kmph20170630_10q.htm
 

 



 

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, 2020

 

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, 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 class Trading Symbol Name of each exchange on which registered
Common KMPH None

 

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 shares of common stock outstanding as of August 11, 2020: 72,463,841

 



 

 

 

 

 

 

INDEX

 

KEMPHARM, INC.

FORM 10-Q

 

    Page
     

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Balance Sheets as of JUNE 30, 2020 (UNAUDITED) and December 31, 2019

3

 

UNAUDITED Condensed Statements of Operations for the three AND SIX months ended JUNE 30, 2020 and 2019

4

  UNAUDITED CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE Three AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 5

 

Unaudited condensed Statements of Cash Flows for the SIX months ended JUNE 30, 2020 and 2019

6

 

Notes to unaudited Condensed Financial Statements

7

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4.

Controls and Procedures

49

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

50

Item 1A.

Risk Factors

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

105

Item 3.

Defaults Upon Senior Securities

105

Item 4.

Mine Safety Disclosures

105

Item 5.

Other Information

105

Item 6.

Exhibits

106

 

 

 

 

Signatures

107

 

 

 
 
 

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

KEMPHARM, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and par value amounts)

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 
   

(unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 6,369     $ 3,217  

Accounts and other receivables

    2,093       1,865  

Prepaid expenses and other current assets

    603       1,552  

Total current assets

    9,065       6,634  

Property and equipment, net

    1,146       1,471  

Operating lease right-of-use assets

    1,404       1,537  

Restricted cash

    186       338  

Other long-term assets

    527       527  

Total assets

  $ 12,328     $ 10,507  
                 

Liabilities and stockholders' deficit

               

Current liabilities:

               

Accounts payable and accrued expenses

  $ 4,729     $ 4,911  

Current portion of convertible notes

    67,271        

Current portion of operating lease liabilities

    309       284  

Other current liabilities

    240       236  

Total current liabilities

    72,549       5,431  

Convertible notes, less current portion, net

          77,343  

Derivative and warrant liability

    47       120  

Operating lease liabilities, less current portion

    1,755       1,901  
Loans payable     781        

Other long-term liabilities

    59       168  

Total liabilities

    75,191       84,963  
                 

Commitments and contingencies (Note D)

               
                 

Stockholders’ deficit:

               

Preferred stock:

               

Series A convertible preferred stock, $0.0001 par value, 9,578 shares authorized, 9,577 shares issued and no shares outstanding as of June 30, 2020 (unaudited) and December 31, 2019

           

Series B-1 convertible preferred stock, $0.0001 par value, 1,576 shares authorized, 1,576 shares issued and no shares outstanding as of June 30, 2020 (unaudited) and December 31, 2019

           

Series B-2 convertible preferred stock, $0.0001 par value, 27,000 shares authorized, no shares issued or outstanding as of June 30, 2020 (unaudited) and December 31, 2019

           

Undesignated preferred stock, $0.0001 par value, 9,961,846 shares authorized, no shares issued or outstanding as of June 30, 2020 (unaudited) and December 31, 2019

           

Common stock, $0.0001 par value, 250,000,000 shares authorized, 67,223,913 shares issued and outstanding as of June 30, 2020 (unaudited); 36,350,785 shares issued and outstanding as of December 31, 2019

    7       4  

Additional paid-in capital

    187,739       171,254  

Accumulated deficit

    (250,609 )     (245,714 )

Total stockholders' deficit

    (62,863 )     (74,456 )

Total liabilities and stockholders' deficit

  $ 12,328     $ 10,507  

 

See accompanying notes to unaudited condensed financial statements

  

3

 
 

 

KEMPHARM, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 6,908     $     $ 8,997     $  

Operating expenses:

                               

Royalty and direct contract acquisition costs

    642             1,305        

Research and development

    1,954       4,803       4,080       13,334  

General and administrative

    1,719       2,989       3,964       5,827  

Severance expense

                830        

Total operating expenses

    4,315       7,792       10,179       19,161  

Income (loss) from operations

    2,593       (7,792 )     (1,182 )     (19,161 )

Other (expense) income:

                               

Interest expense related to amortization of debt issuance costs and discount

    (574 )     (305 )     (1,145 )     (610 )

Interest expense on principal

    (1,197 )     (1,232 )     (2,457 )     (2,461 )

Fair value adjustment related to derivative and warrant liability

    (3 )     (21 )     72       432  

Interest and other income (expense), net

    40       84       (183 )     235  

Total other expenses

    (1,734 )     (1,474 )     (3,713 )     (2,404 )

Income (loss) before income taxes

    859       (9,266 )     (4,895 )     (21,565 )

Income tax benefit

          9             17  

Net income (loss)

  $ 859     $ (9,257 )   $ (4,895 )   $ (21,548 )
                                 

Net income (loss) per share of common stock:

                               
Basic   $ 0.01     $ (0.33 )   $ (0.09 )   $ (0.78 )

Diluted

  $ 0.01     $ (0.33 )   $ (0.09 )   $ (0.78 )
                                 

Weighted average number of shares of common stock outstanding:

                               
Basic     63,163,251       28,386,119       55,618,446       27,548,657  

Diluted

    63,164,403       28,386,119       55,618,446       27,548,657  

 

See accompanying notes to unaudited condensed financial statements

 

4

 
 

 

KEMPHARM, INC.

UNAUDITED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(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

   

Equity

 

Balance as of January 1, 2020

  $     $     $     $     $ 4     $ 171,254     $ (245,714 )   $ (74,456 )

Net loss

                                        (5,754 )     (5,754 )

Stock-based compensation expense

                                  1,029             1,029  

Issuance of common stock in connection with equity line of credit

                                  1,112             1,112  
Issuance of common stock in connection with Deerfield Optional Conversion Feature                             2       9,598             9,600  
Recognition of deferred offering costs in connection with equity line of credit                                   121             121  

Offering expenses charged to equity

                                  (327 )           (327 )

Balance as of March 31, 2020

                            6       182,787       (251,468 )     (68,675 )
Net income                                         859       859  
Stock-based compensation expense                                   620             620  
Issuance of common stock in connection with equity line of credit                                   1,191             1,191  
Issuance of common stock in connection with Deerfield Optional Conversion Feature                             1       3,149             3,150  
Offering expenses charged to equity                                   (92 )           (92 )
Issuance of common stock in exchange for consulting services                                   84             84  
Balance as of June 30, 2020   $     $     $     $     $ 7     $ 187,739     $ (250,609 )   $ (62,863 )

 

   

Preferred Stock

                                 
   

Series A

                                         
   

Convertible

   

Undesignated

           

Additional

           

Total

 
   

Preferred

   

Preferred

   

Common

   

Paid-in

   

Accumulated

   

Stockholders'

 
   

Stock

   

Stock

   

Stock

   

Capital

   

Deficit

   

Deficit

 

Balance as of January 1, 2019

  $     $     $ 3     $ 154,623     $ (221,192 )   $ (66,566 )

Net loss

                            (12,291 )     (12,291 )

Stock-based compensation expense

                      1,290             1,290  

Issuance of common stock in connection with equity line of credit

                      2,721             2,721  

Change in estimated deferred offering costs

                      10             10  

Balance as of March 31, 2019

                3       158,644       (233,483 )     (74,836 )

Net loss

                            (9,257 )     (9,257 )

Stock-based compensation expense

                      1,317             1,317  

Issuance of common stock in connection with equity line of credit

                      1,229             1,229  

Balance as of June 30, 2019

  $     $     $ 3     $ 161,190     $ (242,740 )   $ (81,547 )

 

See accompanying notes to unaudited condensed financial statements

 

5

 
 

 

KEMPHARM, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

   

Six months ended June 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (4,895 )   $ (21,548 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Stock-based compensation expense

    1,649       2,607  

Non-cash interest expense

    2,427       1,919  

Amortization of debt issuance costs and debt discount

    1,145       610  

Depreciation and amortization expense

    140       153  

Fair value adjustment related to derivative and warrant liability

    (72 )     (432 )

Change in estimated deferred offering costs

    130       10  

Loss on sublease and disposal of property and equipment

    251        
Consulting fees paid in stock     84        

Change in assets and liabilities:

               

Accounts and other receivables

    (228 )     (33 )

Prepaid expenses and other assets

    520       767  

Operating lease right-of-use assets

    74       (1,718 )

Accounts payable and accrued expenses

    (945 )     (2,399 )

Operating lease liabilities

    (121 )     2,442  

Other liabilities

    12       (788 )

Net cash provided by (used in) operating activities

    171       (18,410 )
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (7 )     (17 )

Maturities of marketable securities

          3,260  

Net cash (used in) provided by investing activities

    (7 )     3,243  
                 

Cash flows from financing activities:

               

Proceeds from equity line of credit

    2,303       3,950  
Proceeds from Payment Protection Program loan     781        
Payment of deferred offering costs     (97 )      

Repayment of principal on finance lease liabilities

    (117 )     (104 )

Payment of debt issuance costs

    (34 )      

Net cash provided by financing activities

    2,836       3,846  

Net increase (decrease) in cash, cash equivalents and restricted cash

    3,000       (11,321 )

Cash, cash equivalents and restricted cash, beginning of period

    3,555       19,119  

Cash, cash equivalents and restricted cash, end of period

  $ 6,555     $ 7,798  
                 

Supplemental cash flow information:

               

Cash paid for interest

  $ 65     $ 2,455  

2019 Notes principal converted to common stock

    12,750        

Commitment shares issued in connection with equity line of credit included in deferred offering costs

    121        

Deferred offering costs included in accounts payable and accrued expenses

          105  
Property and equipment included in accounts payable and accrued expenses     4        

 

See accompanying notes to unaudited condensed financial statements.

 

6

 

 

KEMPHARM, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 
A. Description of Business and Basis of Presentation

 

Organization

 

KemPharm, Inc. (the “Company”) is a specialty pharmaceutical company focused on the discovery and development of proprietary prodrugs to treat serious medical conditions through its proprietary Ligand Activated Therapy ("LAT®") technology. The Company utilizes its proprietary LAT technology to generate improved prodrug versions of U.S. Food and Drug Administration (the "FDA") approved drugs as well as to generate prodrug versions of existing compounds that may have applications for new disease indications. The Company's prodrug product candidate pipeline is focused on the high need areas of attention deficit hyperactivity disorder ("ADHD") and stimulant use disorder ("SUD"). The Company's co-lead clinical development candidates for the treatment of ADHD, KP415 and KP484, are both based on a prodrug of d-methylphenidate, but have differing duration/effect profiles. In addition, the Company has received FDA approval for APADAZ®, an immediate-release combination product containing benzhydrocodone, a prodrug of hydrocodone, and acetaminophen.

