepaid expense and accrued expensesother assets and $0.5$0.1 million related to a change in discount and rebate liabilities.operating lease right-of-use assets. The adjustments for non-cash items primarily consisted of stock-based compensation expense of $2.4$0.9 million, a change in the fair value adjustment related to investments of $0.5$0.4 million $17.7 million related to acquired in-process research and development which was expensed as part of the transactions under the Arimoclomol Purchase Agreement and $0.4$0.1 million related to depreciation, amortization and other items, partially offset by a change in the fair value adjustment related to derivative and warrant liabilities of $0.3$0.2 million.

For the six months ended June 30, 2021, net cash provided by operating activities of $14.0 million consisted of $18.0 million in adjustments for non-cash items and $0.1 million in changes in working capital, partially offset by a net loss of $4.1 million. The adjustments for non-cash items primarily consisted of a loss on extinguishment of debt of $16.1 million, stock-based compensation expense of $1.0 million, amortization of debt issuance costs and debt discount of $0.2 million, a change in the fair value adjustment related to derivative and warrant liabilities of $0.4 million and $0.4 million related to depreciation, amortization and other items. The changes in working capital consisted of $0.7 million related to a change in accounts and other receivables, $0.1 million related to a change in operating lease right-of-use assets and $2.5 million related to a change in other liabilities, partially offset by $1.7 million related to a change in accounts payable and accrued expenses, $0.2 million related to a change in operating lease liabilities and $1.3 million related to a change in prepaid expenses and other assets. Net loss was primarily attributable to a loss on extinguishment of debt and our spending on research and development programs and operating costs, partially offset by revenue received under the KP415 License Agreement and the Corium Consulting Agreement. 

 

4932

 

Investing Activities

 

For the sixthree months ended June 30,March 31, 2023, net cash used in investing activities was $17.6 million, which was primarily attributable to purchases of investments.

For the three months ended March 31, 2022, net cash used in investing activities was $36.9$3.8 million, which was attributable to net acquisition costs of the transactions under the Arimoclomol Purchase Agreement of $14.1 million and purchases of investments of $23.8 million, partially offset by maturities of investments of $1.0 million.

For the six months ended June 30, 2021, net cash used in investing activities was $81,000, which wasprimarily attributable to purchases of property and equipment.investments.

 

Financing Activities

 

For the sixthree months ended June 30, 2022,March 31, 2023, net cash provided byused in financing activities was $9.0$3.8 million, which was primarily attributable to proceeds from the issuance of debt of $12.8$12.9 million, proceeds frompartially offset by payments of principal on insurance financing arrangements of $0.4 million, payments to repurchase shares as part of $1.3the Share Repurchase Program of $3.4 million and proceeds from salespayments of common stock underprincipal on debt of $12.8 million.

For the Employee Stock Purchase Plan (the "ESPP") of $0.2three months ended March 31, 2022, net cash used in financing activities was $4.7 million, partially offset bywhich was primarily attributable to payments to repurchase shares as part of the Share Repurchase Program of $4.7 million, payments of principal on insurance financing arrangements of $0.5 million and payment of offering costs of $0.1 million.

For the six months ended June 30, 2021, net cash provided by financing activities was $114.0 million, which was primarily attributable to net proceeds from sales of our common stock under the Public Offering of $49.3 million, net proceeds from the January 2021 Inducement Transaction of $41.4 million, net proceeds from the June 2021 Inducement Transaction of $35.6 million and net proceeds from the exercise of common stock warrants of $29.8 million, partially offset by payment of offering costs of $1.1 million, repayment of principal on finance lease liabilities of $0.1 million, payment of debt issuance costs of $2.9 million and repayment of principal on convertible notes of $37.9 million.

50

 

Future Funding Requirements

 

Based on our current operating forecast, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our operations through and beyond 2025.into 2026. This estimate does not include our projected revenue, a portion of which is based on royalties from commercial sales and upon the achievement of milestones in the KP415AZSTARYS License Agreement and the APADAZ License Agreement. Certain of the milestones are associated with regulatory matters that are outside our control. In addition, we maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of a failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.

 

Potential near-term sources of additional funding include:

 

 

any revenues generated under either the KP415AZSTARYS License Agreement or the APADAZ License Agreement;

   
 

any consulting services revenue or short-term milestone payments generated under the KP415AZSTARYS License Agreement;

   
 any product sales under the Arimoclomol EAP; and
   
 

any consulting services revenue generated under other potential consulting arrangements.

 

We cannot guarantee that we will be able to generate sufficient proceeds from any of these potential sources to fund our operating expenses. We anticipate that our expenses will fluctuate substantially as we:

continue our ongoing preclinical studies, clinical trials and our product development activities for our pipeline of product candidates;

seek regulatory approvals for any product candidates that successfully complete clinical trials;

continue research and preclinical development and initiate clinical trials of our product candidates;

seek to discover and develop additional product candidates either internally or in partnership with other pharmaceutical companies;

adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products;
maintain, expand and protect our intellectual property portfolio; and
incur additional legal, accounting and other expenses in operating as a public company.

