zvra20230308b

zvra20230308b_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 March 31, 2023

☐	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

Zevra Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-5894398
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1180 Celebration Boulevard, Suite 103, Celebration, FL		34747
(Address of Principal Executive Offices)		(Zip Code)

(321) 939-3416

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address, and Former Fiscal Year if Changed Since Last Report)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

ZVRA

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 ☒

As of May 8, 2023, the registrant had 33,881,804 shares of common stock outstanding.

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INDEX

ZEVRA THERAPEUTICS, INC.

FORM 10-Q

		Page

	PART I — FINANCIAL INFORMATION

Item 1.	unaudited CondeNSed CONSOLIDaTED Financial Statements
	UNAUDITED Condensed CONSOLIDATED Balance Sheets as of MARCH 31, 2023, and December 31, 2022	4
	UNAUDITED Condensed CONSOLIDATED Statements of Operations for the three Months ended MARCH 31, 2023, and 2022	5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2023, and 2022	6
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE Three MONTHS ENDED MARCH 31, 2023, AND 2022	7
	Unaudited condensed CONSOLIDATED Statements of Cash Flows for the THREE months ended MARCH 31, 2023, and 2022	9
	Notes to unaudited Condensed CONSOLIDATED Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

	Signatures	38

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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, 2022, filed with the SEC on March 7, 2023. Accordingly, you should not place undue reliance upon these forward-looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, the timing of events and circumstances and actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements about:

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

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

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

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

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

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

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

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

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

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

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

	●	senior leadership and board member transitions and refreshments; and

	●	other factors discussed elsewhere in this report.

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

Note Regarding Company Reference

Unless the context otherwise requires, we use the terms “Zevra,” “Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q to refer to Zevra Therapeutics, Inc., formerly known as KemPharm, Inc. prior to February 21, 2023. We have proprietary rights to a number of trademarks used in this Quarterly Report on Form 10-Q that are important to our business, including LAT® and the Zevra 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.

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PART I — FINANCIAL INFORMATION

Item 1.

unaudited condensed CONSOLIDATED Financial Statements

ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)

	*March 31,*			*December 31,*
	*2023*			*2022*
Assets
Current assets:
Cash and cash equivalents	$	40,181		$	65,466
Securities at fair value		34,403			16,900
Short-term investments - other		20,700			481
Accounts and other receivables		7,822			8,299
Prepaid expenses and other current assets		1,174			1,877
Total current assets		104,280			93,023
Inventories		620			671
Property and equipment, net		744			794
Operating lease right-of-use assets		898			988
Long-term investments - other		—			20,000
Other long-term assets		53			53
Total assets	$	106,595		$	115,529

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	10,098		$	6,169
Current portion of operating lease liabilities		470			480
Current portion of discount and rebate liabilities		4,746			4,655
Other current liabilities		302			422
Total current liabilities		15,616			11,726
Line of credit payable		12,914			12,800
Derivative and warrant liability		3			1
Operating lease liabilities, less current portion		736			843
Discount and rebate liabilities, less current portion		5,764			4,327
Other long-term liabilities		158			25
Total liabilities		35,191			29,722

Commitments and contingencies (Note D)

Stockholders’ equity:
Preferred stock:
Undesignated preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2023 or December 31, 2022		—			—
Common stock, $0.0001 par value, 250,000,000 shares authorized, 35,457,496 shares issued and 33,881,804 shares outstanding as of March 31, 2023; 35,450,257 shares issued and 34,540,304 shares outstanding as of December 31, 2022		3			3
Additional paid-in capital		402,786			401,799
Treasury stock, at cost		(10,983	)		(7,536	)
Accumulated deficit		(320,339	)		(308,572	)
Accumulated other comprehensive (loss) income		(63	)		113
Total stockholders' equity		71,404			85,807
Total liabilities and stockholders' equity	$	106,595		$	115,529

