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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended SEPTEMBER 30, 2017

 

OR

 

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

 

For the transition period from                 to        

 

Commission File Number 001-37508

 

Neos Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

2834

 

27-0395455

State or Other Jurisdiction of
Incorporation or Organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer
Identification Number)

 

2940 N. Hwy 360

Grand Prairie, TX 75050

(972) 408-1300

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No  o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a Smaller reporting company)

 

Emerging growth company x

 

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. x

 

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

 

The number of shares outstanding of the registrant’s common stock as of November 3, 2017: 28,996,956 shares.

 

 

 



Table of Contents

 

NEOS THERAPEUTICS, INC.

 

INDEX

 

 

 

Page No.

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

8

 

Condensed Consolidated Statements of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

Item 2

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

28

Item 3

Quantitative and Qualitative Disclosures about Market Risk

46

Item 4

Controls and Procedures

46

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

47

Item 1A

Risk Factors

47

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

77

Item 3

Defaults Upon Senior Securities

77

Item 4

Mine Safety Disclosures

77

Item 5

Other Information

77

Item 6

Exhibits

77

 

 

 

SIGNATURES

79

 

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Special note regarding forward-looking statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

·                  our anticipated cash needs and our estimates regarding our anticipated expenses, capital requirements and our needs for additional financings;

 

·                  our ability to develop and commercialize Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or any other future product or product candidate;

 

·                  the timing, cost or other aspects of the commercial launch and future sales of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or any other future product or product candidate;

 

·                  our ability to increase our manufacturing and distribution capabilities for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or any other future product or product candidate;

 

·                  the attention deficit hyperactivity disorder patient market size and market adoption of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, by physicians and patients;

 

·                  the therapeutic benefits, effectiveness and safety of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER or any other future product or product candidate;

 

·                  our expectations regarding the commercial supply of our Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, or any other future products, or our generic Tussionex;

 

·                  our ability to receive, and the timing of any receipt of the U.S. Food and Drug Administration, (“FDA”), approvals, or other regulatory action in the United States and elsewhere, for any future product candidate;

 

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

 

·                  the projected commercial launch date of Adzenys ER;

 

·                  our entry into the settlement and licensing agreement with Actavis Laboratories FL, Inc. (“Actavis”) the effect of our agreement with Actavis on its Abbreviated New Drug Application, or ANDA, with the FDA for a generic version of Adzenys XR-ODT, and the expected timing of the manufacture and marketing of Actavis’s generic version of Adzenys XR-ODT under the ANDA;

 

·                  our product research and development activities, including the timing and progress of our clinical trials, and projected expenditures;

 

·                  issuance of patents to us by the U.S. Patent and Trademark Office and other governmental patent agencies;

 

·                  our ability to achieve profitability;

 

·                  our staffing needs; and

 

·                  the additional risks, uncertainties and other factors described under the caption “Risk Factors” in this Quarterly Report on Form 10-Q.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects.

 

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The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

Furthermore, this Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information.

 

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Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.                CONDENSED FINANCIAL STATEMENTS.

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

43,398

 

$

24,352

 

Short-term investments

 

23,089

 

15,430

 

Accounts receivable, net of allowances for chargebacks and cash discounts of $2,605 and $950, respectively

 

8,619

 

6,135

 

Inventories

 

9,992

 

5,767

 

Deferred contract sales organization fees

 

70

 

720

 

Other current assets

 

2,760

 

2,865

 

Total current assets

 

87,928

 

55,269

 

 

 

 

 

 

 

Property and equipment, net

 

8,323

 

7,076

 

Intangible assets, net

 

16,739

 

17,647

 

Other assets

 

192

 

150

 

 

 

 

 

 

 

Total assets

 

$

113,182

 

$

80,142

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

10,706

 

$

7,798

 

Accrued expenses

 

9,385

 

5,264

 

Deferred revenue

 

9,327

 

3,662

 

Current portion of long-term debt

 

6,949

 

4,921

 

 

 

 

 

 

 

Total current liabilities

 

36,367

 

21,645

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

58,970

 

58,599

 

Derivative liability

 

1,884

 

 

Deferred rent

 

1,106

 

1,174

 

Other long-term liabilities

 

155

 

272

 

 

 

 

 

 

 

Total long-term liabilities

 

62,115

 

60,045

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2017 and December 31, 2016

 

 

 

