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kmph20220930b_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 September 30, 2022

☐	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 Stock, $0.0001 par value per share

KMPH

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

Total shares of common stock outstanding as of November 8, 2022: 34,504,862

Table of Contents

INDEX

KEMPHARM, INC.

FORM 10-Q

		Page

	PART I — FINANCIAL INFORMATION

Item 1.	unaudited CondeNSed CONSOLIDaTED Financial Statements
	UNAUDITED Condensed CONSOLIDATED Balance Sheets as of September 30, 2022 and December 31, 2021	4
	UNAUDITED Condensed CONSOLIDATED Statements of Operations for the three AND NINE months ended september 30, 2022 and 2021	5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 and 2021	6
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE Three AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021	7
	Unaudited condensed CONSOLIDATED Statements of Cash Flows for the NINE months ended SEPTEMBER 30, 2022 and 2021	9
	Notes to unaudited Condensed CONSOLIDATED Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57

	Signatures	58

Table of Contents

SPECIAL NOTE REGARDING 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 Part II, Item 1A. "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 31, 2022. Accordingly, you should not place undue reliance upon these forward-looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, the timing of events and circumstances and actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements about:

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

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

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

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

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

	●	our expectations regarding federal, state and foreign regulatory requirements;

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

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

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

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

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

	●	other factors discussed elsewhere in this report.

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

Note Regarding Company Reference

Unless the context otherwise requires, we use the terms “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, 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.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.

unaudited condensed CONSOLIDATED Financial Statements

KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)

	*September 30,*			*December 31,*
	*2022*			*2021*
Assets
Current assets:
Cash and cash equivalents	$	70,059		$	112,346
Short-term investments		5,832			—
Accounts and other receivables		6,583			1,528
Prepaid expenses and other current assets		2,659			1,182
Total current assets		85,133			115,056
Inventories		596			—
Property and equipment, net		852			884
Operating lease right-of-use assets		1,068			1,141
Long-term investments		31,463			15,422
Other long-term assets		439			438
Total assets	$	119,551		$	132,941

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	4,279		$	3,038
Current portion of operating lease liabilities		474			356
Current portion of discount and rebate liabilities		2,825			—
Other current liabilities		853			836
Total current liabilities		8,431			4,230
Line of credit payable		12,800			—
Derivative and warrant liability		35			330
Operating lease liabilities, less current portion		956			1,232
Discount and rebate liabilities, less current portion		3,509			—
Other long-term liabilities		26			31
Total liabilities		25,757			5,823

Commitments and contingencies (Note D)

Stockholders’ equity:
Preferred stock:
Undesignated preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2022 or December 31, 2021		—			—
Common stock, $0.0001 par value, 250,000,000 shares authorized, 35,411,097 shares issued and 34,501,144 shares outstanding as of September 30, 2022; 35,325,801 shares issued and 35,005,640 shares outstanding as of December 31, 2021		3			4
Additional paid-in capital		400,677			396,957
Treasury stock, at cost		(7,536	)		(2,814	)
Accumulated deficit		(299,551	)		(267,029	)
Accumulated other comprehensive income		201			—
Total stockholders' equity		93,794			127,118
Total liabilities and stockholders' equity	$	119,551		$	132,941

See accompanying notes to unaudited condensed consolidated financial statements

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KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

	*Three months ended September 30,*						*Nine months ended September 30,*
	*2022*			*2021*			*2022*			*2021*
Revenue, net	$	2,874		$	1,965		$	8,139		$	26,068
Operating expenses:
Cost of revenue		141			0			200			2,000
Research and development		5,385			2,239			13,262			7,352
General and administrative		3,974			1,948			10,266			6,145
Acquired in-process research and development		—			—			17,663			—
Total operating expenses		9,500			4,187			41,391			15,497
(Loss) income from operations		(6,626	)		(2,222	)		(33,252	)		10,571
Other (expense) income:
Loss on extinguishment of debt		—			—			—			(16,096	)
Interest expense related to amortization of debt issuance costs and discount		—			—			—			(150	)
Interest expense on principal		(124	)		(6	)		(165	)		(221	)
Fair value adjustment related to derivative and warrant liability		22			332			295			(92	)
Interest and other (expense) income, net		79			137			(152	)		136
Total other (expense) income		(23	)		463			(22	)		(16,423	)
Loss before income taxes		(6,649	)		(1,759	)		(33,274	)		(5,852	)
Income tax benefit		33			—			752			—
Net loss	$	(6,616	)	$	(1,759	)	$	(32,522	)	$	(5,852	)
Deemed dividend		—			—			—			(54,342	)
Net loss attributable to common stockholders	$	(6,616	)	$	(1,759	)	$	(32,522	)	$	(60,194	)