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 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 financial statements. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

 

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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020, as amended on April 8, 2020 (the "Annual Report").

 

Going Concern

 

The unaudited condensed financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has experienced recurring negative operating cash flows and has a stockholders' deficit and net working capital (current assets less current liabilities) deficit, and its existing cash and cash equivalents and restricted cash are not sufficient to fund the Company’s operating expenses and capital expenditure requirements for at least one year from the date these unaudited condensed financial statements are issued. Various internal and external factors will affect whether and when product candidates become approved drugs and how significant the market share of those approved products will be. The length of time and cost of developing and commercializing these product and product candidates and/or failure of them at any stage of the drug approval or commercialization process will materially affect the Company’s financial condition and future operations. In order to continue as a going concern, the Company, will likely need additional financing to fund its operations. The perception of the Company's inability to continue as a going concern may make it more difficult to obtain financing for the continuation of operations and could result in the loss of confidence by investors, suppliers and employees. Adequate additional financing may not be available to the Company on acceptable terms, or at all.

 

Management believes these conditions raise substantial doubt about the Company’s ability to continue as a going concern within the twelve months after the date these unaudited condensed financial statements are issued. Based upon the Company's current operating plan and projected revenues, the Company believes its cash resources, including the funds received through the Payroll Protection Program ("PPP") (discussed below) will be sufficient to fund operating expense and capital investment requirements past the potential March 2, 2021 Prescription Drug User Fee Act ("PDUFA") date for the KP415 New Drug Application ("NDA") and up to the debt maturity date of March 31, 2021. The ability to continue as a going concern is dependent upon profitable future operations, positive cash flows, the forebearance of the Company's lenders and additional financing. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Management intends to finance operating costs over the next twelve months with existing cash and cash equivalents and restricted cash, as well as anticipated payments arising from the Company's license agreements and additional revenues received through potential consulting fee arrangements.

 

7

 

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The Company cannot predict what the long-term effects of this pandemic and the resulting economic disruptions may have on the Company’s liquidity and results of operations. The extent of the effect of the COVID-19 pandemic on the Company’s liquidity and results of operations will depend on a number 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 pandemic may make it more difficult for the Company to enroll patients in any future clinical trials or cause delays in the regulatory approval of the Company’s product candidates, including causing potential delay of the FDA’s review of the Company’s KP415 NDA. A portion of the Company's projected revenue is based upon the achievement of milestones in the KP415 License Agreement (as defined below) associated with regulatory matters that may be impacted by the COVID-19 pandemic. As a result, the Company cannot predict what, if any, impact that the COVID-19 pandemic may have on the Company’s ability to achieve these milestones. The economic uncertainty surrounding the COVID-19 pandemic may also dramatically reduce the Company’s ability to secure debt or equity financing necessary to support the Company’s operations. The Company is unable to currently estimate the financial effect of the pandemic. If the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flows. The financial statements do not reflect any adjustments as a result of the COVID-19 pandemic.

 

On April 23, 2020 the Company received proceeds of $0.8 million from a loan (the "PPP Loan") under the PPP of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), a portion of which may be forgiven, which the Company intends to use to retain current employees, maintain payroll and make lease and utility payments. The PPP Loan matures on April 23, 2022 and bears annual interest at a rate of 1.0%. Payments of principal and interest on the PPP Loan were originally deferred for the first six months of the PPP Loan term. Thereafter, the Company would have been required to pay the lender equal monthly payments of principal and interest. Refer to Note C for a further discussion of the PPP Loan.

 

Entry into Prior Purchase Agreement

 

In February 2019, the Company entered into a purchase agreement (the “Prior Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) which provided that, upon the terms and subject to the conditions and limitations set forth therein, the Company previously could sell to Lincoln Park up to $15.0 million of shares of common stock from time to time over the 36-month term of the Prior Purchase Agreement, and upon execution of the Prior Purchase Agreement the Company issued an additional 120,200 shares of common stock to Lincoln Park as commitment shares in accordance with the closing conditions within the Prior Purchase Agreement. Concurrently with entering into the Prior Purchase Agreement, the Company also entered into a registration rights agreement with Lincoln Park (the “Prior Registration Rights Agreement”) pursuant to which the Company agreed to register the sale of the shares of common stock that have been and may be issued to Lincoln Park under the Prior Purchase Agreement pursuant to the Company’s existing shelf registration statement on Form S-3 or a new registration statement. The Prior Purchase Agreement was terminated in February 2020 in connection with entering into the Current Purchase Agreement (discussed below). Prior to the termination of the Prior Purchase Agreement, the Company sold 3,401,271 shares of common stock to Lincoln Park (exclusive of the 120,200 commitment shares) under the Prior Purchase Agreement for approximately $5.4 million in gross proceeds.

 

Entry into Current Purchase Agreement

 

In February 2020, the Company entered into a purchase agreement (the “Current Purchase Agreement”) with Lincoln Park which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $4.0 million of shares of common stock from time to time over the 12-month term of the Current Purchase Agreement, and upon execution of the Current Purchase Agreement the Company issued an additional 308,637 shares of common stock to Lincoln Park as commitment shares in accordance with the closing conditions within the Current Purchase Agreement. Concurrently with entering into the Current Purchase Agreement, the Company also entered into a registration rights agreement with Lincoln Park (the “Current Registration Rights Agreement”) pursuant to which the Company agreed to register the sale of the shares of common stock that have been and may be issued to Lincoln Park under the Current Purchase Agreement pursuant to the Company’s existing shelf registration statement on Form S-3 or a new registration statement. In May 2020, the Company reached the maximum allowable shares to be issued under the Current Registration Statement of 9,268,182 shares (inclusive of the 308,637 commitment shares) as defined in Section 2(f)(i) of the Current Purchase Agreement and therefore cannot issue additional shares under the Current Purchase Agreement. As of June 30, 2020, the Company has sold 8,959,545 shares of common stock to Lincoln Park (exclusive of the 308,637 commitment shares) under the Current Purchase Agreement for approximately $2.3 million in gross proceeds.

 

8

 

Entry into APADAZ License Agreement

 

In October 2018, the Company entered into a Collaboration and License Agreement (the "APADAZ License Agreement") with KVK Tech, Inc. ("KVK") pursuant to which we have granted an exclusive license to KVK to conduct regulatory activities for, manufacture and commercialize APADAZ in the United States.

 

Pursuant to the APADAZ License Agreement, KVK agreed to pay the Company certain payments and cost reimbursements of an estimated $3.4 million, which includes a payment of $2.0 million within 10 days of the achievement of a specified milestone related to the initial formulary adoption of APADAZ (the "Initial Adoption Milestone"). In addition, KVK has agreed to make additional payments to the Company upon the achievement of specified sales milestones of up to $53.0 million in the aggregate. Further, the Company and KVK will share the quarterly net profits of APADAZ by KVK in the United States at specified tiered percentages, ranging from the Company receiving 30% to 50% of net profits, based on the amount of net sales on a rolling four quarter basis. The Company is responsible for a portion of commercialization and regulatory expenses for APADAZ until the Initial Adoption Milestone is achieved, after which KVK will be responsible for all expenses incurred in connection with commercialization and maintaining regulatory approval in the United States.

 

The APADAZ License Agreement will terminate on the later of the date that all of the patent rights for APADAZ have expired in the United States or KVK’s cessation of commercialization of APADAZ in the United States. KVK may terminate the APADAZ License Agreement upon 90 days written notice if a regulatory authority in the United States orders KVK to stop sales of APADAZ due to a safety concern. In addition, after the third anniversary of the APADAZ License Agreement, KVK may terminate the APADAZ License Agreement without cause upon 18 months prior written notice. The Company may terminate the APADAZ License Agreement if KVK stops conducting regulatory activities for or commercializing APADAZ in the United States for a period of six months, subject to specified exceptions, or if KVK or its affiliates challenge the validity, enforceability or scope of any licensed patent under the APADAZ License Agreement. Both parties may terminate the APADAZ License Agreement (i) upon a material breach of the APADAZ License Agreement, subject to a 30-day cure period, (ii) if the other party encounters bankruptcy or insolvency or (iii) if the Initial Adoption Milestone is not achieved. Upon termination, all licenses and other rights granted by the Company to KVK pursuant to the APADAZ License Agreement would revert to the Company.

 

The APADAZ License Agreement also established a joint steering committee, which monitors progress of the commercialization of APADAZ.

 

Entry into KP415 License Agreement

 

In September 2019, the Company entered into a Collaboration and License Agreement (the “KP415 License Agreement”) with Commave Therapeutics SA, an affiliate of Gurnet Point Capital (“Commave”). Under the KP415 License Agreement, the Company granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize the Company’s product candidates containing serdexmethylphenidate ("SDX") and d-methylphenidate ("d-MPH"), including KP415, KP484, and, at the option of Commave, KP879, KP922 or any other product candidate developed by the Company containing SDX and developed to treat ADHD or any other central nervous system disorder (the “Additional Product Candidates” and, collectively with KP415 and KP484, the “Licensed Product Candidates”). Pursuant to the KP415 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 the KP415 and KP484; (iii) agreed to pay additional payments of up to $420.0 million upon the achievement of specified U.S. sales milestones; and (iv) has agreed to pay the Company 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 May 2020, the FDA accepted the Company’s NDA for KP415. Per the KP415 License Agreement, the Company received a regulatory milestone payment of $5.0 million following the FDA’s acceptance of the KP415 NDA.

 

Commave has also agreed to be responsible and reimburse the Company 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.

 

The KP415 License Agreement also established a joint steering committee, which monitors progress of the development of both KP415 and KP484. Subject to the oversight of the joint steering committee, the Company otherwise retains all responsibility for the conduct of all regulatory activities required to obtain new drug application approval of KP415 and KP484; provided that Commave shall be the sponsor of any clinical trials conducted by the Company on behalf of Commave.

 

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 KP415, KP484 or KP879 under the KP415 License Agreement.

 

9

 

 

 
B. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of unaudited condensed financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed 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, and the fair value of the derivative and warrant liability, 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.

 

Reclassifications

 

During the third quarter of 2019, the Company began presenting accounts and other receivables as a separate line item on the unaudited condensed statements of cash flows. In prior periods, accounts and other receivables were reported within the prepaid expenses and other current assets line items in the unaudited condensed statements of cash flows. In accordance with U.S. GAAP, the change in current period presentation requires a  reclassification of prior period balances. The reclassification of prior period balances resulted in an increase in change in prepaid expenses and other assets of $33,000 on the Company's unaudited condensed statement of cash flows for the six month period ended June 30, 2019. This reclassification had no effect on the unaudited condensed balance sheets, unaudited condensed statements of operations and unaudited condensed statements of changes in stockholders' deficit.