Common stock, $0.001 par value, 100,000,000 authorized at September 30, 2017 and December 31, 2016; 28,099,541 and 28,080,635 issued and outstanding at September 30, 2017, respectively; 16,079,902 and 16,060,996 issued and outstanding at December 31, 2016, respectively

 

28

 

16

 

Treasury stock, at cost, 18,906 shares at September 30, 2017 and December 31, 2016

 

(232

)

(232

)

Additional paid-in capital

 

267,046

 

198,787

 

Accumulated deficit

 

(252,141

)

(200,118

)

Accumulated other comprehensive loss

 

(1

)

(1

)

 

 

 

 

 

 

Total stockholders’ equity (deficit)

 

14,700

 

(1,548

)

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

113,182

 

$

80,142

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

6,695

 

$

1,583

 

$

17,231

 

$

5,651

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

2,422

 

2,318

 

9,613

 

7,418

 

Gross profit (loss)

 

4,273

 

(735

)

7,618

 

(1,767

)

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,757

 

2,881

 

7,173

 

8,605

 

Selling and marketing expenses

 

12,618

 

16,977

 

35,030

 

39,630

 

General and administrative expenses

 

3,911

 

3,140

 

10,766

 

9,600

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(14,013

)

(23,733

)

(45,351

)

(59,602

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,648

)

(2,130

)

(7,250

)

(4,746

)

Loss on debt extinguishment

 

 

 

 

(1,187

)

Other income, net

 

403

 

57

 

578

 

575

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,258

)

$

(25,806

)

$

(52,023

)

$

(64,960

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used to compute net loss per share, basic and diluted

 

27,884,983

 

16,070,705

 

23,404,617

 

16,048,801

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.58

)

$

(1.61

)

$

(2.22

)

$

(4.05

)

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,258

)

$

(25,806

)

$

(52,023

)

$

(64,960

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on short-term investments

 

5

 

(26

)

 

12

 

Reclassification of gains included in net loss

 

 

(3

)

 

(3

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

$

5

 

$

(29

)

$

 

$

9

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(16,253

)

$

(25,835

)

$

(52,023

)

$

(64,951

)

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Nine months ended September 30, 2017

(In thousands, except shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

(Loss)

 

Equity (Deficit)

 

Balance, December 31, 2016

 

 

$

 

16,079,902

 

$

16

 

(18,906

)

$

(232

)

$

198,787

 

$

(200,118

)

$

(1

)

$

(1,548

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of issuance costs

 

 

 

12,019,639

 

12

 

 

 

64,552

 

 

 

64,564

 

Share-based compensation expense

 

 

 

 

 

 

 

3,094

 

 

 

3,094

 

Beneficial conversion feature on convertible notes

 

 

 

 

 

 

 

613

 

 

 

613

 

Net unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(52,023

)

 

(52,023

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

 

$

 

28,099,541

 

$

28

 

(18,906

)

$

(232

)

$

267,046

 

$

(252,141

)

$

(1

)

$

14,700

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(52,023

)

$

(64,960

)

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

 

 

 

 

 

Share-based compensation expense

 

3,094

 

2,462

 

Depreciation and amortization of property and equipment

 

951

 

1,307

 

Amortization of patents and other intangible assets

 

1,226

 

1,238

 

Deferred interest on debt

 

2,111

 

2,695

 

Amortization of senior debt discounts

 

610

 

331

 

Changes in fair value of earnout and derivative liabilities

 

(311

)

141

 

Loss on debt extinguishment

 

 

942

 

Gain on sale of equipment

 

(43

)

(487

)

Other adjustments

 

(167

)

(122

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(2,484

)

(360

)

Inventories

 

(4,225

)

(3,163

)

Deferred contract sales organization fees

 

720

 

(123

)

Other assets

 

63

 

(194

)

Accounts payable

 

2,500

 

2,387

 

Accrued expenses

 

4,121

 

4,719

 

Deferred revenue

 

5,665

 

2,558

 

 

 

 

 

 

 

Net cash used in operating activities

 

(38,192

)

(50,629

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of short-term investments

 

(40,029

)

(51,396

)

Sales and maturities of short-term investments

 

32,469

 

34,998

 

Proceeds from sale-leaseback of equipment

 

3,222

 

 

Capital expenditures

 

(2,096

)

(3,135

)

Intangible asset expenditures

 

(68

)

(625

)

 

 

 

 

 

 

Net cash used in investing activities

 

(6,502

)

(20,158

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

64,564

 

 