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

	*Three months ended March 31,*
	*2023*			*2022*
Revenue, net	$	2,879		$	3,965
Operating expenses:
Cost of revenue		125			8
Research and development		8,844			3,082
Selling, general and administrative		6,834			2,734
Total operating expenses		15,803			5,824
Loss from operations		(12,924	)		(1,859	)
Other (expense) income:
Interest expense		(182	)		(5	)
Fair value adjustment related to derivative and warrant liability		(2	)		241
Fair value adjustment related to investments		196			(352	)
Interest and other income, net		1,042			107
Total other (expense) income		1,054			(9	)
Loss before income taxes		(11,870	)		(1,868	)
Income tax benefit		103			4
Net loss	$	(11,767	)	$	(1,864	)
Net loss attributable to common stockholders	$	(11,767	)	$	(1,864	)

Basic and diluted net loss per share of common stock:
Net loss attributable to common stockholders	$	(0.34	)	$	(0.05	)

Weighted average number of shares of common stock outstanding:
Basic and diluted		34,466,542			34,506,597

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share amounts)

	*Three months ended March 31,*
	*2023*			*2022*
Net loss attributable to common stockholders	$	(11,767	)	$	(1,864	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(176	)		—
Other comprehensive (loss) income		(176	)		—
Comprehensive loss	$	(11,943	)	$	(1,864	)

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

			*Additional*		*Treasury*						*Other*			*Total*
	*Common*		*Paid-in*		*Stock,*			*Accumulated*			*Comprehensive*			*Stockholders'*
	*Stock*		*Capital*		*at cost*			*Deficit*			*Income (Loss)*			*Equity*
Balance as of January 1, 2023	$	3	$	401,799	$	(7,536	)	$	(308,572	)	$	113		$	85,807
Net loss		—		—		—			(11,767	)		—			(11,767	)
Stock-based compensation expense		—		591		—			—			—			591
Shares repurchased as part of the Share Repurchase Program		—		—		(3,447	)		—			—			(3,447	)
Issuance of common stock in exchange for consulting services		—		42		—			—			—			42
Severance expense		—		354		—			—			—			354
Other comprehensive loss		—		—		—			—			(176	)		(176	)
Balance as of March 31, 2023	$	3	$	402,786	$	(10,983	)	$	(320,339	)	$	(63	)	$	71,404

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

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

(in thousands)

				Additional								Total
	*Common*			*Paid-in*		*Treasury*			*Accumulated*			*Stockholders'*
	*Stock*			*Capital*		*Stock, at cost*			*Deficit*			*Equity*
Balance as of January 1, 2022	$	4		$	396,957	$	(2,814	)	$	(267,029	)	$	127,118
Net loss		—			—		—			(1,864	)		(1,864	)
Stock-based compensation expense		—			918		—			—			918
Shares repurchased as part of the Share Repurchase Program		(1	)		—		(4,722	)		—			(4,723	)
Issuance of common stock in exchange for consulting services		—			50		—			—			50
Balance as of March 31, 2022	$	3		$	397,925	$	(7,536	)	$	(268,893	)	$	121,499

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	*Three months ended March 31,*
	*2023*			*2022*
Cash flows from operating activities:
Net loss	$	(11,767	)	$	(1,864	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		591			918
Non-cash severance expense		354			—
Depreciation and amortization expense		79			65
Fair value adjustment related to derivative and warrant liability		2			(241	)
Fair value adjustment related to investments		(196	)		352
Consulting fees paid in common stock		42			50
Gain on foreign currency exchange		(240	)		—
Change in assets and liabilities:
Accounts and other receivables		477			(1,792	)
Prepaid expenses and other assets		703			303
Inventories		51			—
Operating lease right-of-use assets		80			51
Accounts payable and accrued expenses		3,929			(486	)
Discount and rebate liability		1,528			—
Operating lease liabilities		(107	)		(88	)
Other liabilities		429			(821	)
Net cash used in operating activities		(4,045	)		(3,553	)