 

Revenue Recognition

 

The Company commenced recognizing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”), starting January 1, 2018. However, the Company had no revenue until the third quarter of 2019.

 

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 benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated 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 basis is not available.

 

The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods or services is transferred. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should there be royalties, the Company utilizes the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.

 

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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.

 

11

 

 

KP415 License Agreement

 

In September 2019, the Company entered into the KP415 License Agreement with Commave under which the Company granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize the Company's product candidates containing SDX and d-MPH, including KP415, KP484, and, at the option of Commave, KP879, KP922 and/or any other product candidate developed by the Company containing SDX and developed to treat ADHD or any other central nervous system disorder. The license granted to Commave is distinct from other performance obligations as Commave can benefit from the license either on its own or together with other resources that are readily available and the license is separately identifiable from other promises in the KP415 License Agreement.

 

In exchange for the exclusive, worldwide license, discussed above, Commave paid the Company a non-refundable upfront payment of $10.0 million. The Company is also entitled to additional payments from Commave of up to $63.0 million, conditioned upon the achievement of specified regulatory milestones related to KP415 and KP484. In May 2020, the FDA accepted the Company’s NDA for KP415. Per the KP415 License Agreement, the Company received a regulatory milestone payment of $5.0 million following the FDA’s acceptance of the KP415 NDA. In addition, the Company is entitled to payments from Commave of up to $420.0 million in the aggregate, conditioned upon the achievement of certain U.S. sales milestones, which are dependent upon, among other things, the timing of approval for a new drug application for KP415 and its final approved label, if any. Further, Commave will pay the Company quarterly, tiered royalty payments ranging from a percentage in the high single digits to mid-twenties of Net Sales (as defined in the KP415 License Agreement) in the U.S. 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

 

Commave also agreed to be responsible for and reimburse the Company for all of development, commercialization and regulatory expenses incurred on the licensed products, subject to certain limitations as set forth in the KP415 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.

 

The KP415 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 KP415 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 KP415 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 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.

 

The consideration allocated to the performance of consulting services, which includes the reimbursement of out-of-pocket third-party research and development costs, was the fair value of the Development Costs (as defined in the KP415 License Agreement), which reflects the standalone selling price. The Company utilized a blended approach which took into consideration the adjusted market assessment approach and the expected cost plus a margin approach to determine this standalone selling price. This blended approach utilized the adjusted market approach and expected cost plus margin approach to value the performance of consulting services which included analyzing hourly rates of vendors in the a market who perform similar services to those of the Company to develop a range and then analyzing the average cost per hour of our internal resources and applying a margin which placed the value in the median of the previously identified range. For the reimbursement of out-of-pocket third-party research and development costs the Company utilized the expected cost plus a margin approach, which included estimating the actual out-of-pocket cost the Company expects to pay to third-parties for research and development costs and applying a margin, if necessary. The Company determined that no margin was necessary of these out-of-pocket third-party research and development costs as these are purely pass-through costs and the margin for managing these third-party activities is included within the value of the performance of consulting services. The Company determined that the performance of consulting services, including reimbursement of out-of-pocket third-party research and development 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 be recognized as the consulting services are performed and the services associated with the reimbursable out-of-pocket third-party research and development costs are 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 discussed above, the combination of the standalone selling price of these consulting services and certain out-of-pocket third-party research and development costs for KP415 was the fair value of the Development Costs at inception. These Development Costs effectively created a cap on certain consulting services and out-of-pocket third-party research and development costs identified in the initial product development plan for KP415 which was anticipated at the inception date of the KP415 License Agreement. As of June 30, 2020, the Company has recognized all of the consulting services and out-of-pocket third-party research and development costs under this cap. 

 

12

 

 

Under the KP415 License Agreement, Commave was granted an exclusive option to include Additional Products as Product(s) (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 right of first refusal ("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. 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 KP415 and KP484 and the achievement of certain U.S. sales milestones, which are dependent upon, among other things, the timing of approval for a new drug application for KP415 and its final approved label, if any. Further, Commave will pay the Company quarterly, tiered royalty payments ranging from a percentage in the high single digits to mid-twenties of Net Sales (as defined in the KP415 License Agreement) in the U.S. 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 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. 

 

For example, in May 2020, the FDA accepted the Company’s NDA for KP415. Per the KP415 License Agreement, the Company received a regulatory milestone payment of $5.0 million following the FDA’s acceptance of the KP415 NDA. Since the FDA accepted the Company's NDA for KP415 the constraint was 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 the second quarter of 2020 the full $5.0 million payment was recognized as revenue during the second quarter of 2020. 

 

For the three and six months ended June 30, 2020, the Company recognized revenue under the KP415 License Agreement of $5.6 million and $7.3 million, respectively. In accordance with the guidance provided in ASC 340-40, Contracts with Customers, the Company capitalized approximately $2.8 million of incremental costs incurred in obtaining the KP415 License Agreement and will amortize these costs as the revenue associated with the exclusive worldwide license, reimbursement of out-of-pocket third-party research and development costs and consulting services is recognized. As of June 30, 2020, the Company has recognized all of these incremental costs, $0.1 million and $0.8 million of which was recognized in the three and six months ended June 30, 2020, respectively, and are recorded in the line item titled royalty and direct contract acquisition costs in the unaudited condensed statement of operations. There was no revenue recognized, or associated direct contract acquisition costs for the three and six months ended June 30, 2019 related to the KP415 License Agreement. There was no deferred revenue related to this agreement as of June 30, 2020 or December 31, 2019.

 

Consulting Arrangements

 

From time to time, the Company enters into consulting arrangements with third-parties to provide research and development, manufacturing and/or commercialization services. Such arrangements may require the Company to deliver various rights, services, including research and development services, regulatory services and/or commercialization 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. For the three and six months ended June 30, 2020, the Company recognized revenue under consulting arrangements of $1.3 million and $1.7 million, respectively. There was no revenue recognized from consulting arrangements for the three and six months ended June 30, 2019. There was no deferred revenue from consulting arrangements as of June 30, 2020 or December 31, 2019.

 

Accounts and Other Receivables

 

Accounts and other receivables consists of receivables under the KP415 License Agreement, as well as receivables related to consulting arrangements, income tax receivables and other receivables due to the Company. Receivables under the KP415 License Agreement are recorded for amounts due to the Company related to reimbursable out-of-pocket third-party research and development costs and performance of consulting services. 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, 2020, the Company had receivables related to the KP415 License Agreement in the amount of $0.6 million and receivables related to consulting arrangements of $1.3 million. As of December 31, 2019, the Company had receivables related to the KP415 License Agreement in the amount of $1.6 million and receivables related to consulting arrangements of $0.1 million. As of June 30, 2020 and December 31, 2019 no reserve or allowance for doubtful accounts has been established.

 

13

 

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 April 2012, President Obama signed the Jump-Start Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company could have elected to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later than public companies must adopt the standards. The Company has irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2016-13 did not have a material impact on the Company's financial statements and disclosures.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the FASB finalized on August 28, 2018, including the consideration of costs and benefits. This update applies to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The adoption of ASU 2018-13 did not have a material impact on the Company's financial statements and disclosures.

 

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C.

Debt Obligations

 

As of June 30, 2020 and December 31, 2019, the Company had convertible notes outstanding, in the aggregate principal amounts, as follows (in thousands):

 

    June 30, 2020     December 31, 2019  

Deerfield Convertible Note

  $ 7,219     $ 6,981  

2021 Notes

          3,000  

December 2019 Notes

    58,716       70,218  

January 2020 Note

    3,081        

Total outstanding principal on debt obligations

    69,016       80,199  

Less: debt issuance costs and discounts

    (1,745 )     (2,856 )

Convertible notes, net

  $ 67,271     $ 77,343  

 

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 is no longer obligated to provide the Company any additional disbursements under the Deerfield Facility Agreement. Deerfield may 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").

 

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 the $3,333,333 of the principal amount then due, plus $168,288 of accrued interest, into 598,568 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 is also obligated to repay principal of the Deerfield Convertible Note in the amount of $6,980,824 plus any capitalized interest to date on March 31, 2021. Prepayment of the outstanding balance is not allowed without written consent of Deerfield.

 

Pursuant to the Deerfield Facility Agreement, the Company issued to Deerfield 1,923,077 shares of Series D redeemable convertible preferred stock ("Series D Preferred") as consideration for the loans provided to the Company thereunder. Upon completion of the initial public offering, these shares of Series D Preferred automatically reclassified into 256,410 shares of the Company’s common stock.

 

The Company also 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. 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 are amortized over the term of the related debt and the expense is recorded as interest expense related to amortization of debt issuance costs and discount in the statements of operations.

 

Pursuant to the Deerfield Facility Agreement, the Company may not 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 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.

 

The Deerfield Facility Agreement also includes high yield discount obligation protections that went into effect in June 2019. Going forward, if at any interest payment date our outstanding indebtedness under the Deerfield Facility Agreement would qualify as an "applicable high yield discount obligation" under the Internal Revenue Code of 1986 (the" Code") then the Company is obligated to prepay in cash on each such date the amount necessary to avoid such classification.

 

15

 

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 no 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.

 

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 be due and payable immediately.

 

As described in more detail below, 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 senior secured convertible promissory notes issued under the terms of the Deerfield Facility Agreement.

 

Facility Agreement Waiver and Fifth Amendment to Senior Secured Convertible Note

 

In June 2018, the Company entered into the Facility Agreement Waiver and Fifth Amendment (the "Fifth Amendment") to the Deerfield Convertible Note with Deerfield. The Fifth Amendment, among other things, provided that (i) $3,333,333 of the principal amount, plus $168,288 of accrued interest, of the Deerfield Convertible Note issued pursuant to the terms of the Deerfield Facility Agreement was converted into 598,568 shares of the Company’s common stock, with such principal conversion amount being applied against and in full satisfaction of the amortization payment due June 2, 2018; (ii) Deerfield waived specified rights under the Deerfield Facility Agreement with regards to such principal and interest amount; and (iii) amended specified provisions of the Deerfield Convertible Note as they relate to the delivery of shares of the Company’s common stock in connection with any conversion of the Deerfield Convertible Note.

 

2021 Note Exchange Effected in October 2018

 

In October 2018, the Company entered into an exchange agreement (the “October 2018 Exchange Agreement”) with Deerfield and Deerfield Special Situations Fund, L.P. (the “Deerfield Lenders”). Under the October 2018 Exchange Agreement, the Deerfield Lenders exchanged an aggregate of $9,577,000 principal amount of the 2021 Notes for an aggregate of 9,577 shares of Series A Convertible Preferred Stock, par value $0.0001 ("Series A Preferred Stock").

 

As a condition to closing of the October 2018 Exchange Agreement, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State Delaware, setting forth the preferences, rights and limitations of the Series A Preferred Stock.