Proceeds from Deerfield debt note, net of fees

 

 

58,419

 

Payment of senior debt and fee

 

 

(26,063

)

Payments made on borrowings

 

(784

)

(8,856

)

Proceeds from exercise of stock options and warrants

 

 

13

 

Payments made on behalf of Deerfield

 

(40

)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

63,740

 

23,513

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

19,046

 

(47,274

)

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning

 

24,352

 

90,763

 

Ending

 

$

43,398

 

$

43,489

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Transactions:

 

 

 

 

 

Issuance of senior secured convertible notes

 

$

6,586

 

$

 

Capital lease liability from sale-leaseback transactions

 

$

3,222

 

$

 

Derivative Liability incurred in connection with First Amendment to Facility

 

$

2,107

 

$

 

Beneficial conversion feature incurred on convertible notes

 

$

613

 

$

 

Capital and intangible asset expenditures included in accounts payable

 

$

338

 

$

 

Deferred contract sales organization fees

 

$

70

 

$

597

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

4,568

 

$

2,830

 

 

See notes to condensed consolidated financial statements.

 

9



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and nature of operations

 

Neos Therapeutics, Inc., a Delaware corporation, and its subsidiaries (the “Company”), is a fully integrated pharmaceutical company. The Company has developed a broad, proprietary modified-release drug delivery technology that enables the manufacture of single and multiple ingredient extended-release pharmaceuticals in patient- and caregiver-friendly orally disintegrating tablet and liquid suspension dosage forms. The Company has a pipeline of extended-release pharmaceuticals including three approved products for the treatment of attention deficit hyperactivity disorder (“ADHD”). Adzenys XR-ODT was approved by the US Food and Drug Administration (the “FDA”) on January 27, 2016 and launched commercially on May 16, 2016. The Company received approval from the FDA for Cotempla XR-ODT, its methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017, initiating an early experience program with limited product availability on September 5, 2017 before launching this product nationwide on October 2, 2017. Also, the Company received approval from the FDA for Adzenys ER on September 15, 2017, and plans to launch this production in the first quarter of 2018. In addition, the Company manufactures and markets a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release liquid suspension for the treatment of cough and upper respiratory symptoms of a cold.

 

Note 2. Summary of significant accounting policies

 

Basis of presentation:  The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), for reporting on Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows.  In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results of operations for and financial condition as of the end of the interim period have been included.  Results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or any period thereafter.  The audited consolidated financial statements as of and for the year ended December 31, 2016 included information and footnotes necessary for such presentation and were included in the Neos Therapeutics, Inc. Annual Report on Form 10-K and filed with the SEC on March 15, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016.

 

Principles of consolidation:  At September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016, the condensed consolidated financial statements include the accounts of the Company and its four wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

 

Use of estimates:  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

 

Reclassifications:  Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current period’s presentation.

 

Liquidity:  During 2016 and the nine months ended September 30, 2017, the Company produced operating losses and used cash to fund operations. Management intends to achieve profitability through revenue growth from pharmaceutical products developed with its extended-release technologies. The Company does not anticipate it will be profitable until after the successful commercialization of its approved products, Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER.  Accordingly, management has performed the review required for going concern accounting and believes the Company presently has sufficient liquidity to continue to operate for the next twelve months after the filing of this Report on Form 10-Q.

 

Cash equivalents:  The Company invests its available cash balances in bank deposits and money market funds. The Company considers highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company’s primary objectives for investment of available cash are the preservation of capital and the maintenance of liquidity.

 

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Short-term investments:  Short-term investments consist of debt securities that have original maturities greater than three months but less than or equal to one year and are classified as available-for-sale securities. Such securities are carried at estimated fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in other income (expense) in the consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income are recognized in other income when earned. The cost of securities sold is calculated using the specific identification method. The Company places all investments with government agencies, or corporate institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date, if any, as non-current assets.

 

Inventories: Inventories are stated at the lower of cost (first in, first out) or market in 2016 and, effective January 1, 2017, inventory is now required to be measured at the lower of cost (first in, first out) or net realizable value.  The change to stating inventories at the lower of cost or net realizable value in 2017 was adopted prospectively and did not have a significant effect on the Company’s ongoing financial reporting as valuing inventory at the lower of cost or net realizable value approximated the prior policy of valuing inventory at the lower of cost or market. Inventories have been reduced by an allowance for excess and obsolete inventories. Cost elements include material, labor and manufacturing overhead. Inventories consist of raw materials, work in process, finished goods and deferred cost of goods sold. The cost of sales associated with the deferred product revenues are recorded as deferred costs of goods sold that are released from inventory into cost of goods sold as the deferred revenue is recognized into revenue.