Cash flows from investing activities:
Purchases of property and equipment		(29	)		(16	)
Purchases of investments		(17,526	)		(3,832	)
Net cash used in investing activities		(17,555	)		(3,848	)

Cash flows from financing activities:
Proceeds from issuance of debt		12,914			—
Repayment of debt		(12,800	)		—
Payments of principal on insurance financing arrangements		(415	)		—
Payment to repurchase shares as part of the share repurchase program		(3,447	)		(4,723	)
Repayment of principal on finance lease liabilities		(2	)		(10	)
Net cash used in financing activities		(3,750	)		(4,733	)
Effect of exchange rate changes on cash and cash equivalents		65			—
Net decrease in cash and cash equivalents		(25,285	)		(12,134	)
Cash and cash equivalents, beginning of period		65,466			112,346
Cash and cash equivalents, end of period	$	40,181		$	100,212

Supplemental cash flow information:
Cash paid for interest	$	68		$	5

See accompanying notes to unaudited condensed consolidated financial statements.

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ZEVRA THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Organization

Zevra Therapeutics, Inc. (the "Company") is a rare disease company melding science, data and patient need to create transformational therapies for diseases with limited or no treatment options. The Company has a diverse portfolio of products and product candidates, which includes a combination of both a clinical stage pipeline and commercial stage assets. The Company's pipeline includes arimoclomol, an orally-delivered, first-in-class investigational product candidate being developed for Niemann-Pick disease type C ("NPC"), which has been granted orphan drug designation, Fast-track designation, Breakthrough Therapy designation and rare pediatric disease designation for the treatment of NPC by the U.S. Food and Drug Administration ("FDA") and orphan medical product designation for the treatment of NPC by the European Medicines Agency ("EMA"). KP1077 is the Company's lead clinical development product candidate which is being developed as a treatment for idiopathic hypersomnia ("IH"), a rare neurological sleep disorder, and narcolepsy. KP1077 is comprised solely of serdexmethylphenidate ("SDX"), the Company's proprietary prodrug of d-methylphenidate (“d-MPH”). The FDA has granted KP1077 orphan drug designation for the treatment of IH. The Company changed its name from KemPharm, Inc. to Zevra Therapeutics, Inc. effective as of February 21, 2023.

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

This interim information should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the United States Securities and Exchange Commission (“SEC”) on March 7, 2023.

Basis of Presentation

The Company prepared the consolidated financial statements in accordance with U.S. GAAP and the rules and regulations of the SEC and, in the Company's opinion, reflect all adjustments, including normal recurring items that are necessary.

Arimoclomol Acquisition

On May 15, 2022, the Company and Zevra Denmark A/S (formerly known as KemPharm Denmark A/S prior to February 21, 2023) (“Zevra DK”), a newly formed Danish company and wholly-owned subsidiary of the Company, entered into an asset purchase agreement (the “Arimoclomol Purchase Agreement”) with Orphazyme A/S in restructuring, a Danish public limited liability company (“Orphazyme”). The Arimoclomol Purchase Agreement closed on May 31, 2022. Under the terms of the Arimoclomol Purchase Agreement, Zevra 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, Zevra 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 the Company's asset valuations included projected revenues, probability of commercial success, and the discount rate. The fair value using the excess earnings valuation method was determined using an estimated weighted average cost of capital of 42%, which reflects the risks inherent in future cash flow projections and represents a rate of return that a market participant would expect for this asset. This fair value measurement was based on significant inputs not observable in the market and thus represent Level 3 fair value measurement.

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

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

Cash	$	12,800
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.

Amendment to Registration Statement on Form S-3

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 the Company's common stock issuable upon the exercise of the warrants issued in the Company's January 2021 underwritten public offering (the "Public Offering") and remaining unexercised as of the date of the amendment, which was declared effective on February 1, 2022.

On March 1, 2023, following its name change, the Company's common stock began trading on the Nasdaq Global Select Market under the ticker symbol "ZVRA".