 

Each share of Series A Preferred Stock has an aggregate stated value of $1,000 and is convertible into shares of common stock at a price equal to $3.00 per share (subject to adjustment to reflect stock splits and similar events). Immediately following the exchange under the October 2018 Exchange Agreement, there were an aggregate of 3,192,333 shares of common stock issuable upon conversion of the then outstanding Series A Preferred Stock (without giving effect to the limitation on conversion described below). As of June 30, 2020, all 9,577 shares of Series A Preferred Stock issued under the October 2018 Exchange Agreement have been converted into an aggregate 3,192,333 shares of the Company's common stock.

 

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2021 Note Exchange Effected in September 2019

 

In September 2019, the Company entered into an Exchange Agreement and Amendment to Facility Agreement (the “September 2019 Exchange Agreement”) with the Deerfield Lenders. Under the September 2019 Exchange Agreement, the Company issued an aggregate of 1,499,894 shares of the Company’s common stock and an aggregate of 1,576 shares of the Company’s Series B-1 Convertible Preferred Stock, par value $0.0001 per share ("Series B-1 Preferred Stock") (such shares of common stock and Series B-1 Preferred Stock, the “Initial Exchange Shares”), in exchange for the cancellation of an aggregate of $3,000,000 principal amount of the Company’s 2021 Notes. The September 2019 Exchange Agreement provided the Deerfield Lenders the option to exchange up to an additional aggregate of $27,000,000 principal amount of the 2021 Notes (the “Optional Exchange Principal Amount”) for shares of common stock or shares of the Company’s Series B-2 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-2 Preferred Stock” and, together with the Series B-1 Preferred Stock, the “Series B Preferred Stock”), subject to the terms and conditions set forth in the September 2019 Exchange Agreement, including limits as to the principal amount that can be exchanged prior to specified dates therein. If the Deerfield Lenders choose to exchange any portion of the Optional Exchange Principal Amount for shares of Series B-2 Preferred Stock, such exchange will be effected at an exchange price of $1,000 per share. If the Deerfield Lenders choose to exchange any portion of the Optional Exchange Principal Amount for shares of common stock, such exchange will be effected at an exchange price equal to the greater of (i) $0.9494, or (ii) the average of the volume-weighted average price of the common stock on the Nasdaq Capital Market on each of the 15 trading days immediately preceding such exchange.

 

As a condition to closing of the September 2019 Exchange Agreement, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (the “Series B-1 Certificate of Designation”) and a 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-1 Preferred Stock and the Series B-2 Preferred Stock, respectively.

 

Each share of Series B-1 Preferred Stock has an aggregate stated value of $1,000 and is convertible into shares of common stock at a per share price equal to $0.9494 per share (subject to adjustment to reflect stock splits and similar events). Immediately following the exchange under the September 2019 Exchange Agreement, there were an aggregate of 1,659,996 shares of common stock issuable upon conversion of the then outstanding Series B-1 Preferred Stock (without giving effect to the limitation on conversion described below). Each share of Series B-2 Preferred Stock has an aggregate stated value of $1,000 and is convertible into shares of common stock at a per share price equal to the greater of (i) $0.9494 (subject to adjustment to reflect stock splits and similar events), or (ii) the average of the volume-weighted average prices of the common stock on the Nasdaq Capital Market on each of the 15 trading days immediately preceding such exchange. Immediately following the exchange under the September 2019 Exchange Agreement there was an aggregate of 28,439,015 shares of Common Stock issuable (i) in exchange of the Optional Exchange Principal Amount, or (ii) upon conversion of the Series B-2 Preferred Stock issuable in exchange of the Optional Exchange Principal Amount (in each case without giving effect to the limitation on conversion described below).

 

The Series B Preferred Stock is convertible at any time at the option of the Deerfield Lenders; provided that the Deerfield Lenders are prohibited from converting shares of Series B Preferred Stock into shares of 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 common stock then issued and outstanding. The Series B Preferred Stock is not redeemable. In the event of the Company’s liquidation, dissolution or winding up, the Deerfield Lenders will receive an amount equal to $0.0001 per share, plus any declared but unpaid dividends, and thereafter will share ratably in any distribution of the Company’s assets with holders of common stock and with the holders of any shares of any other class or series of capital stock of the Company entitled to share in such remaining assets of the Company (including the Series A Preferred Stock on an as-converted basis). With respect to rights upon liquidation, the Series B Preferred Stock ranks senior to the common stock, on parity with the Series A Preferred Stock, if any is outstanding, 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 materially and adversely affect the holders of Series B Preferred Stock), the Series B Preferred Stock does not have voting rights. The Series B 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 Preferred Stock will participate in any dividends on the common stock on an as-converted basis (without giving effect to the limitation on conversion described above). The Series B-1 Certificate of Designation and the Series B-2 Certificate of Designation also provide for partial liquidated damages in the event that the Company fails to timely convert shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock, respectively, into common stock in accordance with the applicable certificate of designation.

 

As of June 30, 2020, 1,576 shares of Series B-1 Preferred Stock have been converted into 1,659,966 shares of common stock, and there were no shares of Series B-2 Preferred Stock outstanding.

 

The September 2019 Exchange Agreement also amended the Deerfield Facility Agreement, 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 pursuant to the Deerfield Facility Agreement until June 1, 2020. The September 2019 Exchange Agreement contains customary representations, warranties and covenants made by the Company and the Holders. The September 2019 Exchange Agreement also requires the Company to reimburse the Holders for up to $150,000 of expenses relating to the transactions contemplated by the September 2019 Exchange Agreement.

 

The Company determined the changes to the Deerfield Facility Agreement 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 Facility Agreement resulted in no gain on restructuring because the total cash outflows required under the amended Deerfield Facility Agreement exceeded the carrying value of the original Deerfield Facility Agreement immediately prior to amendment. Prospectively, the Deerfield Facility Agreement, and the associated 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 September 2019 Exchange Agreement, were accounted for as a debt modification with the $2.3 million change in fair value of the embedded conversion feature, associated with the Optional Exchange Principal Amount, recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the 2021 Notes.

 

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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 $71,418,011 (the “December 2019 Notes”), in exchange for the cancellation of an aggregate of $71,418,011 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 $745,011 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 bear interest at 6.75% per annum. The December 2019 Notes are convertible into shares of the Company’s common stock at an initial conversion price of $17.11 per share (which represents the conversion price of the 2021 Notes), subject to adjustment in accordance with the terms of the December 2019 Notes. As of the date of issuance, the December 2019 Notes were convertible, by their terms, into an aggregate of 4,174,051 shares of the Company’s common stock. The Company subsequently amended the December 2019 Notes to provide that such notes shall be convertible into shares of the Company's common stock at a conversion price of $5.85 per share (which represents the conversion price of the Deerfield Convertible Note). The conversion price of the December 2019 Notes will be adjusted downward if the Company issues or sells 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 effects 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 will be adjusted downward pursuant to this anti-dilution adjustment only if such sales are made at a price less than $5.85 per share, provided that this anti-dilution adjustment will not apply to any sales made under (x) the Current Purchase Agreement, (y) the ATM Agreement, or (z) the September 2019 Exchange Agreement (as amended). Notwithstanding anything in the contrary in the December 2019 Notes, the anti-dilution adjustment of such notes shall not result in the conversion price of the December 2019 Notes being less than $0.583 per share. The December 2019 Notes are convertible at any time at the option of the holders thereof, provided that a holder of a December 2019 Note is 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 beneficially own 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, has 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 have 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 shall include, 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 are subject to specified events of default, the occurrence of which would entitle the December 2019 Holders to immediately demand repayment of all outstanding principal and accrued interest on the December 2019 Notes. Such events of default include, 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 amends 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 amends and restates 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 remains $5.85 per share, subject to adjustment on the same basis as the December 2019 Notes.

 

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

 

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The December 2019 Exchange Agreement contains 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.

 

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.

 

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) $0.60 (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 June 30, 2020, the Deerfield Lenders have converted $14.0 million of principal under the December 2019 Notes into 23,250,000 shares of common stock.

 

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.

 

19

 

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 $3,037,354 (the "January 2020 Note") in exchange for the cancellation of an aggregate of $3,037,354 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 $37,354, 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).

 

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.

 

PPP Loan

 

On April 23, 2020 the Company received proceeds of $0.8 million from the PPP Loan under the PPP of the recently enacted CARES Act, a portion of which may be forgiven, which the Company intends to use to retain current employees, maintain payroll and make lease and utility payments. The PPP Loan matures on April 23, 2022 and bears annual interest at a rate of 1.0%. Payments of principal and interest on the PPP Loan were originally deferred for the first six months of the PPP Loan term. Thereafter, the Company would have been required to pay the lender equal monthly payments of principal and interest.

 

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company  may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness was originally based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 75% of the loan amount was used for eligible payroll costs. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week period would have qualified for forgiveness.

 

On June 5, 2020, President Trump signed into law the PPP Flexibility Act of 2020 (the "Flexibility Act"), which among other things provided the following important changes to the PPP:

 

 

Extended the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks after the date of loan disbursement, providing substantially greater flexibility for borrowers to qualify for loan forgiveness. Borrowers who had already received PPP loans retained the option to use an eight-week covered period.

 

Lowered the requirements that 75 percent of a borrower’s loan proceeds must be used for payroll costs and that 75 percent of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60 percent for each of these requirements. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

 

Provided a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to worker or customer safety requirements related to COVID–19.

 

Provided a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

 

Increased to five years the maturity of PPP loans that are approved by the U.S. Small Business Administration (the "SBA") (based on the date SBA assigns a loan number) on or after June 5, 2020.

 

Extended the deferral period for borrower payments of principal, interest, and fees on PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period).

 

Based on the changes provided by the Flexibility Act the Company plans to take advantage of (i) the extended covered period for loan forgiveness from eight weeks to 24 weeks, (ii) the lowered requirement that a certain percentage of loan proceeds must be used for payroll costs from 75 percent to 60 percent, (iii) the extended deferral period for payments of principal, interest and fees from six months after loan disbursement to 10 months after the SBA remits the borrower's loan forgiveness amount to the lender and (iv) take advantage of an safe harbor provisions as applicable. The Company will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above. Based on the changes provided by the Flexibility Act the Company expects that substantially all of the PPP loan will be forgiven, however, the Company cannot provide any assurance that the Company will be eligible for loan forgiveness, that the Company will ultimately apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

 

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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. As of June 30, 2020 and December 31, 2019, no accruals have been made related to commitments and contingencies.