 

To date, we have generated revenue from the KP415AZSTARYS License Agreement, reimbursements of out-of-pocket third-party costs, the performance of consulting services and product sales under the Arimoclomol EAP. We expect that, for the foreseeable future, our only sources of revenues will be through payments arising from the KP415AZSTARYS License Agreement, the APADAZ License Agreement, through potential consulting arrangements and any other future arrangements related to one of our product candidates and product sales under the Arimoclomol EAP. While we have entered into the APADAZ License Agreement to commercialize APADAZ in the United States, and entered into the KP415AZSTARYS License Agreement to develop, manufacture and commercialize AZSTARYS, and KP484, we cannot guarantee that this, or any strategy we adopt in the future, will be successful. For instance, we received milestone payments under the KP415AZSTARYS License Agreement, but we cannot guarantee that we will earn any additional milestone or royalty payments under this agreement in the future. We also cannot guarantee that we will continue to generate revenue under the Arimoclomol EAP. We also expect to continue to incur additional costs associated with operating as a public company.

 

The COVID-19 pandemic has caused and continues to cause major disruptions to businesses and markets worldwide. We cannot predict what the long-term effects of this pandemic or future public health crises and the resulting economic disruptions may have on our liquidity and results of operations. The extent of the effect of the COVID-19 pandemic on our liquidity and results of operations will depend on a number of future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. The COVID-19 pandemicA future public health crisis may make it more difficult for us to enroll patients in any future clinical trials or cause delays in the regulatory approval of our product candidates. A portion of our projected revenue is based upon the achievement of milestones in the KP415AZSTARYS License Agreement associated with regulatory matters that may be impacted by the COVID-19 pandemic. As a result, we cannot predict what, if any, impact that the COVID-19 pandemic or a future public health crisis may have on our ability to achieve these milestones. The economic uncertainty surrounding the COVID-19 pandemic and as a result of rising inflation and interest rates may also dramatically reduce our ability to secure debt or equity financing necessary to support our operations. We are unable to currently estimate the financial effect

33

 

We have based our estimates of our cash needs and cash runway on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect and we cannot guarantee that we will be able to generate sufficient proceeds from the KP415AZSTARYS License Agreement, the APADAZ License Agreement, the Corium Consulting Agreement, product salesreimbursements under the Arimoclomol EAP and other potential consulting arrangements or other funding transactions to fund our operating expenses. To meet any additional cash requirements, we may seek to sell additional equity or convertible securities that may result in dilution to our stockholders, issue additional debt or seek other third-party funding, including potential strategic transactions, such as licensing or collaboration arrangements. Because of the numerous risks and uncertainties associated with the development and commercialization of product candidates and products, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the commercialization and development of our partnered product or product candidates, should they obtain regulatory approval.

 

51

Critical Accounting Policies and Significant Judgments and Estimates

 

This management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

Our critical accounting policies have not changed materially from those described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022.7, 2023.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.

Controls and Procedures

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022.March 31, 2023. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022,March 31, 2023, our chief executive officer and our chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fiscal quarter ended June 30, 2022,March 31, 2023, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

5234

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. We believe there is no litigation pending that would reasonably be expected to, individually or in the aggregate, have a material adverse effect on our results of operations or financial condition.

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider all the risk factors and uncertainties described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on March 31, 2022,7, 2023, before investing in our common stock. Except as discloseddiscussed below, there have been no material changes to the risk factors described in that report. If any of those risks materialize, our business, financial condition and results of operations could be seriously harmed. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements because of those risk factors and the other factors described in in this Quarterly Report on Form 10-Q.

 

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on the management, research and development, clinical, financial and business development expertise of our senior leadership team, as well as the other members of our scientific and clinical teams. Although we have employment agreements with each of our executive officers, these agreements do not obligate them to continue working for our company and they may terminate their employment with us at any time. Among other recent changes in our senior management team, our Chief Executive Officer has resigned effective as of June 1, 2023. Our future performance will depend, in part, on a successful transition period with our new Chief Executive Officer, including any interim Chief Executive Officer, the successful integration of these and any other new senior level executives into their roles, and the continuity of leadership among the larger workforce. If we engage in acquisitions to growdo not successfully manage these transitions, it could be viewed negatively by our customers, employees, investors, and other third-party partners, and could have an adverse impact on our business and results of operations.

Recruiting and retaining qualified scientific and clinical personnel and, if we progress the development of our product candidate pipeline toward scaling up for commercialization, manufacturing and sales and marketing personnel, will incur a varietyalso be critical to our success. The loss of coststhe services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may potentially facetake an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize our prodrug product candidates. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous riskspharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited

We could be negatively affected as a result of the actions of activist stockholders, which could be disruptive and costly and may conflict with or disrupt the strategic direction of our business.