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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 March 31, 2023, 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 the Company's 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. As of March 31, 2023, the Company had repurchased 1,575,692 shares of its common stock for approximately $11.0 million under the Share Repurchase Program.

Reclassifications

Certain reclassifications were made to the 2022 unaudited condensed consolidated financial statements to conform to the classifications used in 2023. These reclassifications had no impact on the consolidated net loss, changes in stockholder's equity, or cash flows previously reported.

B.	Summary of Significant Accounting Policies

Use of Estimates

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

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

Investments

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

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”) and, as a result, follows the five-step model when recognizing revenue: 1) identifying a contract; 2) identifying the performance obligations; 3) determining the transaction price; 4) allocating the price to performance obligations; and 5) recognizing revenue when the performance obligations have been fulfilled.

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Arimoclomol Early Access Program

Net revenue includes revenue from the sale of arimoclomol for the treatment of NPC under the remunerated early access compassionate use program in France (“French nATU”). An early access compassionate use program is a program giving specific patients access to a drug, which is not yet approved for commercial sale. Only drugs targeting serious or rare indications and for which there is currently no appropriate treatment are considered for early access compassionate use programs. Further, to be considered for the early access compassionate use program, the drug must have proven efficacy and safety and must either be undergoing price negotiations or seeking marketing approval. In accordance with ASC 606, the Company recognizes revenue when fulfilling its performance obligation under the Arimoclomol Early Access Program ("Arimoclomol EAP") by transferring control of promised goods or services to its customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining when the customer obtains control of the product, the Company considers certain indicators, including whether the Company has a present right to payment from the customer, whether title and/or significant risks and rewards of ownership have transferred to the customer and whether the customer acceptance has been received. Revenue is recognized net of sales deductions, including discounts, rebates, applicable distributor fees, and revenue-based taxes. Under the French nATU, the manufacturer can set its own price for the drug products until a price agreement with the authorities is in place. Any excess in the price charged the manufacturer compared to the price agreed with the health authorities once the drug product is approved in France must be repaid. The repayment is considered in the clawback liability (rebate). An estimate of net revenue and clawback liability are recognized using the ‘expected value’ method. Accounting for net revenue and clawback liability requires determination of the most appropriate method for the expected final transaction price, which depends on the terms and conditions in the contracts with the French Health Authorities and is subject to price negotiations with the French Health Authorities, following marketing approval. This estimate also requires assumptions with respect to inputs into the method, including current pricing of comparable marketed products within the rare disease area in France. Management has considered the expected final sales price as well as the price of similar drug products. The Company is operating within a rare disease therapeutic area where there is unmet treatment need and hence a limited number of comparable commercialized drugs products. The limited available relevant market information for directly comparable commercialized drugs within rare disease increases the uncertainty in management's estimate. For the three months ended March 31, 2023, the Company recognized revenue related to the Arimoclomol EAP in France of $2.0 million, which is net of a clawback liability of $1.3 million and other gross to net adjustments. As part of the Arimoclomol Purchase Agreement the Company assumed an estimated reserve liability of $5.2 million related to revenue generated from the Arimoclomol EAP in France. The total estimate reserve liability as of March 31, 2023, including the additional clawback liability for the three months ended March 31, 2023, was $10.5 million. The total reserve liability as of December 31, 2022, was $9.0 million. As of March 31, 2023, and December 31, 2022, this estimated reserve liability is recorded as discount and rebate liabilities in the unaudited condensed consolidated balance sheets and is separated into current and long-term based upon the timing of the expected payment to the French regulators.