 

 
E. Preferred Stock and Warrants

 

Authorized, Issued, and Outstanding Preferred Stock

 

As of June 30, 2020 and December 31,  2019, the Company had 10,000,000 shares of authorized preferred stock, of which 9,578 shares were designated as Series A Preferred Stock, 1,576 shares were designated as Series B-1 Preferred Stock and 27,000 shares were designated as Series B-2 Preferred Stock. Of the designated preferred stock 9,577 shares of Series A Preferred Stock and 1,576 shares of Series B-1 Preferred Stock were issued as of June 30, 2020 and December 31, 2019. No shares of Series A Preferred Stock or Series B-1 Preferred Stock were outstanding as of June 30, 2020 and December 31, 2019. No shares of Series B-2 Preferred Stock were issued or outstanding as of June 30, 2020 and December 31, 2019.

 

In October 2018, the Company entered into the October 2018 Exchange Agreement. Under the October 2018 Exchange Agreement the Company issued to the Holders 9,577 shares of Series A Preferred Stock. Each share of Series A Preferred Stock has an aggregate stated value of $1,000 and is convertible into shares of common stock at a price equal to $3.00 per share (subject to adjustment to reflect stock splits and similar events). Immediately following the exchange under the October 2018 Exchange Agreement, there were an aggregate of 3,192,333 shares of common stock issuable upon conversion of the Series A Preferred Stock (without giving effect to the limitation on conversion described below), and as of June 30, 2020 all issued shares of Series A Preferred Stock had been converted into shares of common stock.

 

In September 2019, the Company entered into the September 2019 Exchange Agreement. Under the September 2019 Exchange Agreement the Company issued to the Holders 1,576 shares of Series B-1 Preferred Stock. Each share of Series B-1 Preferred Stock had an aggregate stated value of $1,000 and was convertible into shares of common stock at a price equal to the greater of (i) $0.9494, or (ii) the average of the volume-weighted average price of the Common Stock on the Nasdaq Capital Market on each of the 15 trading days immediately preceding such exchange (subject to adjustment to reflect stock splits and similar events). Immediately following the exchange under the September 2019 Exchange Agreement, there were an aggregate of 1,659,996 shares of common stock issuable upon conversion of the Series B-1 Preferred Stock (without giving effect to the limitation on conversion described below). The Series B Preferred Stock is convertible at any time at the option of the Holders; provided that the Holders are prohibited from converting shares of Series B Preferred Stock into shares of 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 common stock then issued and outstanding. The Series B Preferred Stock is not redeemable. In the event of the Company’s liquidation, dissolution or winding up, the Holders will receive an amount equal to $0.0001 per share, plus any declared but unpaid dividends, and thereafter will share ratably in any distribution of the Company’s assets with holders of common stock and with the holders of any shares of any other class or series of capital stock of the Company entitled to share in such remaining assets of the Company (including Series A Preferred Stock on an as-converted basis. With respect to rights upon liquidation, the Series B Preferred Stock ranks senior to the common stock, on parity with the Series A Preferred Stock, if any is then outstanding, 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 materially and adversely affect the holders of Series B Preferred Stock), the Series B Preferred Stock does not have voting rights. The Series B 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 Preferred Stock will participate in any dividends on the common stock on an as-converted basis (without giving effect to the limitation on conversion described above). The Series B-1 Certificate of Designation and the Series B-2 Certificate of Designation also provide for partial liquidated damages in the event that the Company fails to timely convert shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock, respectively, into Common Stock in accordance with the applicable Certificate of Designation. As of June 30, 2020, 1,576 shares of Series B-1 Preferred Stock have been converted into 1,659,996 shares of common stock.

 

21

 

 

 
F. Common Stock and Warrants

 

Authorized, Issued, and Outstanding Common Shares

 

As of June 30, 2020 and December 31, 2019, the Company had authorized shares of common stock of 250,000,000 shares. Of the authorized shares, 67,223,913 and 36,350,785 shares of common stock were issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.

 

As of June 30, 2020 and December 31, 2019, the Company had reserved authorized shares of common stock for future issuance as follows:

 

    June 30, 2020     December 31, 2019  

Conversion of Deerfield Convertible Note

    1,254,682       1,213,606  
Conversion of 2021 Notes           175,336  

Conversion of January 2020 Note

    535,513        

Conversion of December 2019 Notes not subject to the Deerfield Optional Conversion Feature

    9,677,740       3,186,770  

Outstanding awards under equity incentive plans

    5,697,534       5,192,222  

Outstanding common stock warrants

    2,423,077       2,423,077  

In exchange for the Deerfield Optional Conversion Feature*

    5,189,015       26,439,015  
Possible future issuances under the equity line of credit           9,553,046  

Possible future issuances under equity incentive plans

    803,473       84,616  

Total common shares reserved for future issuance

    25,581,034       48,267,688  
                 
* Common Stock issuable (i) in exchange of the Deerfield Optional Conversion Feature, or (ii) upon conversion of the Series B-2 Preferred Stock issuable in exchange of the Deerfield Optional Conversion Feature

 

Common Stock Activity

 

The following table summarizes common stock activity for the six months ended June 30, 2020:

 

    Shares of Common Stock  

Balance as of December 31, 2019

    36,350,785  

Common stock issued under equity line of credit

    4,308,637  

Restricted stock vested during the period

    60,922  

Common stock issued as compensation to third-parties

    39,767  

Common stock issued as a result of Deerfield Optional Conversion Feature conversion

    16,000,000  
Balance as of March 31, 2020     56,760,111  
Common stock issued under equity line of credit     4,959,545  
Restricted stock vested during the period     64,277  
Common stock issued as compensation to third-parties     189,980  
Common stock issued as a result of Deerfield Optional Conversion Feature conversion     5,250,000  

Balance as of June 30, 2020

    67,223,913  

 

22

 

 

Warrants

 

During 2013, the Company issued $3.8 million of convertible notes and the warrants (the “2013 Warrants”) to purchase 1,079,453 shares of equity securities in a future financing meeting specified requirements (a “Qualified Financing”). The 2013 Warrants allow the holders to purchase shares of the same class and series of equity securities issued in the Qualified Financing for an exercise price equal to the per share price paid by the purchasers of such equity securities in the Qualified Financing. When the Company entered into the Deerfield Facility Agreement, the 2013 Warrants became warrants to purchase 1,079,453 shares of Series D Preferred. Upon completion of the Company's initial public offering (the "IPO"), the 2013 Warrants automatically converted into warrants to purchase 143,466 shares of the Company’s common stock at an exercise price of $5.85 per share. The 2013 Warrants expired on June 2, 2019.

 

On June 2, 2014, pursuant to the terms of the Deerfield Facility Agreement, the Company issued the Deerfield Warrant to purchase 14,423,076 shares of Series D Preferred (Note E). The Company recorded the fair value of the Deerfield Warrant as a debt discount and a warrant liability. The Deerfield Warrant, if unexercised, expires on the earlier of June 2, 2024, or upon a liquidation event. Upon completion of the IPO, 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. The Company is amortizing the debt discount over the term of the Deerfield Convertible Note and the expense is recorded as interest expense related to amortization of debt issuance costs and discount in the condensed statements of operations.

 

The Company determined that the 2013 Warrants and Deerfield 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 2013 Warrants and the Deerfield Warrant automatically converted into warrants to purchase the Company’s common stock. The Company marked the 2013 Warrants to fair value and reclassified them to equity upon closing of the IPO. 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. Changes to the fair value of the warrant liability are recorded through the condensed statements of operations as a fair value adjustment (Note H).

 

In connection with a Collaboration and License Agreement (the “APADAZ License Agreement”) with KVK Tech, Inc. (“KVK”), in October 2018, the Company issued to KVK a warrant to purchase up to 500,000 shares of common stock of the Company at an exercise price of $2.30 per share, which reflected the closing price of the Company’s common stock on the Nasdaq Global 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. 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. 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.

 

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 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 in the balance sheets.

 

23

 

 

 
G. 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. The maximum number of shares of common stock that may be issued under the 2014 Plan is 6,530,725 as of June 30, 2020. The number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2016, and ending on and including January 1, 2024, 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, 2020, the common stock reserved for issuance under the 2014 Plan automatically increased by 1,454,031 shares.

 

During 2020, the Company granted to certain consultants fully vested restricted stock awards ("RSAs") under the 2014 Plan. The RSAs were granted as compensation in accordance with each consultants consulting agreement for services performed during the first half of 2020. For the three and six months ended June 30, 2020, RSAs were granted for a total of 64,277 and 125,199 shares of common stock.

 

During the second quarter of 2019, the Company granted to each non-employee member of the Company's board of directors (each a "non-employee Director") two separate fully vested RSAs under the 2014 Plan. The RSAs were granted in lieu of the quarterly cash compensation payable under the Company's Third Amended and Restated Non-Employee Director Compensation Policy to each non-employee Director for service as a member of the Company's board of directors, and applicable committees thereof, for the first and second quarters of 2019. For the three and six months ended June 30, 2019, RSAs were granted for a total of 81,720 shares of common stock.

 

During the three and six months ended June 30, 2020 and 2019, no stock options were exercised.

 

Stock-based compensation expense recorded under the Incentive Stock Plan and the 2014 Plan is included in the following line items in the accompanying condensed statements of operations (in thousands):

  

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Research and development

  $ 345     $ 363     $ 591     $ 796  

General and administrative

    275       954       638       1,811  

Severance expense

                420        

Total stock-based compensation expense

  $ 620     $ 1,317     $ 1,649     $ 2,607  

 

There was $0.3 million of stock-based compensation expense related to performance-based awards recognized during the three and six months ended June 30, 2020. There was no stock-based compensation expense related to performance-based awards recognized during the three or six months ended June 30, 2019.

 

24

 

 

 
H. 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, restricted cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.

 

The fair value of the Deerfield Convertible Note was $6.5 million and $6.0 million, respectively, as of June 30, 2020 and December 31, 2019. The fair value of the December 2019 Notes was $52.6 million and $57.0 million, respectively, as of June 30, 2020 and December 31, 2019. The fair value of the January 2020 Note was $2.8 million as of June 30, 2020 and the fair value of the 2021 Notes was $2.4 million as of  December 31, 2019The Deerfield Convertible Note, December 2019 Notes, January 2020 Note and 2021 Notes fall within Level 3 of the fair value hierarchy as their value is based on the credit worthiness of the Company, which is an unobservable input. The Company used a Tsiveriotis-Fernandes model to value the Deerfield Convertible Note and December 2019 Notes as of June 30, 2020 and December 31, 2019. The Company also used a Tsiveriotis-Fernandes model to value the January 2020 Note as of June 30, 2020 and the 2021 Notes as of  December 31, 2019.