 

Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable, pre-launch inventories are expensed into research and development. Manufacturing costs for the production of Adzenys XR-ODT incurred after the January 27, 2016 FDA approval date and manufacturing costs for the production of Cotempla XR-ODT incurred after the June 19, 2017 FDA approval date are being capitalized into inventory. Manufacturing costs for the production of Adzenys ER incurred after September 30, 2017, following the FDA approval date of September 15, 2017, will be capitalized into inventory.

 

Derivative liabilities: The Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives requiring separate recognition in the Company’s financial statements. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability and the change in fair value is recorded in other income (expense) in the consolidated results of operations. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within twelve months of the balance sheet date.

 

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption and are classified in interest expense in the consolidated results of operations.

 

Intangible assets:  Intangible assets subject to amortization, which principally include proprietary modified-release drug delivery technology, the costs to acquire the rights to Tussionex Abbreviated New Drug Application (“Tussionex ANDA”) and patents, are recorded at cost and amortized over the estimated lives of the assets, which primarily range from 10 to 20 years.

 

Revenue recognition:  Revenue is generated from product sales, recorded on a net sales basis. Product revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid for the product, or the buyer is obligated to pay for the product and the obligation is not contingent on resale of the product,

 

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(3) the buyer’s obligation to pay would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated.

 

The Company sells its commercial products to a limited number of pharmaceutical wholesalers, all subject to rights of return. Pharmaceutical wholesalers buy drug products directly from manufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are assumed by the wholesaler (freight on board destination). These wholesalers then resell the product to retail customers such as food, drug and mass merchandisers.

 

The Company has a limited sales history for Adzenys XR-ODT and Cotempla XR-ODT, and no sales history for Adzenys ER, and has determined that at this time it cannot reliably estimate expected returns of the product at the time of shipment to wholesalers. Accordingly, the Company defers or will defer recognition of revenue on product shipments of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, respectively, until the right of return no longer exists, which occurs at the earlier of the time Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER units are dispensed through patient prescriptions or expiration of the right of return. The Company calculates and expects to calculate patient prescriptions dispensed of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, respectively, using an analysis of third-party information.

 

Net product sales

 

Net product sales for the Company’s products represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments include savings offers, prompt payment discounts, wholesaler fees and estimated allowances for product returns, rebates and chargebacks to be incurred on the selling price of the respective product sales. Wholesale distribution fees based on definitive contractual agreements are incurred on the management of these products by wholesalers and are recorded within net sales for generic Tussionex and as deferred wholesale distribution fees in other current assets for Adzenys XR-ODT, Cotempla XR-ODT and/or Adzenys ER. The deferred wholesale distribution fees for Adzenys XR-ODT, Cotempla XR-ODT and/or Adzenys ER will be later recorded within net product sales when revenue associated with those fees is recognized. The Company estimates and records gross to net sales adjustments for product returns and chargebacks based upon analysis of third-party information, including information obtained from the Company’s third party logistics providers (“3PLs”), with respect to their inventory levels and sell-through to the wholesalers’ customers, for savings offers from data available from third parties regarding savings offers processed for prescriptions written for the Company’s products, and, in the case of generic Tussionex, experience reported by the Company’s previous commercialization partners, and rebates based upon analysis of third-party information, including information obtained both from 3PLs and third parties which process rebates due to governmental entities and commercial payors. Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from the estimates, at which time reserves would be adjusted accordingly. Wholesale distribution fees and the allowance for prompt pay discounts are recorded at the time of shipment and such fees and allowances and all other accruals are recorded in the same period that the related revenue is recognized.

 

Savings offers

 

The Company offers or expects to offer savings programs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, respectively, to patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The Company records the amount redeemed based on information from third-party providers and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

 

Product returns

 

Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date.

 

Generic Tussionex product returns are estimated based upon data available from sales of the Company’s product by its former commercialization partner and from actual experience as reported by retailers. Historical trend of returns will be continually monitored and may result in future adjustments to such estimates.

 

Rebates

 

The Company’s products are subject to commercial managed care and government-managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state

 

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governments. Estimated rebates payable under such programs are recorded as a reduction of revenue at the time revenues are recorded. Calculations related to these rebate accruals are estimated based on information from third-party providers. Historical trend of such rebates will be continually monitored and may result in future adjustments to such estimates.