Licensing Agreements

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

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

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

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

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

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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 ("Commave"), an affiliate of Gurnet Point Capital ("GPC"). 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-MPH, including AZSTARYS, or any other product candidates containing SDX and developed to treat ADHD or any other central nervous system ("CNS") disease. Corium, Inc. ("Corium") was tasked by Commave, to lead all commercialization activities for AZSTARYS under the AZSTARYS License Agreement. Pursuant to the AZSTARYS License Agreement, Commave agreed to pay milestone payments upon the occurrence of specified regulatory milestones related to AZSTARYS, additional fixed payments upon the achievement of specified U.S. sales milestones, and quarterly, tiered royalty payments based on a range of percentages of net sales. Commave is obligated to make such royalty payments on a product-by-product basis until expiration of the royalty term for the applicable product.

In April 2021, the Company entered into Amendment No. 1 to the AZSTARYS License Agreement (the "AZSTARYS Amendment"). Pursuant to the AZSTARYS Amendment, the Company and Commave agreed to modify the compensation terms of the AZSTARYS License Agreement. 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.

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.

In accordance with the terms of the Company’s March 20, 2012 Termination Agreement with Aquestive Therapeutics, Aquestive Therapeutics has the right to receive an amount equal to 10% of any royalty or milestone payments made to the Company related to AZSTARYS, KP879 or KP1077 under the AZSTARYS License Agreement.

The AZSTARYS 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 AZSTARYS 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 AZSTARYS License Agreement) which was allocated among the performance obligations based on their respective related stand-alone selling price.

The Company is entitled to additional payments from Commave conditioned upon the achievement of specified regulatory milestones related to AZSTARYS and the achievement of certain U.S. sales milestones. Further, Commave will pay the Company quarterly, tiered royalty payments based on a range of percentage of Net Sales (as defined in the AZSTARYS License Agreement). The Company concluded that these regulatory milestones, sales milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these milestone payments. At the end of each reporting period, the Company updates its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal. For the three months ended March 31, 2023 and 2022, the Company recognized $0.6 million and $0.1 million of revenue under the AZSTARYS License Agreement, respectively. There was no deferred revenue related to this agreement as of March 31, 2023, or December 31, 2022.

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Consulting Arrangements

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

Corium Consulting Agreement

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

Under the Corium Consulting Agreement, the Company was entitled to receive payments from Corium of up to $15.6 million, $13.6 million of which was paid in quarterly installments through March 31, 2022. The remaining $2.0 million was conditioned upon the approval by the FDA of the NDA for Corium's product candidate, ADLARITY. This $2.0 million was earned in the first quarter of 2022. Corium also agreed to be responsible for and reimburse the Company for all development, commercialization and regulatory expenses incurred as part of the performance of the Corium Consulting Services. The Corium Consulting Agreement is within the scope of ASC 606, as the transaction represents a contract with a customer where the participants function in a customer / vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated under the Corium Consulting Agreement. The Company identified the performance of consulting services, which includes the reimbursement to the Company of third-party pass-through costs, as its only performance obligation at inception. The Company further determined that the transaction price, at inception, under the agreement was $13.6 million which is the fair value of the consulting services, including the reimbursement of third-party pass-through costs. The Company concluded that the regulatory milestone contains a significant uncertainty associated with a future event. As such, this milestone is constrained at contract inception and is not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these milestone payments.

The Company determined that the performance of consulting services, including reimbursement of third-party pass-through costs, is a performance obligation that is satisfied over time as the services are performed and the reimbursable costs are paid. As such, the revenue related to the performance obligation was recognized as the consulting services were performed and the services associated with the reimbursable third-party pass-through costs were 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.

For the three months ended March 31, 2023, and 2022, the Company recognized $0.2 million and $3.5 million of revenue, respectively, under the Corium Consulting Agreement. As of March 31, 2023, and December 31, 2022, the Company had no deferred revenue related to this agreement. The Corium Consulting Agreement expired on March 31, 2023.

Foreign currency

Assets and liabilities are translated into the reporting currency using the exchange rates in effect on the unaudited consolidated condensed balance sheet dates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year, which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the net assets of foreign subsidiaries are recorded in accumulated other comprehensive income/loss in the accompanying unaudited condensed consolidated statements of stockholders’ equity.