 

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, 2020 and December 31, 2019 (in thousands):

 

    Balance as of June 30, 2020     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  

Deerfield Warrant liability

  $ 38     $     $     $ 38  

Embedded Warrant Put Option

                       

Deerfield Note Put Option

                       

KVK Warrant liability

    9             9        

Total liabilities

  $ 47     $     $ 9     $ 38  

 

    Balance as of December 31, 2019     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  

Deerfield Warrant liability

  $ 77     $     $     $ 77  

Embedded Warrant Put Option

    19                   19  

Deerfield Note Put Option

                       

Fundamental change and make-whole interest provisions embedded within 2021 Notes

                       

KVK Warrant liability

    24             24        

Total liabilities

  $ 120     $     $ 24     $ 96  

 

25

 

 

The Company’s Deerfield Warrant liability, embedded Warrant Put Option, embedded Deerfield Note Put Option and the fundamental change and make-whole interest provisions embedded in the 2021 Notes are measured at fair value on a recurring basis. As of June 30, 2020 and December 31, 2019, the Deerfield Warrant liability, embedded Warrant Put Option and embedded Deerfield Note Put Option are reported on the unaudited condensed balance sheets in derivative and warrant liability. As of December 31, 2019, the fundamental change and make-whole interest provisions embedded in the 2021 Notes is reported on the balance sheet in derivative and warrant liability. The Company used a Monte Carlo simulation to value the Deerfield Warrant liability, embedded Warrant Put Option and the embedded Deerfield Note Put Option as of June 30, 2020 and December 31, 2019. The Company also used a Monte Carlo simulation to value the fundamental change and make-whole interest provisions embedded in the 2021 Notes as of December 31, 2019. 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 Deerfield Warrant liability, embedded Warrant Put Option and the embedded Deerfield Note Put Option are reflected in the unaudited condensed statements of operations for the three and six months ended June 30, 2020 and 2019 as a fair value adjustment related to derivative and warrant liability. In addition, changes in the fair value of the fundamental change and make-whole interest provisions embedded in the 2021 Notes are reflected in the unaudited condensed statements of operations for the three and six months ended June 30, 2019 as a fair value adjustment related to derivative and warrant liability.

 

The Company’s KVK Warrant liability is measured at fair value on a recurring basis. As of June 30, 2020 and December 31, 2019, the KVK Warrant liability is reported on the unaudited condensed 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 statements of operations for the three and six months ended June 30, 2020 and 2019 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,

 
   

2020

   

2019

   

2020

   

2019

 

Balance as of beginning of period

  $ 38     $ 1,421     $ 96     $ 1,845  

Adjustment to fair value

          16       (58 )     (408 )

Balance as of end of period

  $ 38     $ 1,437     $ 38     $ 1,437  

   

26

 

 
I. Net Loss Per Share

 

Under the two-class method, for periods with net income, basic net income per share of common stock is computed by dividing the net income attributable to shares of common stock by the weighted average number of shares of common stock outstanding during the period. Net income attributable to shares of common stock 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. 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 (loss) 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 and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding convertible securities under the if-converted method when calculating diluted income (loss) per share of common stock in which it is assumed that the outstanding convertible securities convert into common stock at the beginning of the period or date of issuance, if the convertible security was issued during the period. The Company reports the more dilutive of the approaches (two-class or if-converted) as its diluted net income (loss) per share of common stock during the period.

 

Diluted net loss per share of common stock is the same as basic net loss per share of common stock for the three and six months ended June 30, 2019 because the effects of potentially dilutive items were anti-dilutive for the respective periods. For the three and six months ended June 30, 2020, certain dilutive items were anti-dilutive for the period and are presented in the table immediately below. 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 June 30,

   

Six months ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Deerfield Convertible Note

    1,254,682       1,167,302       1,254,682       1,167,302  

2021 Notes

          4,481,182             4,481,182  
January 2020 Note     535,513             535,513        

December 2019 Notes*

    14,866,755             14,866,755        

Awards under equity incentive plans

    5,682,534       5,067,069       5,697,534       5,067,069  

Common stock warrants

    2,423,077       2,423,077       2,423,077       2,423,077  

Series A Convertible Preferred Stock

          1,112,334             1,112,334  

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

    24,762,561       14,250,964       24,777,561       14,250,964  
                                 
* Inclusive of 5,189,015 shares of Common Stock issuable (i) in exchange of the Deerfield Optional Conversion Feature, or (ii) upon conversion of the Series B-2 Preferred Stock issuable in exchange of the Deerfield Optional Conversion Feature.

 

The items which were dilutive for the three and six months ended June 30, 2020 are included in the reconciliation of basic net income (loss) per share of common stock to diluted net income (loss) per share of common stock below. 

 

   

Three months ended

   

Six months ended

 
   

June 30, 2020

   

June 30, 2020

 

Basic net income (loss) per share of common stock:

               

Net income (loss)

  $ 859     $ (4,892 )

Less: Net income (loss) attributable to participating securities

    (26 )      

Net income (loss) attributable to shares of common stock

    833       (4,892 )

Less: Dividends declared or accumulated

           

Undistributed net income (loss) attributable to shares of common stock, basic

  $ 833     $ (4,892 )

Weighted average number of shares of common stock outstanding

    63,163       55,618  

Basic net income (loss) per share of common stock

  $ 0.01     $ (0.09 )

Diluted net income (loss) per share of common stock:

               

Net income (loss)

  $ 833     $ (4,892 )

Less: Fair value adjustment income related to Deerfield Warrant liability and embedded warrant put option

          (38 )

Less: Fair value adjustment income related to Embedded Warrant Put Option

          (19 )

Less: Fair value adjustment income related to KVK Warrant liability

    3       (17 )

Net income (loss) attributable to shares of common stock, diluted

  $ 836     $ (4,966 )

Weighted average number of shares of common stock outstanding

    63,163       55,618  

Dilutive effect of common stock options

    1        

Dilutive effect of Deerfield Warrant

           

Dilutive effect of KVK Warrant

           

Weighted average number of shares of common stock outstanding, diluted

    63,164       55,618  

Diluted net income (loss) per share of common stock

  $ 0.01     $ (0.09 )

 

27

 

 

J.

Severance Expense

 

In February 2020, the Company eliminated the chief business officer role and Gordon K. Johnson separated from the Company. In connection with his separation, Mr. Johnson is entitled to severance benefits as documented in his Amended and Restated Employment Agreement entered into in June 2015. The severance benefits consist of personnel and other related charges of approximately $0.4 million and stock compensation expense of approximately $0.4 million related to the acceleration of vesting on unvested shares subject to certain stock options. These severance benefits are presented as severance expense in the unaudited condensed statements of operations for the six months ended June 30, 2020. As of June 30, 2020, the Company had accrued severance expense recorded within accounts payable and accrued expenses in the amount of $0.2 million. As of June 30, 2020, there was no accrued severance. For the three months ended June 30, 2020 and three and six months ended June 30, 2019 there was no severance expense.

 

 
K. 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's leases have remaining lease terms of 1 year to 6 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. In February 2020, 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,

 

Lease Cost

 

2020

   

2019

   

2020

   

2019

 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 30     $ 30     $ 61     $ 61  

Interest on lease liabilities

    7       11       15       22  

Total finance lease cost

    37       41       76       83  

Operating lease cost

    92       124       181       248  

Short-term lease cost

    54       58       111       115  

Variable lease cost

    13       6       27       21  

Less: sublease income

    (40 )     (25 )     (53 )     (50 )

Total lease costs

  $ 156     $ 204     $ 342     $ 417  

 

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

 

   

Six months ended June 30,

 
   

2020

   

2019

 

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

               

Operating cash flows from finance leases

  $ 15     $ 22  

Financing cash flows from finance leases

    117       104  

Operating cash flows from operating leases

    221       217  

Operating cash flows from short-term leases

    111       115  

Operating cash flows from variable lease costs

    27       21  
                 

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

               

Finance leases

  $     $ 737  

Operating leases

    20       1,852  

 

28

 

 

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,

 
   

2020

   

2019

 

Finance Leases

               

Property and equipment, at cost

  $ 1,013     $ 1,013  

less: accumulated depreciation and amortization

    (460 )     (398 )

Property and equipment, net

  $ 553     $ 615  
                 

Other current liabilities

  $ 240     $ 236  

Other long-term liabilities

    47       168  

Total finance lease liabilities

  $ 287     $ 404  
                 

Operating Leases

               

Operating lease right-of-use assets

  $ 1,404     $ 1,537  

Total operating lease right-of-use assets

  $ 1,404     $ 1,537  
                 

Current portion of operating lease liabilities

  $ 309     $ 284  

Operating lease liabilities, less current portion

    1,755       1,901  

Total operating lease liabilities

  $ 2,064     $ 2,185  
                 

Weighted Average Remaining Lease Term

               

Finance leases (years)

    1       2  

Operating leases (years)

    5       6  
                 

Weighted Average Discount Rate

               

Finance leases

    7.7 %     7.7 %

Operating leases

    7.5 %     7.5 %

 

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

 

   

Finance

   

Operating

 

Year Ending December 31,

 

Leases

   

Leases

 

2020 (excluding the six months ended June 30, 2020)

  $ 128     $ 226  

2021

    163       460  

2022

    11       463  

2023

          472  

2024

          484  

Thereafter

          420  

Total lease payments

    302       2,525  

Less: future interest expense

    (15 )     (461 )

Lease liabilities

  $ 287     $ 2,064  

 

29

 

 

 

 

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 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 the “Risk Factors” section of this Quarterly Report on Form 10-Q, 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.

 

Unless the context otherwise requires, we use the terms “KemPharm,” “Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q to refer to KemPharm, Inc. 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, APADAZ, LAT and the KemPharm 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.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including the section entitled “Management’s 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 “Risk Factors” and elsewhere in this report. 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:

 

  our development plan for our ADHD product candidates, including expectations about the timing of our regulatory filings;
     

 

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

     
  our ability to raise funds on commercially available 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 result of those trials;

     

 

our expectations regarding federal, state and foreign regulatory requirements;

     

 

the potential therapeutic benefits and effectiveness of our product candidates and partnered assets;

     

 

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

     

 

the potential outcome of any strategic collaborations or partnerships for the development or sale of our product candidates and partnered assets;

     

 

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

     

 

the timing of commercializing our product candidates and partnered assets.

 

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 important factors in the cautionary statements included in this report, particularly in the section entitled “Risk Factors” 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.