Basic and diluted net loss per share of common stock:
Net loss attributable to common stockholders	$	(0.19	)	$	(0.05	)	$	(0.94	)	$	(2.16	)

Weighted average number of shares of common stock outstanding:
Basic and diluted		34,494,702			35,217,953			34,482,791			27,904,711

See accompanying notes to unaudited condensed consolidated financial statements

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KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share amounts)

	*Three months ended September 30,*						*Nine months ended September 30,*
	*2022*			*2021*			*2022*			*2021*
Net loss attributable to common stockholders	$	(6,616	)	$	(1,759	)	$	(32,522	)	$	(60,194	)
Other comprehensive income:
Foreign currency translation adjustment		201			—			201			—
Other comprehensive income		201			—			201			—
Comprehensive loss	$	(6,415	)	$	(1,759	)	$	(32,321	)	$	(60,194	)

See accompanying notes to unaudited condensed consolidated financial statements

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KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

	*Undesignated*					*Additional*		*Treasury*						*Other*		*Total*
	*Preferred*		*Common*			*Paid-in*		*Stock,*			*Accumulated*			*Comprehensive*		*Stockholders'*
	*Stock*		*Stock*			*Capital*		*at cost*			*Deficit*			*Income*		*Equity*
Balance as of January 1, 2022	$	—	$	4		$	396,957	$	(2,814	)	$	(267,029	)	$	—	$	127,118
Net loss		—		—			—		—			(1,864	)		—		(1,864	)
Stock-based compensation expense		—		—			918		—			—			—		918
Shares repurchased as part of the Share Repurchase Program		—		(1	)		—		(4,722	)		—			—		(4,723	)
Issuance of common stock in exchange for consulting services		—		—			50		—			—			—		50
Balance as of March 31, 2022	$	—	$	3		$	397,925	$	(7,536	)	$	(268,893	)	$	—	$	121,499
Net loss		—		—			—		—			(24,042	)		—		(24,042	)
Stock-based compensation expense		—		—			1,510		—			—			—		1,510
Issuance of common stock in exchange for consulting services		—		—			50		—			—			—		50
Issuance of common stock as part of the Employee Stock Purchase Plan		—		—			216		—			—			—		216
Balance as of June 30, 2022	$	—	$	3		$	399,701	$	(7,536	)	$	(292,935	)	$	—	$	99,233
Net loss		—		—			—		—			(6,616	)		—		(6,616	)
Stock-based compensation expense		—		—			911		—			—			—		911
Issuance of common stock in exchange for consulting services		—		—			65		—			—			—		65
Other comprehensive income		—		—			—		—			—			201		201
Balance as of September 30, 2022	$	—	$	3		$	400,677	$	(7,536	)	$	(299,551	)	$	201	$	93,794

See accompanying notes to unaudited condensed consolidated financial statements

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KEMPHARM, INC.

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

(in thousands)

	*Preferred Stock*
	*Series A*		*Series B-1*		*Series B-2*
	*Convertible*		*Convertible*		*Convertible*			*Undesignated*				*Additional*						*Total*
	*Preferred*		*Preferred*		*Preferred*			*Preferred*		*Common*		*Paid-in*			*Accumulated*			*Stockholders'*
	*Stock*		*Stock*		*Stock*			*Stock*		*Stock*		*Capital*			*Deficit*			*Deficit*
Balance as of January 1, 2021	$	—	$	—	$	—		$	—	$	0	$	192,062		$	(258,474	)	$	(66,412	)
Net loss		—		—		—			—		—		—			(10,296	)		(10,296	)
Stock-based compensation expense		—		—		—			—		—		675			—			675
Issuance of common stock in connection with Public Offering, net of discounts and commissions		—		—		—			—		1		49,284			—			49,285
Issuance of common stock in connection with the exercise of warrants in the Inducement Transaction, net of discounts and commissions		—		—		—			—		1		40,390			—			40,391
Issuance of common stock in connection with the exercise of common stock warrants		—		—		—			—		—		25,593			—			25,593
Fair value of warrants issued in connection with the Exchange Agreement		—		—		—			—		—		15,990			—			15,990
Fair value of Series B-2 Preferred Stock issued in accordance with the Exchange Agreement		—		—		29,056			—		—		—			—			—
Issuance of common stock as a result of Series B-2 Preferred Stock conversion		—		—		(29,056	)		—		1		29,055			—			29,056
Fair value of warrants issued in connection with the Inducement Transaction		—		—		—			—		—		38,437			—			38,437
Deemed dividend related the Inducement Transaction		—		—		—			—		—		(37,444	)		—			(37,444	)
Offering expenses charged to equity		—		—		—			—		—		(1,106	)		—			(1,106	)
Issuance of common stock in exchange for consulting services		—		—		—			—		—		82			—			82
Balance as of March 31, 2021	$	—	$	—	$	—		$	—	$	3	$	353,018		$	(268,770	)	$	84,251
Net income		—		—		—			—		—		—			6,203			6,203
Stock-based compensation expense		—		—		—			—		—		318			—			318
Issuance of common stock in connection with the exercise of warrants in the June 2021 Inducement Transaction, net of discounts and commissions		—		—		—			—		—		35,455			—			35,455
Issuance of common stock in connection with the exercise of common stock warrants		—		—		—			—		—		4,191			—			4,191
Fair value of warrants issued in connection with the June 2021 Inducement Transaction		—		—		—			—		—		17,089			—			17,089
Deemed dividend related the June 2021 Inducement Transaction		—		—		—			—		—		(16,898	)		—			(16,898	)
Offering expenses charged to equity		—		—		—			—		—		(18	)		—			(18	)
Issuance of common stock in exchange for consulting services		—		—		—			—		—		72			—			72
Balance as of June 30, 2021	$	—	$	—	$	—		$	—	$	3	$	393,227		$	(262,567	)	$	130,663
Net loss		—		—		—			—		—		—			(1,759	)		(1,759	)
Stock-based compensation expense		—		—		—			—		—		620			—			620
Issuance of common stock in connection with the exercise of warrants in the June 2021 Inducement Transaction, net of discounts and commissions		—		—		—			—		1		1,104			—			1,105
Issuance of common stock in connection with the exercise of common stock warrants		—		—		—			—		—		1,035			—			1,035
Issuance of common stock in exchange for consulting services		—		—		—			—		—		73			—			73
Balance as of September 30, 2021	$	—	$	—	$	—		$	—	$	4	$	396,059		$	(264,326	)	$	131,737