 

Wholesaler chargebacks

 

The Company’s products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to the Company. Chargebacks are accounted for by establishing an accrual in an amount equal to the Company’s estimate of chargeback claims at the time of product sale based on information provided by third parties. Due to estimates and assumptions inherent in determining the amount of chargebacks, the actual amount of claims for chargebacks may be different from estimates, which may result in adjustments to such reserves.

 

Research and development costs:  Research and development costs are charged to operations when incurred and include salaries and benefits, facilities costs, overhead costs, raw materials, laboratory and clinical supplies, clinical trial costs, contract services, fees paid to regulatory authorities for review and approval of the Company’s product candidates and other related costs. During the third quarter of 2016, the Company reclassified its approved product and facility regulatory fees out of research and development expense and into cost of sales commensurate with the commercial launch of Adzenys XR-ODT. The Company has reclassified all such applicable regulatory fees for prior quarters and prior years out of research and development expense and into cost of goods sold in accordance with this approach.

 

Advertising costs: Advertising costs are comprised of print and electronic media placements that are expensed as incurred. The Company recognized advertising costs of $51,000 and $299,000 during the three and nine months ended September 30, 2017, respectively, and advertising costs of $7.0 million and $7.2 million during the three and nine months ended September 30, 2016, respectively.

 

Share-based compensation:  Share-based compensation awards, including grants of employee stock options, restricted stock, restricted stock units (“RSUs”) and modifications to existing stock options, are recognized in the statement of operations based on their fair values. Compensation expense related to awards to employees is recognized on a straight-line basis, based on the grant date fair value, over the requisite service period of the award, which is generally the vesting term. The fair value of the Company’s stock-based awards to employees and directors is estimated using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (1) the expected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and (4) expected dividends.

 

Due to the previous lack of a public market for the trading of its common stock and a lack of company-specific historical and implied volatility data, the Company had, prior to the IPO, historically utilized third party valuation analyses to determine the fair value. After the closing of the Company’s IPO, the Company’s board of directors has determined the fair value of each share of underlying common stock based on the closing price of the Company’s common stock as reported by the NASDAQ Global Market on the date of grant.

 

Under new guidance for accounting for share-based payments, the Company has elected to continue estimating forfeitures at the time of grant and, if necessary, revise the estimate in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest. The adoption of this standard in 2017 did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

Beginning in July 2016, the Company began recording stock compensation expense in the same income statement line as the cash compensation of the employee with the option in accordance with Staff Accounting Bulletin (“SAB”) Topic 14 due to the increased number and amount of options and option compensation. The Company has reclassified all prior quarters’ amounts out of general and administrative expense to the appropriate income statement line in accordance with this approach.

 

Paragraph IV litigation costs: Legal costs incurred by the Company in the enforcement of the Company’s intellectual property rights are charged to expense as incurred.

 

Income taxes:  Income taxes are accounted for using the liability method, under which deferred taxes are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse.

 

Management evaluates the Company’s tax positions in accordance with guidance on accounting for uncertainty in income taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination.  As of September 30, 2017 and December 31, 2016, the

 

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Company has unrecognized tax benefits associated with uncertain tax positions in the consolidated financial statements. These uncertain tax positions were netted against net operating losses (NOL’s) with no separate reserve for uncertain tax positions required.

 

Deferred tax assets should be reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized.  At September 30, 2017 and December 31, 2016, based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized. In evaluating the objective evidence that historical results provide, the Company considered that three years of cumulative operating losses was significant negative evidence outweighing projections for future taxable income. Therefore, management has determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero. The Company may not ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

 