Accounts and Other Receivables

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

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C.	Debt Obligations

Line of Credit

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

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

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

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

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D.	Commitments and Contingencies

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

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

E.	Stock and Warrants

Authorized, Issued, and Outstanding Common Shares

As of March 31, 2023, and December 31, 2022, the Company had authorized shares of common stock of 250,000,000 shares. Of the authorized shares, 35,457,496 and 35,450,257 shares of common stock were issued as of March 31, 2023, and December 31, 2022, respectively, and 33,881,804 and 34,540,304 respectively shares of common stock were outstanding as of March 31, 2023, and December 31, 2022, respectively.

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

	*March 31, 2023*		*December 31, 2022*
Outstanding awards under equity incentive plans		6,024,889		2,456,407
Outstanding common stock warrants		4,252,490		4,252,600
Possible future issuances under equity incentive plans		3,731,263		4,421,508
Possible future issuances under employee stock purchase plans		1,417,365		1,417,365
Total common shares reserved for future issuance		15,426,007		12,547,880

Common Stock Activity

The following table summarizes common stock activity for the three months ended March 31, 2023:

	*Shares of Common Stock*
Balance as of January 1, 2023		34,540,304
Common stock issued as compensation to third-parties		7,129
Common stock repurchased as a result of the Stock Repurchase Plan		(665,739	)
Common stock issued as a result of stock warrants exercised		110
Balance as of March 31, 2023		33,881,804

Authorized, Issued, and Outstanding Preferred Stock

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

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Warrants

Warrants to Purchase Common Stock

In June 2014, the Company entered into a multi-tranche credit facility (the "Deerfield Facility Agreement") with Deerfield Private Design Fund III, LP (“Deerfield”). The Company issued to Deerfield a warrant to purchase 120,192 shares of the Company's common stock, which is exercisable at $38.34 per share until June 2, 2024, and Deerfield assigned this warrant to OTA LLC in December of 2022 (the “OTA Warrant”). This warrant qualifies as a participating security under ASC Topic 260, Earnings per Share, and is treated as such in the net loss per share calculation (Note H). If a Major Transaction occurs (as defined in the Deerfield Facility Agreement), OTA may require the Company to redeem the OTA Warrant for a cash amount equal to the Black-Scholes value of the portion of the OTA Warrant to be redeemed (the “Warrant Put Option”). The Company determined that the OTA Warrant should be recorded as a liability and stated at fair value at each reporting period. Changes to the fair value of the warrant liability are recorded through the unaudited condensed statements of operations as a fair value adjustment (Note G).

The Company issued to KVK a warrant to purchase up to 31,250 shares of common stock of the Company at an exercise price of $36.80 per share (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. 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.The Company determined that the KVK Warrant qualifies as a derivative under ASC 815 and should be recorded as a liability and stated at fair value each reporting period. The Company calculates the fair value of the KVK Warrant using a probability-weighted Black-Scholes option pricing model. Changes in fair value resulting from changes in the inputs to the Black Scholes model are accounted for as changes in the fair value of the derivative under ASC 815 and are recorded as fair value adjustment related to derivative and warrant liability in the unaudited condensed consolidated statements of operations.

On January 12, 2021, the Company issued warrants to purchase 12,078,361 shares of the Company’s common stock (collectively, the “Offering Warrants”) in the Public Offering. The Offering Warrants were immediately exercisable and expire on the fifth anniversary of their issuance date, at an exercise price per share of common stock equal to $6.50 per share. The Offering Warrants meet the equity classification requirements and thus are recorded in additional paid-in capital on the unaudited condensed consolidated balance sheets. As of March 31, 2023, 3,461,968 Offering Warrants have been exercised for 3,030,991 shares of common stock and gross proceeds of approximately $16.9 million.