  

30

 

 

Overview

 

We are a specialty pharmaceutical company focused on the discovery and development of proprietary prodrugs to treat serious medical conditions through our proprietary Ligand Activated Therapy, or LAT®, technology. We utilize our proprietary LAT technology to generate improved prodrug versions of drugs approved by the U.S. Food and Drug Administration, or FDA, as well as to generate prodrug versions of existing compounds that may have applications for new disease indications. Our prodrug product candidate pipeline is focused on the high need areas of attention deficit hyperactivity disorder, or ADHD, and stimulant use disorder, or SUD. Our co-lead clinical development candidates for the treatment of ADHD, KP415 and KP484, are both based on a prodrug of d-methylphenidate, or d-MPH, but have differing duration/effect profiles. Our preclinical product candidate for the treatment of SUD is KP879, based on a prodrug of d-MPH. In September 2019, we entered into a Collaboration and License Agreement, or the KP415 License Agreement, with Commave Therapeutics SA, an affiliate of Gurnet Point Capital, or Commave. Under the KP415 License Agreement, we granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize our product candidates containing serdexmethylphenidate, or SDX, and d-MPH, including KP415 and KP484. In addition, we have announced our commercial partnership with KVK Tech, Inc., or KVK, of APADAZ®, an FDA approved immediate-release, or IR, combination product of benzhydrocodone, our prodrug of hydrocodone, and acetaminophen, or APAP, for the short-term (no more than 14 days) management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate.

 

We expect that our only source of revenues will be through payments arising from our license agreements with KVK and Commave, and through potential consulting arrangements and any other future arrangements we might enter into related to one of our other product candidates. To date, we have generated revenue from the KP415 License Agreement in the form of the non-refundable upfront payment of $10.0 million, of which we paid Aquestive Therapeutics, or Aquestive, $1.0 million as a royalty payment, a regulatory milestone payment of $5.0 million following the FDA's acceptance of the KP415 new drug application, or NDA, of which we paid Aquestive $0.5 million as a royalty payment, reimbursement of out-of-pocket third-party research and development costs and payments related to the performance of consulting services and revenues received through consulting arrangements. In May 2020, the FDA accepted our NDA for KP415.

 

We have had recurring negative cash flows from operations and, as of June 30, 2020, had an accumulated deficit of $250.6 million and a net working capital (current assets less current liabilities) deficit of $63.5 million. Our cash flows from operations for the six months ended June 30, 2020 and 2019 were $0.2 million of net cash provided by operations and $18.4 million of net cash used in operations, respectively.

 

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 other 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.

 

Our commercial revenue, if any, will be derived from sales of APADAZ or any other product candidates for which we obtain regulatory approval. In October 2018, we entered into the APADAZ License Agreement with KVK, pursuant to which we granted an exclusive license to KVK to commercialize APADAZ in the United States, and in September 2019, we entered into the KP415 License Agreement, pursuant to which we granted an exclusive, worldwide license to Commave to develop, manufacture and commercialize our product candidates containing SDX and d-MPH, including KP415 and KP484. We cannot guarantee that KVK or Commave will be able to successfully commercialize APADAZ or our product candidates covered under the KP415 License Agreement, or that we will ever receive any payments under the APADAZ License Agreement from commercial sales of APADAZ or any future payments under the KP415 License Agreement. We also do not know when, if ever, any other product candidate will be commercially available. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or debt, the terms of these securities may restrict our ability to operate. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or altogether cease our research and development programs or future commercialization efforts.

 

Our recurring negative cash flows from operations, net working capital (current assets less current liabilities) deficit and stockholders' deficit raise substantial doubt about our ability to continue as a going concern. We expect that our only sources of revenues will be through payments arising from our license agreements with KVK and Commave, and through potential consulting arrangements and any other future arrangements related to one of our other product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our inability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or debt, the terms of these securities may restrict our ability to operate. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or altogether cease our research and development programs or future commercialization efforts.

 

31

 

 

Our Product Candidates and Approved Products

 

We have employed our proprietary LAT technology to create a portfolio of product candidates and approved products that we believe will offer significant improvements over FDA-approved and widely-prescribed drugs.

 

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

 

Selected KemPharm Partnered and Optioned Assets

 

    Product Candidate        
Parent Drug (Effect Profile)   / Product   Development   Key

(Indication)

 

(Status)

 

Status

 

Milestone

Methylphenidate (ER)

(ADHD)

 

KP415

(Partnered)

  Clinical   Potential PDUFA Date - March 2021

Methylphenidate (ER)

(ADHD)

 

KP484

(Partnered)

 

Clinical

 

Initiation of Pivotal Efficacy Trial - 2021

Methylphenidate (ER)*

(SUD)

 

KP879

(Optioned)

 

Preclinical

  IND Submission - 2021

Hydrocodone/APAP (IR)

(Pain)

 

APADAZ

(Partnered)

  FDA Approved  

Initial Adoption Milestone from KVK - 2021

             
* This product candidate is subject to an option in favor of Commave under the terms of the KP415 License Agreement, but is not currently licensed to Commave, thereunder.

 

Subject to Commave's approval, we intend to seek approval of both KP415 and KP484 under the 505(b)(2) NDA pathway, which will allow us to rely on the FDA's previous findings of safety and effectiveness for one or more approved products. We submitted a 505(b)(2) NDA for KP415 in March 2020 which was accepted by the FDA in May 2020. We anticipate initiating additional pharmacokinetic, or PK, and pivotal efficacy trials for KP484 in 2021, subject to Commave's approval.

 

32

 

 

Third-Party Agreements

 

APADAZ License Agreement

 

In October 2018, we entered into the APADAZ License Agreement with KVK pursuant to which we have granted an exclusive license to KVK to conduct regulatory activities for, manufacture and commercialize APADAZ in the United States.

 

Pursuant to the APADAZ License Agreement, KVK has agreed to pay us certain payments and cost reimbursements of an estimated $3.4 million, which includes a payment of $2.0 million within 10 days of the achievement of a specified milestone related to the initial formulary adoption of APADAZ, or the Initial Adoption Milestone. In addition, KVK has agreed to make additional payments to us upon the achievement of specified sales milestones of up to $53.0 million in the aggregate. Further, we and KVK will share the quarterly net profits of APADAZ by KVK in the United States at specified tiered percentages, ranging from us receiving 30% to 50% of net profits, based on the amount of net sales on a rolling four quarter basis. We are responsible for a portion of commercialization and regulatory expenses for APADAZ until the Initial Adoption Milestone is achieved, after which KVK will be responsible for all expenses incurred in connection with commercialization and maintaining regulatory approval in the United States.

 

The APADAZ License Agreement will terminate on the later of the date that all of the patent rights for APADAZ have expired in the United States or KVK’s cessation of commercialization of APADAZ in the United States. KVK may terminate the APADAZ License Agreement upon 90 days written notice if a regulatory authority in the United States orders KVK to stop sales of APADAZ due to a safety concern. In addition, after the third anniversary of the APADAZ License Agreement, KVK may terminate the APADAZ License Agreement without cause upon 18 months prior written notice. We may terminate the APADAZ License Agreement if KVK stops conducting regulatory activities for or commercializing APADAZ in the United States for a period of six months, subject to specified exceptions, or if KVK or its affiliates challenge the validity, enforceability or scope of any licensed patent under the APADAZ License Agreement. Both parties may terminate the APADAZ License Agreement (i) upon a material breach of the APADAZ License Agreement, subject to a 30-day cure period, (ii) the other party encounters bankruptcy or insolvency or (iii) if the Initial Adoption Milestone is not achieved. Upon termination, all licenses and other rights granted by us to KVK pursuant to the APADAZ License Agreement would revert to us.

 

The APADAZ License Agreement also established a joint steering committee, which monitors progress of the commercialization of APADAZ.

 

33

 

 

KP415 License Agreement

 

In September 2019, we entered into 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 KP415, 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 KP415 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 Candidates 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 the KP415 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, depending, among other things, on timing of approval for a new drug applicable for KP415 and its final approved label, if any. In May 2020, the FDA accepted our NDA for KP415. Per the KP415 License Agreement, we received a regulatory milestone payment of $5.0 million following the FDA’s acceptance of the KP415 NDA. 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.

 

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.

 

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 affiliates challenge 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).

 

The KP415 License Agreement also established a joint steering committee, which monitors progress of the development of both KP415 and KP484. Subject to the oversight of the joint steering committee, we otherwise retain all responsibility for the conduct of all regulatory activities required to obtain new drug application approval of KP415 and KP484; provided that Commave shall be the sponsor of any clinical trials conducted by us on behalf of Commave.

 

34

 

 

JMI Agreement

 

In November 2009, we entered into a supply agreement, or the Supply Agreement, with Johnson Matthey, Inc., or JMI, whereby JMI has agreed to supply us with all the benzhydrocodone necessary for clinical trials and commercial sale for a price equal to JMI's manufacturing cost and to provide process optimization and development services for benzhydrocodone. In exchange, we issued shares of our common stock to JMI, provided that the commercial supply arrangement for benzhydrocodone would be exclusive to JMI in the United States and agreed to pay JMI royalties on the net sales of any products that utilize benzhydrocodone as the active pharmaceutical ingredient, or API. The percentage royalty rate ranges from the high teens at low volumes to the mid-single digits at higher volumes. Our FDA-approved drug, APADAZ, contains benzhydrocodone.

 

We are responsible for all costs of any benzhydrocodone manufactured during a specified validation process for APADAZ. After completion of the validation process, but prior to the commercial launch of any products that utilize benzhydrocodone as the API JMI will manufacture batches of benzhydrocodone at a price to be negotiated. Failure to agree upon this pricing would result in JMI supplying these batches to us free of charge and we would pay JMI an additional royalty payment on such batches. The percentage royalty rate ranges from the low teens at low volumes to the low single digits at higher volumes and is additive to any minimum royalty we may owe JMI on such batch. JMI will manufacture and supply benzhydrocodone at a price equal to JMI's fully allocated manufacturing cost after commercial launch of APADAZ.

 

We must purchase all our U.S. benzhydrocodone needs from JMI and JMI cannot supply benzhydrocodone to other companies. After the commercial launch of any product that utilizes benzhydrocodone as the API, JMI is required to identify a secondary manufacturing site and qualify and validate that site to produce benzhydrocodone.

 

The term of the supply agreement extends as long as we hold a valid and enforceable patent for benzhydrocodone or until the tenth anniversary of the commercial launch of any product that utilizes benzhydrocodone as the API, whichever date is later. Upon the expiration of such term, the agreement will automatically renew for a period of two years unless either party provides 12 months' prior notice of its intent not to renew.

 

Other Third-Party Agreements

 

Under our March 2012 asset purchase agreement with Shire Pharmaceuticals, LLC, or Shire, Shire had a right of first refusal to acquire, license or commercialize KP415 and KP484. In early 2019, Shire was acquired by Takeda Pharmaceutical Company, Ltd, or Takeda, to whom this right of first refusal was transferred at that time. Takeda did not exercise this right of first refusal in connection with our entry into the KP415 License Agreement.