Recent accounting pronouncements: In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU was designed to reduce the diversity in practice of how the eight specified items are presented and classified in the statement of cash flows, including debt prepayment or debt extinguishment costs. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company believes the amendments will not have a significant effect on its ongoing financial reporting as the Company has classified its debt prepayment and debt extinguishment costs in the Consolidated Statements of Cash Flows in accordance with the amendments.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU No. 2016-02, Leases (Topic 842). The Company is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance replaces transaction-and industry-specific revenue recognition guidance under current U.S. GAAP with a principles-based approach for determining revenue recognition. The new guidance requires an entity to recognize the amount of revenue based on the value of transferred goods or services to customers. There is also additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard will become effective for the Company beginning in the first quarter of 2018. Earlier application is permitted in 2017. In March and April 2016, the FASB issued new guidance intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The guidance permits the use of either a retrospective or cumulative effect transition method. In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional clarification and implementation guidance on the previously issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company has a limited sales history for Adzenys XR-ODT and Cotempla XR-ODT and no sales history for Adzenys ER and under ASC 605 has determined that at this time it cannot reliably estimate historical returns of the product at the time of delivery to wholesalers, when title to the asset transfers and the customer is invoiced.  To implement ASC 606, the Company is assessing other market data obtained from its 3PLs to determine a reliable return rate. The Company expects the impact of this new standard will accelerate revenue based on satisfaction of the performance obligation upon delivery at a point in time when the customer obtains control of the asset.  For purposes of providing comparable periods upon adoption in the first quarter of 2018, the Company will apply the retrospective transition method.

 

From time to time, additional new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

 

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Note 3. Net loss per share

 

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities, which include warrants, outstanding stock options under the stock option plan and shares issuable in future periods, such as RSU awards, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. Restricted stock is considered legally issued and outstanding on the grant date, while RSUs are not considered legally issued and outstanding until the RSUs vest. Once the RSUs are vested, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not considered for inclusion in total common shares issued and outstanding until vested.

 

The following potentially dilutive securities outstanding as of September 30, 2017 and 2016 were excluded from consideration in the computation of diluted net loss per share of common stock for the nine months ended September 30, 2017 and 2016, respectively, because including them would have been anti-dilutive:

 

 

 

September 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Senior Secured Convertible Notes — registered conversion shares not issued

 

940,924

 

 

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

70,833

 

70,833

 

Stock options outstanding

 

2,455,555

 

2,121,274

 

RSU’s granted, not issued or outstanding

 

78,750

 

 

 

Note 4. Fair value of financial instruments

 

The Company records financial assets and liabilities at fair value. The carrying amounts of certain financial assets and liabilities including cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued liabilities and deferred revenue, approximated their fair value due to their short maturities. The remaining financial instruments were reported on the Company’s condensed consolidated balance sheets at amounts that approximate current fair values based on market based assumptions and inputs.

 

As a basis for categorizing inputs, the Company uses a three tier fair value hierarchy, which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions as follows:

 

Level 1:                            Unadjusted quoted prices for identical assets in an active market.

 

Level 2:                            Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full-term of the asset.

 

Level 3:                            Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

 

The following table presents the hierarchy for the Company’s financial instruments measured at fair value on a recurring basis for the indicated dates:

 

 

 

Fair Value as of September 30, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,903

 

$

2,495

 

$

 

$

43,398

 

Short-term investments

 

 

23,089

 

 

23,089

 

Earnout liability

 

 

 

144

 

144

 

Derivative liability (see Note 7)

 

 

 

1,884

 

1,884

 

 

 

$

40,903

 

$

25,584

 

$

2,028

 

$

68,515

 

 

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Fair Value as of December 31, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash-and cash equivalents

 

$

17,917

 

$

6,435

 

$

 

$

24,352

 

Short-term investments

 

 

15,430

 

 

15,430

 

Earnout liability

 

 

 

232

 

232

 

 

 

$

17,917

 

$

21,865

 

$

232

 

$

40,014

 

 

The Company’s Level 1 assets included bank deposits, certificates of deposit and actively traded money market funds with a maturity of 90 days or less at September 30, 2017 and December 31, 2016. Asset values were considered to approximate fair value due to their short-term nature.

 

The Company’s Level 2 assets included commercial paper and corporate bonds with maturities of less than one year that are not actively traded which were classified as available for sale securities. The estimated fair values of these securities were determined by third parties using valuation techniques that incorporate standard observable inputs and assumptions such as quoted prices for similar assets, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

 

The Company’s cash and cash equivalents and short-term investments had quoted prices at September 30, 2017 as shown below:

 

 

 

September 30, 2017

 

 

 

Amortized

 

Unrealized

 

Market

 

 

 

Cost

 

Gain / (Loss)

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Bank deposits and money market funds

 

$

40,903

 

$

 

$

40,903

 

 

 

 

 

 

 

 

 

Financial and corporate debt securities

 

25,585

 

(1

)

25,584

 

 

 

 

 

 

 

 

 

 

 

$

66,488

 

$

(1

)

$

66,487

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Amortized

 

Unrealized

 

Market

 

 

 

Cost

 

Gain / (Loss)

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Bank deposits and money market funds

 

$

17,917

 

$

 

$

17,917

 

 

 

 

 

 

 

 

 

Financial and corporate debt securities

 

21,866

 

(1

)

21,865

 

 

 

 

 

 

 

 

 

 

 

$

39,783

 

$

(1

)

$

39,782

 

 

The Company’s Level 3 liability included the fair value of the earnout liability at September 30, 2017 and December 31, 2016 and the fair value of the Deerfield derivative liability at September 30, 2017.