See accompanying notes to unaudited condensed consolidated financial statements

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KEMPHARM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	*Nine months ended September 30,*
	*2022*			*2021*
Cash flows from operating activities:
Net loss	$	(32,522	)	$	(5,852	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss on extinguishment of debt		—			16,096
Stock-based compensation expense		3,339			1,613
Non-cash interest expense		—			8
Amortization of debt issuance costs and debt discount		—			150
Depreciation and amortization expense		644			193
Fair value adjustment related to derivative and warrant liability		(295	)		92
Fair value adjustment related to investments		634			—
Loss on sublease and disposal of property and equipment		9			76
Consulting fees paid in common stock		165			227
Acquired in-process research and development		17,663			—
Change in assets and liabilities:
Accounts and other receivables		(4,646	)		960
Prepaid expenses and other assets		(1,196	)		(1,366	)
Inventories		280			—
Operating lease right-of-use assets		82			88
Accounts payable and accrued expenses		1,262			(1,891	)
Discount and rebate liabilities		858			—
Operating lease liabilities		(160	)		(241	)
Other liabilities		(372	)		1,134
Net cash (used in) provided by operating activities		(14,255	)		11,287

Cash flows from investing activities:
Acquisitions, net		(14,090	)		—
Purchases of property and equipment		(59	)		(85	)
Purchases of investments		(23,832	)		—
Maturities of investments		1,325			—
Net cash used in investing activities		(36,656	)		(85	)

Cash flows from financing activities:
Proceeds from issuance of debt		12,800			—
Proceeds from Public Offering, net of discounts and commissions		—			49,285
Proceeds from January 2021 Inducement Transaction, net of discounts and commissions		—			41,384
Proceeds from June 2021 Inducement Transaction, net of discounts and commissions		—			36,751
Proceeds from insurance financing arrangements		1,273			—
Proceeds from Employee Stock Purchase Plan		216			—
Payments of principal on insurance financing arrangements		(876	)		—
Payment to repurchase shares as part of the Share Repurchase Program		(4,723	)		—
Payment of offering costs		(68	)		(1,299	)
Repayment of principal on finance lease liabilities		(13	)		(156	)
Payment of debt issuance costs		—			(2,881	)
Repayment of principal on convertible notes		—			(37,924	)
Net proceeds from exercise of common stock warrants		—			30,819
Net cash provided by financing activities		8,609			115,979
Effect of exchange rate changes on cash and cash equivalents		15			—
Net (decrease) increase in cash and cash equivalents		(42,287	)		127,181
Cash and cash equivalents, beginning of period		112,346			4,322
Cash and cash equivalents, end of period	$	70,059		$	131,503

Supplemental cash flow information:
Cash paid for interest	$	165		$	213
Facility Notes principal converted to Series B-2 Preferred Stock		—			31,477
Amounts due for property and equipment included in accounts payable and accrued expenses		—			—
Amounts due for deferred offering costs included in accounts payable and accrued expenses		—			70
Fair value of warrants issued to underwriters in connection with Public Offering		—			3,485

See accompanying notes to unaudited condensed consolidated financial statements.