 

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 KP415, KP484 or KP879, and any product candidates containing SDX, including royalty payments on any license of KP415, KP484 or KP879, the sale of KP415, KP484 or KP879 to a third party, the commercialization of KP415, KP484 or KP879 and the portion of any consideration that is attributable to the value of KP415, KP484 or KP879 and paid to us or our stockholders in a change of control transaction. In connection with the KP415 License Agreement, we paid Aquestive a royalty equal to 10% of the upfront license payment we received in the third quarter of 2019 and the regulatory milestone payment we received in the second quarter of 2020.

 

35

 
 

 

Results of Operations

 

Comparison of the three months ended June 30, 2020 and 2019 (in thousands):

 

   

Three months ended June 30,

   

Period-to-

 
   

2020

   

2019

   

Period Change

 

Revenue

  $ 6,908     $     $ 6,908  

Operating expenses:

                       

Royalty and direct contract acquisition costs

    642             642  

Research and development

    1,954       4,803       (2,849 )

General and administrative

    1,719       2,989       (1,270 )

Total operating expenses

    4,315       7,792       (3,477 )

Income (loss) from operations

    2,593       (7,792 )     10,385  

Other (expense) income:

                       

Interest expense related to amortization of debt issuance costs and discount

    (574 )     (305 )     (269 )

Interest expense on principal

    (1,197 )     (1,232 )     35  

Fair value adjustment related to derivative and warrant liability

    (3 )     (21 )     18  

Interest and other income, net

    40       84       (44 )

Total other expenses

    (1,734 )     (1,474 )     (260 )

Income (loss) before income taxes

    859       (9,266 )     10,125  

Income tax benefit

          9       (9 )

Net income (loss)

  $ 859     $ (9,257 )   $ 10,116  

 

Net Income (Loss)

 

Net income for the three months ended June 30, 2020 was $0.9 million, an increase of $10.1 million compared to a net loss for the three months ended June 30, 2019 of $9.3 million. The increase was primarily attributable to an increase in income (loss) from operations of $10.4 million, partially offset by an increase in net interest expense and other items of $0.3 million.

 

Revenue

 

Revenue for the three months ended June 30, 2020 was $6.9 million, which was comprised of a regulatory milestone payment of $5.0 million received upon the acceptance of the KP415 NDA by the FDA, $0.5 million of consulting fees earned and $0.1 million of reimbursements for out-of-pocket third-party research and development costs related to the KP415 License Agreement and $1.0 million of consulting fees earned and $0.3 million of reimbursements for out-of-pocket third-party costs related to consulting arrangements. We had no revenue in the three months ended June 30, 2019.

 

Royalty and Direct Contract Acquisition Costs

 

Royalties and direct contract acquisition costs for the three months ended June 30, 2020 was $0.6 million, which was comprised of a royalty payment of $0.5 million paid to Aquestive related to the regulatory milestone discussed above and contract costs of $0.1 million which are directly attributable to the revenue recognized under the KP415 License Agreement for the period. We had no royalties and direct contract acquisition costs for the three months ended June 30, 2019.

 

Research and Development

 

Research and development expenses decreased by $2.8 million, from $4.8 million for the three months ended June 30, 2019, to $2.0 million for the three months ended June 30, 2020. This decrease was primarily attributable to a decrease in net third-party research and development costs, personnel-related costs and other miscellaneous research and development expenses.

 

General and Administrative

 

General and administrative expenses decreased by $1.3 million, from $3.0 million for the three months ended June 30, 2019, to $1.7 million for the three months ended June 30, 2020. This decrease was primarily attributable to a decrease in personnel-related costs and other miscellaneous general and administrative costs.

 

Other (Expense) Income

 

Other expenses increased by $0.3 million, from $1.5 million for the three months ended June 30, 2019, to $1.7 million for the three months ended June 30, 2020. This period-to-period increase in expense was primarily attributable to an increase in net interest expense and other items of $0.3 million.

 

36

 

Comparison of the six months ended June 30, 2020 and 2019 (in thousands):

 

   

Six months ended June 30,

   

Period-to-

 
   

2020

   

2019

   

Period Change

 

Revenue

  $ 8,997     $     $ 8,997  

Operating expenses:

                       

Royalty and direct contract acquisition costs

    1,305             1,305  

Research and development

    4,080       13,334       (9,254 )

General and administrative

    3,964       5,827       (1,863 )

Severance expense

    830             830  

Total operating expenses

    10,179       19,161       (8,982 )

Loss from operations

    (1,182 )     (19,161 )     17,979  

Other (expense) income:

                       

Interest expense related to amortization of debt issuance costs and discount

    (1,145 )     (610 )     (535 )

Interest expense on principal

    (2,457 )     (2,461 )     4  

Fair value adjustment related to derivative and warrant liability

    72       432       (360 )

Interest and other (expense) income, net

    (183 )     235       (418 )

Total other expenses

    (3,713 )     (2,404 )     (1,309 )

Loss before income taxes

    (4,895 )     (21,565 )     16,670  

Income tax benefit

          17       (17 )

Net loss

  $ (4,895 )   $ (21,548 )   $ 16,653  

 

Net Loss

 

Net loss for the six months ended June 30, 2020 was $4.9 million, a decrease of $16.7 million compared to a net loss for the six months ended June 30, 2019 of $21.5 million. The decrease was primarily attributable to a decrease in loss from operations of $18.0 million, partially offset by a decrease in fair value adjustment income related to derivative and warrant liability of $0.4 million and an increase in net interest expense and other items of $0.9 million.

 

Revenue

 

Revenue for the six months ended June 30, 2020 was $9.0 million, which was comprised of a regulatory milestone payment of $5.0 million received upon the acceptance of the KP415 NDA by the FDA, $1.8 million of consulting fees earned and $0.5 million of reimbursements for out-of-pocket third-party research and development costs related to the KP415 License Agreement and $1.4 million of consulting fees earned and $0.3 million of reimbursements for out-of-pocket third-party costs related to consulting arrangements. We had no revenue in the six months ended June 30, 2019.

 

Royalty and Direct Contract Acquisition Costs

 

Royalties and direct contract acquisition costs for the six months ended June 30, 2020 was $1.3 million, which was comprised of a royalty payment of $0.5 million paid to Aquestive related to the regulatory milestone discussed above and contract costs of $0.8 million which are directly attributable to the revenue recognized under the KP415 License Agreement for the period. We had no royalties and direct contract acquisition costs for the six months ended June 30, 2019.

 

Research and Development

 

Research and development expenses decreased by $9.3 million, from $13.3 million for the six months ended June 30, 2019, to $4.1 million for the six months ended June 30, 2020. This decrease was primarily attributable to a decrease in net third-party research and development costs, personnel-related costs and other miscellaneous research and development expenses.

 

General and Administrative

 

General and administrative expenses decreased by $1.9 million, from $5.8 million for the six months ended June 30, 2019, to $4.0 million for the six months ended June 30, 2020. This decrease was primarily attributable to a decrease in personnel-related costs and other miscellaneous general and administrative costs.

 

Severance Expense

 

Severance expense of $0.8 million was recognized for the six months ended June 30, 2020 due to the termination of our chief business officer in February 2020. Severance expense is comprised of $0.4 million of personnel and other related charges and $0.4 million of stock compensation expense related to the acceleration of vesting on certain stock options upon employee termination. We had no severance expense in the six months ended June 30, 2019.

 

Other (Expense) Income

 

Other expenses increased by $1.3 million, from $2.4 million for the six months ended June 30, 2019, to $3.7 million for the six months ended June 30, 2020. This period-to-period increase in expense was primarily attributable to a decrease in fair value adjustment income related to derivative and warrant liability of $0.4 million and an increase in net interest expense and other items of $0.9 million.

 

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Liquidity and Capital Resources

 

Sources of Liquidity

 

Through June 30, 2020, 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 Fund, LLC, or Lincoln Park, and from revenue received under the KP415 License Agreement and consulting arrangements. As of June 30, 2020, we had cash and cash equivalents of $6.4 million and restricted cash of $0.2 million.

 

We filed a registration statement on Form S-3 covering the sale from time to time of up to $150.0 million of our common stock, preferred stock, debt and/or warrants, which was declared effective by the Securities and Exchange Commission, or SEC, on October 17, 2016, or the Prior Registration Statement. In October 2019, we filed a registration statement on Form S-3 covering the sale from time to time of up to $80.0 million of our common stock, preferred stock, and debt and/or warrants, which was declared effective by the SEC on April 10, 2020, or the Current Registration Statement. Effective April 10, 2020, we ceased making any sales under the Prior Registration Statement.

 

Based on the market value of our outstanding common stock held by non-affiliates as of March 31, 2020, the date we filed amendment No. 1 to the Current Registration Statement, in order to issue securities under the Current Registration Statement we must rely on Instruction I.B.6. of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the Current Registration Statement during any twelve-month period. At the time we sell securities pursuant to the Current Registration Statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6. may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale, as computed in accordance with Instruction I.B.6. Based on this calculation, the amount of securities we are able to sell under the Current Registration Statement, as of March 31, 2020, was approximately $6.8 million, of which we (i) have filed a prospectus supplement to register approximately $2.7 million for sales under the Current Purchase Agreement; and (ii) have previously sold an aggregate of $4.1 million of shares of common stock in prior offerings on Form S-3 in the previous 12 months. Accordingly, we expect that we will be unable to sell additional securities beyond those amounts pursuant to our Current Registration Statement in the near term, unless and until the market value of our outstanding common stock held by non-affiliates increases significantly. In addition, under the terms of the Current Purchase Agreement, stockholder approval may be required to access a portion of the amounts available under the Current Purchase Agreement.

 

In February 2019, we entered into a purchase agreement, or the Prior Purchase Agreement, with Lincoln Park, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $15.0 million of shares of our common stock, from time to time over the 36-month term of the Prior Purchase Agreement, and upon execution of the Prior Purchase Agreement we issued an additional 120,200 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Prior Purchase Agreement. Concurrently with entering into the Prior Purchase Agreement, we also entered into a registration rights agreement with Lincoln Park, pursuant to which we agreed to register the sale of the shares of our common stock that have been and may be issued to Lincoln Park under the Prior Purchase Agreement pursuant to our existing shelf registration statement on Form S-3 or a new registration statement. In February 2020, upon entering into a subsequent purchase agreement, or the Current Purchase Agreement, with Lincoln Park, we terminated the Prior Purchase Agreement and we filed a prospectus supplement to the Prior Registration Statement to terminate this offering in its entirety. As a result, we will not make any future sales under the Prior Purchase Agreement. Through the date of termination we sold 3,401,271 shares of our common stock  (exclusive of the 120,200 commitment shares)  to Lincoln Park under the Prior Purchase Agreement for approximately $5.4 million in gross proceeds.

 

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In September 2019, we entered into the KP415 License Agreement with Commave and Commave paid us a non