 

The fair value of the earnout liability was determined after taking into consideration valuations using the Monte Carlo method based on assumptions at December 31, 2016 and revised at September 30, 2017. These revisions were primarily due to an updated revenue forecast for the Company’s generic Tussionex and the use of a directly-calculated revenue volatility of 42% based on data for potential comparable publicly-traded companies in the generic drug manufacturing space including the Company, whereas previously an unlevered equity volatility of 50% had been selected. Significant changes to these assumptions would result in increases/decreases to the fair value of the earnout liability.

 

The fair value of the derivative liability was determined after taking into consideration valuations using the Monte Carlo method based on assumptions at June 1, 2017 and September 30, 2017. The methodologies and significant inputs used in the determination of the fair value of the debt derivative liability were as follows:

 

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September 30, 2017
Derivative Liability

 

Initial Valuation
Derivative Liability

 

 

 

(in thousands)

 

(in thousands)

 

Date of Valuation

 

9/30/2017

 

6/1/2017

 

Valuation Method

 

Monte Carlo

 

Monte Carlo

 

Volatility (annual)

 

69.2

%

76.4

%

Time period from valuation until maturity of debt (yrs.)

 

4.612

 

4.943

 

Cumulative probability of a change in control prepayment implied by model

 

28

%

28

%

Cumulative probability of other accelerated prepayments implied by model

 

17

%

17

%

Discount rate

 

15.92

%

15.87

%

Fair value of liability at valuation date

 

$

1,884

 

$

2,107

 

 

Significant changes to these assumptions would result in increases/decreases to the fair value of the earnout and debt derivative liabilities.

 

Changes in Level 3 liabilities measured at fair value for the periods indicated were as follows:

 

 

 

Level 3

 

 

 

Liabilities

 

 

 

(in thousands)

 

Balance at December 31, 2016

 

$

232

 

 

 

 

 

Addition of Deerfield derivative liability

 

2,107

 

Change in fair value

 

(311

)

 

 

 

 

Balance at September 30, 2017

 

$

2,028

 

 

Note 5. Inventories

 

Inventories at the indicated dates consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Raw materials

 

$

3,193

 

$

1,672

 

Work in progress

 

3,604

 

2,546

 

Finished goods

 

2,528

 

2,060

 

Deferred cost of goods sold

 

949

 

225

 

 

 

 

 

 

 

Inventory at cost

 

10,274

 

6,503

 

Inventory reserve

 

(282

)

(736

)

 

 

 

 

 

 

 

 

$

9,992

 

$

5,767

 

 

The deferred cost of goods sold relates to Adzenys XR-ODT and Cotempla XR-ODT and will be recognized when the associated revenue is recognized.

 

Note 6. Sale-leaseback transaction

 

The Company accounts for the sale and leaseback transactions discussed below as capital leases. Accordingly, the leased assets are recorded in property and equipment and the capitalized lease obligations are included in long-term liabilities at the present value of the future lease payments in accordance with the terms of the lease (see Note 7). Lease payments are applied using the effective interest rate inherent in the leases. Depreciation of the property and equipment is included within depreciation and amortization in the condensed consolidated statements of operations and condensed consolidated statements of cash flows.

 

In 2012, the Company negotiated financing arrangements with a related party which provided for the sale-leaseback of up to $6.5 million of the Company’s property and equipment with a bargain purchase option at the end of the respective lease. These financing arrangements were executed in five separate tranches that occurred in February, July and November 2013,

 

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and March 2014. In the aggregate, the Company sold groups of assets for $795,000 and $5.5 million, which resulted in a net gains of approximately $116,000 and $2.7 million, in the years ended December 31, 2014 and 2013, respectively, and executed capital leases for these assets with repurchase options at the end of each respective lease term. Gains on the transactions are recognized on a straight-line basis over each respective 42-month lease term. The two February 2013 and the November 2013 leases for a total of $3.5 million and $1.0 million of assets expired in July 2016 and April 2017, respectively, and the related $2.6 million and $161,000 gains, respectively, were fully amortized at that time and the $385,000  and $100,000 lease buy-out option liabilities, respectively, were fully satisfied. The July 2013 lease for a total of $1.0 million of assets expired in December 2016 and the related $0.1 million loss had been recorded at inception of the lease and the $100,000 lease buy-out option liability was fully satisfied. The March 2014 lease for $795,000 of asset expired in September 2017 and the related $116,000 gain was fully amortized at that time and the lease buy-out option liability of $79,000 was fully satisfied.