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KEMPHARM, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Organization

KemPharm, Inc. (the "Company") is a biotechnology company focused on the discovery, development and commercialization of novel treatments for rare central nervous system ("CNS") and neurodegenerative diseases, lysosomal storage disorders and related treatment areas. The Company has a diverse product portfolio, combining a clinical-stage pipeline with new drug application ("NDA") stage and commercial assets. The Company's pipeline includes arimoclomol, an orally-delivered, first-in-class investigational product candidate for Niemann-Pick disease type C ("NPC"), and KP1077, which the Company is developing as a treatment for idiopathic hypersomnia ("IH"), a rare neurological sleep disorder, and narcolepsy. In addition, the U.S. Food and Drug Administration ("FDA") has approved AZSTARYS^®, formally referred to as KP415, a once-daily treatment for attention deficit hyperactivity disorder ("ADHD") in patients age six years and older containing the Company's prodrug, serdexmethylphenidate ("SDX"), which is being commercialized by Corium, Inc. ("Corium"), an affiliate of Gurnet Point Capital, L.P., in the U.S. The FDA has also approved APADAZ^®, an immediate-release combination product containing benzhydrocodone, the Company's prodrug of hydrocodone, and acetaminophen, which is being commercialized by KVK-Tech, Inc. in the U.S.

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

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

Basis of Presentation

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

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Arimoclomol Acquisition

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

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

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

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

Cash	$	12,800
Assumed reserve liability		5,200
Total consideration	$	18,000

Total consideration	$	18,000
Direct transaction costs associated with the acquisition (1)		1,290
Total purchase price to be allocated	$	19,290

Property and equipment, inventory and assembled workforce acquired	$	1,627
IPR&D (2)		17,663
Total allocated purchase price	$	19,290

(1) As a result of the asset acquisition accounting, the transaction costs associated with the acquisition should be included in the costs of the assets acquired and allocated amongst qualifying assets using the relative fair value basis. The transaction costs primarily included financial advisor fees and legal expenses.
(2) The primary asset acquired, the IPR&D asset, was expensed and the allocated transaction related costs were included with and expensed with this asset.

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Underwriting Agreement

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

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

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

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

Listing on the Nasdaq Stock Market

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

On October 19, 2021, the Company announced that its shares of common stock were approved for listing to the Nasdaq Global Select Market. Trading on the Nasdaq Global Select Market commenced effective with the open of business on October 19, 2021, under the Company’s ticker symbol, “KMPH”. The Company was previously listed on the Nasdaq Capital Market, following its uplisting to the exchange in January 2021.

Entry into 2021 ATM Agreement

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

Share Repurchase Program

On December 20, 2021, the Company initiated a share repurchase program (the "Share Repurchase Program") pursuant to which the Company may repurchase up to $50 million of shares of its common stock through December 31, 2023. Capital allocation to the Share Repurchase Program will be based on a variety of factors, including our business results, the receipt of royalties and sales milestones under the AZSTARYS License Agreement (refer to Note B), and potentially other sources of non-dilutive capital that may become available to the Company. Repurchases will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to a variety of factors, including the market price of the Company’s common stock, general market and economic conditions and applicable legal requirements. The exact number of shares to be repurchased by the Company is not guaranteed and the program may be suspended, modified, or discontinued at any time without prior notice. The Company does not currently intend to retire the repurchased treasury shares, rather all repurchased treasury shares will remain authorized but unissued. As of September 30, 2022, the Company has repurchased 909,953 shares of its common stock for approximately $7.5 million under the Share Repurchase Program.

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B.	Summary of Significant Accounting Policies

Use of Estimates

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

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

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.

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.

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.

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AZSTARYS License Agreement

In September 2019, the Company entered into a Collaboration and License Agreement (the “AZSTARYS License Agreement”) with Commave Therapeutics SA, an affiliate of Gurnet Point Capital (“Commave”). Under the AZSTARYS License Agreement, the Company granted to Commave an exclusive, worldwide license to develop, manufacture and commercialize the Company’s product candidates containing SDX and d-methylphenidate (“d-MPH”), including AZSTARYS, 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 CNS disorder (the “Additional Product Candidates” and, collectively with AZSTARYS and KP484, the “Licensed Product Candidates”). Pursuant to the AZSTARYS License Agreement, Commave (i) paid the Company an upfront payment of $10.0 million; (ii) agreed to pay milestone payments of up to $63.0 million upon the occurrence of specified regulatory milestones related to AZSTARYS and KP484; (iii) agreed to pay additional 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 AZSTARYS 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 AZSTARYS License Agreement. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the royalty term for the applicable product.

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

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

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