On January 12, 2021, the Company issued a warrant to Roth Capital Partners ("Roth") to purchase 806,932 shares of the Company’s common stock and the exercise price is $8.125 per share. In connection with the closing of the Roth's partial exercise of its over-allotment option, on February 3, 2021, Roth was issued an additional warrant to purchase 18,702 shares of common stock. As of March 31, 2023, 400,000 of these warrants have been exercised for 400,000 shares of common stock and gross proceeds of approximately $3.3 million.

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January 2021 Warrant Exercise Inducement Letters and Issuance of Warrants

On January 26, 2021, the Company entered into warrant exercise inducement offer letters ( “January 2021 Inducement Transaction”) with certain holders of warrants issued in the Public Offering (the “January 2021 Inducement Warrants”) to purchase up to 7,944,430 shares of the Company’s common stock (the "January 2021 Inducement Warrants"). The January 2021 Inducement Warrants were immediately exercisable and expire on the fifth anniversary of their issuance date, at an exercise price per share of common stock equal to $6.36 per share. As of March 31, 2023, 1,676,921 January 2021 Inducement Warrants have been exercised for 1,676,921 shares of common stock and gross proceeds of approximately $10.7 million.

June 2021 Warrant Exercise Inducement Letters and Issuance of Warrants

On June 18, 2021, the Company entered into warrant exercise inducement offer letters ( “June 2021 Inducement Transaction”) with certain holders of warrants issued in the January 2021 Inducement Transaction discussed above (the "January 2021 Inducement Warrants") pursuant to which such holders agreed to exercise for cash their January 2021 Inducement Warrants to purchase 6,117,509 shares of the Company’s common stock in exchange for the Company’s agreement to issue new warrants to purchase up to 1,529,379 shares of the Company's common stock (the “June 2021 Inducement Warrants”) on substantially the same terms as the January 2021 Inducement Warrants. The June 2021 Inducement Warrants were immediately exercisable and expire on December 31, 2026, at an exercise price per share of common stock equal to $16.50 per share. As of March 31, 2023, no June 2021 Inducement Warrants have been exercised.

F.	Stock-Based Compensation

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

In November 2014, the Board of Directors of the Company ("the Board"), and in April 2015, the Company’s stockholders, approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), which became effective in April 2015. The 2014 Plan provides for the grant of stock options, other forms of equity compensation, and performance cash awards. In June 2021, the Company's stockholders approved an Amended and Restated 2014 Equity Incentive Plan (the "A&R 2014 Plan"), following its adoption by the Board in April 2021, which among other things added 4,900,000 shares to the maximum number of shares of common stock to be issued under the plan and extended the annual automatic increases (discussed further below) until January 1, 2031 and eliminated individual grant limits that applied under the 2014 Plan to awards that were intended to comply with the exemption for "performance-based compensation" under Code Section 162(m). The maximum number of shares of common stock that may be issued under the A&R 2014 Plan is 8,271,497 as of March 31, 2023. The number of shares of common stock reserved for issuance under the A&R 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2016, and ending on and including January 1, 2031, by 4% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Board. Pursuant to the terms of the 2014 Plan, on January 1, 2023, the common stock reserved for issuance under the 2014 Plan automatically increased by 1,381,612 shares.

During the three months ended March 31, 2023, and 2022, no stock options were exercised.

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

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

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

	*Three months ended March 31,*
	*2023*		*2022*
Research and development	$	572	$	311
Selling, general and administrative		19		607
Total stock-based compensation expense	$	591	$	918

There was no stock-based compensation expense related to performance-based awards recognized during the three months ended March 31, 2023, or 2022.

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

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G.	Fair Value of Financial Instruments

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

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

	●	Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
	●	Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
	●	Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

	*Balance as of March 31, 2023*		*Quoted Prices in Active Markets for Identical Assets (Level 1)*		*Significant Other Observable Inputs (Level 2)*		*Significant Unobservable Inputs (Level 3)*
OTA Warrant liability	$	3	$	—	$	—	$	3
Total liabilities	$	3	$	—	$	—	$	3

Securities:

SEC Form 10-Q filed by KemPharm Inc.