In January 2023, our board of directors received notice from a stockholder of his intention to nominate three nominees to stand for election to our board of directors at our 2023 annual meeting of stockholder and to submit a proposal at the annual meeting, which resulted in a contested election at the annual meeting at which such nominees were elected by our stockholders. Similar to the activist stockholder activities initiated in January 2023, activist stockholders may from time to time attempt to effect changes in our strategic direction and seek changes regarding our corporate governance or structure. Our board of directors and management team strive to maintain constructive, ongoing communications with all stockholders who wish to speak with us, including activist stockholders, and welcome their views and opinions with the goal of working together constructively to enhance value for all stockholders. Any future proxy contest with respect to election of our directors, or other activist stockholder activities, could adversely affect our business because: (1) responding to a proxy contest and other actions by activist stockholders can be costly and time-consuming, disruptive to our operations and divert the attention of management and our employees; (2) actual or perceived uncertainties as to our future direction caused by activist activities may cause or appear to cause instability or lack of continuity, resulting in the loss of potential business opportunities, and potentially making it more difficult to attract and retain qualified personnel and business partners; and (3) if individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans. Activist stockholder activities may also cause significant fluctuations in our stock price to decline.based on temporary or speculative market perceptions, or other factors that do not necessarily reflect the fundamental underlying value of our business.

 

If appropriate opportunities become available, we may seek to acquire businesses or assets to enhance our business. For example, in May 2022, we acquired allConcentration of the assets and operations of Orphazyme related to arimoclomol. In connection with any acquisitions, we could issue additional equity securities, which would dilute our stockholders, incur substantial debt to fund the acquisitions or assume significant liabilities.Credit Risk 

 

Acquisitions involve manyFinancial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, and diverse risksinvestments. The Company invests in money market funds, U.S. treasury securities, and uncertainties, including problems integratingU.S. government agency securities. The Company maintains bank deposits in federally insured financial institutions and these deposits may exceed federally insured limits. The Company is exposed to credit risk in the purchased operations or assets as well as unanticipated costs, liabilities,event of a default by the financial institutions holding its cash and economic, political, legalcash equivalents to the extent recorded on the unaudited condensed consolidated balance sheets. The Company has not experienced any material losses on its deposits of cash, cash equivalents, and regulatory challenges due to our inexperience operating in new regions or countries, and we may fail to successfully integrate acquired companies, such as Orphazyme, or retain key personnel from the acquired company. To date, we have limited experience with acquisitions and the integration of acquired operations and personnel. Acquisitions may divert our attention from our core business. Acquisitions may require us to record goodwill and non-amortizable intangible assets that will be subject to testing on a regular basis and potential period impairment charges, incur amortization expenses related to certain intangible assets, and incur write offs and restructuring and other related expenses, any of which could harm our operating results and financial condition.

New business strategies, especially those involving acquisitions, are inherently risky and may not be successful. Failure to successfully identify, complete, manage and integrate acquisitions could materially and adversely affect our business, financial condition and results of operations and could cause our stock price to decline.investments.

 

53

Global economic uncertainty and other global economic or political and regulatory developments could have a material adverse effect on our business, cash flows, financial condition and/or prospects.

Growth in the global pharmaceutical market has become increasingly tied to (i) global economic growth as an economic downturn may, for example as a the result of the COVID-19 pandemic's paralyzing effects on economic activities, reduce the amount of funding for the pharmaceutical sector as a whole or certain diseases targeted by us and (ii) political conditions, tension and uncertainty which could, for instance, impact the regulations applicable to us.

Uncertain political and geopolitical conditions currently exist in various parts of the world. At the end of 2021 and into 2022, tensions between the United States and Russia escalated when Russia amassed large numbers of military ground forces and support personnel on the Ukraine-Russia border and in February 2022, Russia launched a wide-ranging attack on Ukraine. In response, the North Atlantic Treaty Organization ("NATO") has deployed additional military forces to Eastern Europe, and the United Kingdom, the European Union and the United States announced certain sanctions against Russia. The conflict in Ukraine and any retaliatory measures taken by the United States and NATO could threaten global security and result in further regional conflict and otherwise have a lasting impact on regional and global economies, any or all of which could adversely affect our business. In addition, the full effects of the United Kingdom’s exit from the EU in January 2020 are impossible to predict but may result in significant market volatility and dislocation, and adversely affect the United Kingdom, European and global economy.

Future legal or regulatory changes in jurisdictions where we currently operate, or in such jurisdictions in which we may choose to operate in the future, could materially and adversely affect our business, results of operations, cash flows, financial condition and/or prospects, including by imposing regulatory and operational restrictions and compliance obligations on our business, reducing our revenue or increasing our expenses.

The above circumstances, individually or in the aggregate, could have a material adverse effect on our business, cash flows, financial condition and/or prospects.

5435

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities By the Issuer and Affiliated Purchasers

 

Issuer Purchases of Equity Securities

 

 

Period

 

Total Number of

Shares Purchased

  

Average Price

Paid per Share

  

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

  

Maximum Number (or

Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

April 1, 2022 through April 30, 2022

    $     $42,500,000 
May 1, 2022 through May 31, 2022           42,500,000 
June 1, 2022 through June 30, 2022           42,500,000 

Total

    $     $42,500,000 

Period

 

Total Number of

Shares Purchased

  

Average Price

Paid per Share

  

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

  

Maximum Number (or

Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 
January 1, 2023, through January 31, 2023    $     $42,500,000 
February 1, 2023, through February 28, 2023           42,500,000 
March 1, 2023, through March 31, 2023  665,739   5.09   1,575,692   39,079,815 

Total

  665,739  $5.09   1,575,692  $39,079,815 

 

(1) On December 20, 2021, the Company announced that it had initiated a share repurchase program, or the Share Repurchase Program, pursuant to which the Company may repurchase up to $50 million of shares of its common stock through December 31, 2023. Repurchases will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to a variety of factors, including the market price of the Company’s common stock, general market and economic conditions and applicable legal requirements. The exact number of shares to be repurchased by the Company is not guaranteed and the program may be suspended, modified, or discontinued at any time without prior notice.

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

5536

 

Item 6.

Exhibits

 

The following is a list of exhibits filed as part of this Form 10-Q (the SEC file number for all items incorporated by reference herein from reports on Forms 10-K, 10-Q, and 8-K is 001-36913):

 

Exhibit No.

 

Description

3.1

 

Amended and Restated Certificate of Incorporation of KemPharm,Zevra Therapeutics, Inc. (incorporated herein by reference to the Registrant’s Current Report on Form 8-K as filed with the SEC on April 21, 2015).

3.1.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant, effective as of December 23, 2020 (incorporated herein by reference to Registrant's Current Report on Form 8-K as filed with the SEC on December 23, 2020).

3.2

3.1.2
 Certificate of Amendment of Amended and Restated Bylaws, as currently in effect,Certificate of KemPharm,Incorporation of Zevra Therapeutics, Inc. (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on July 17, 2020)February 24, 2023).

3.2

Amended and Restated Bylaws, as currently in effect, of Zevra Therapeutics, Inc. (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on February 24, 2023).

4.1

 

Specimen stock certificate evidencing shares of Common Stock (incorporated herein by reference to the Registrant's Annual Report on Form 10-K as filed with the SEC on March 12, 2021).
10.1†10.1 Asset PurchaseAmendment to Employment Agreement, dated as of January 6, 2023, between Zevra Therapeutics, Inc. and Richard W. Pascoe (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on January 9, 2023).
10.2Transition Agreement, dated as of January 4, 2023, as amended, between Zevra Therapeutics, Inc. and among KemPharm,Travis C. Mickle, Ph.D. (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on January 9, 2023).
10.3Consulting Agreement, dated as of January 6, 2023, between Zevra Therapeutics, Inc., KemPharm Denmark A/S and Orphazyme A/S, in restructuring,Travis C. Mickle, Ph.D. (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on January 9, 2023).
10.42023 Employment Inducement Award Plan and forms of award agreements thereunder (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on March 7, 2023).
10.5Transition Agreement, dated as of May 15, 20226, 2023, between Zevra Therapeutics, Inc. and Richard W. Pascoe (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on May 16, 2022)8, 2023).
10.210.6 Revolving Loan Agreement Regarding Employment Terms, dated as of May 31, 2022 by and among KemPharm,15, 2023, between Zevra Therapeutics, Inc. and Ameris Bank, as lenderChristal M.M. Mickle (incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on June 1, 2022)May 15, 2023).

31.1*

 

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

 

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**

 

Certification of the Principal Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

 

Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

 

Inline XBRL Instance Document

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104** Cover page Interactive Data File (embedded within the Inline XBRL and combined in Exhibit 101)

 

*

Filed herewith

**

Furnished herewith

Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the Securities and Exchange Commission upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.

 

5637

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

KemPharm,Zevra Therapeutics, Inc.

 

 

Date:      August 12, 2022May 15, 2023

By:

/s/ Travis C. MickleRichard W. Pascoe

 

 

Travis C. Mickle, Ph.D.Richard W. Pascoe

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

Date:      August 12, 2022May 15, 2023

By:

/s/ R. LaDuane Clifton

 

 

R. LaDuane Clifton, CPA

 

 

Chief Financial Officer, Secretary and Treasurer

(Principal Financial Officer)

 

5738