 

In February 2017, the Company entered into an agreement with a related party for the sale-leaseback of newly acquired assets of up to $5.0 million to finance its capital expenditures. Each lease under this master agreement will be for an initial term of 36 months and will have an option to purchase the equipment at the end of the respective lease that management considers to be a bargain purchase option. Under this agreement, the Company entered into leases and sold assets with a total capitalized cost of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on February 13, 2017 and June 30, 2017, respectively. The February sale resulted in net gains of $14,000 which has been deferred and is being amortized over the 36-month term of the lease. There was no gain or loss on the June 2017 sale.

 

For the three months ended September 30, 2017 and 2016, approximately $10,000 and $72,000, respectively, and for the nine months ended September 30, 2017 and 2016 approximately $43,000 and $487,000, respectively, of the net gain on sale-leasebacks was recognized in other income on the condensed consolidated statements of operations.

 

Note 7. Long-term debt

 

Long-term debt at the indicated dates consists of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Deerfield senior secured credit facility, net of discount of $3,049 and $1,401, respectively

 

$

56,951

 

$

63,075

 

Senior secured convertible notes due June 1, 2018, net of discount of $502

 

6,085

 

 

Capital leases, maturing through June 2020

 

2,883

 

445

 

 

 

 

 

 

 

 

 

65,919

 

63,520

 

Less current portion

 

(6,949

)

(4,921

)

 

 

 

 

 

 

Long-term debt

 

$

58,970

 

$

58,599

 

 

Senior secured credit facility: On May 11, 2016, the Company entered into a $60.0 million senior secured credit facility (“Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of loan) and Deerfield Special Situations Fund, L.P. (33 1/3% of Loan) (“Deerfield”), as lenders. On February 8, 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share, which includes 750,000 shares of the Company’s common stock resulting from the underwriters’ exercise of their over-allotment option at the public offering price on February 17, 2017 (see Note 8). Deerfield, the Company’s senior lender, participated in the purchase of the Company’s common shares as part of this public offering, and as a result, is now classified as a related party.

 

Approximately $33 million of the $60 million Facility proceeds was used to prepay the existing $24.3 million principal and $0.1 million of accrued interest related to the senior Loan and Security Agreement (“LSA”) with Hercules Technology III, L.P., (“Hercules”), the $1.1 million LSA end of term fee, an LSA prepayment charge of $243,000 and the $5.9 million of principal and $1.3 million of interest on the 10% related party amended and restated subordinated note (“Note”) that was issued by the Company to Essex Capital Corporation (“Essex”), which were otherwise payable in 2016 and 2017.  Principal on the Facility is due in three equal annual installments beginning in May 2019 and continuing through May 2021, with a final payment of principal, interest and all other obligations under the Facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of 12.95% per year. The Company had an option, which it exercised, to defer payment of each of the first four interest payments, adding such amounts to the outstanding loan principal. The aggregate $6.6 million in deferred interest payments (“Accrued Interest”) was to be paid in cash on June 1, 2017.  Borrowings under the Facility

 

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are collateralized by substantially all of the Company’s assets, except the assets under capital lease, and the Company will maintain cash on deposit of not less than $5.0 million.

 

On June 1, 2017 (the “Amendment Date”), the Company and Deerfield entered into a First Amendment (the “Amendment”) to the Facility which extended the date to repay the Accrued Interest under the Facility to June 1, 2018 (the “PIK Maturity Date”), which may be extended to June 1, 2019 at the election of the Company if certain conditions have been met as specified in the Amendment.

 

The right to payment of the Accrued Interest was memorialized in the form of Senior Secured Convertible Notes (the “Convertible Notes”) issued to Deerfield on the Amendment Date. Interest is due quarterly at a rate of 12.95% per year. The principal amount of the Convertible Notes issued under the Amendment and all accrued and unpaid interest thereon shall become due and payable upon written notice from Deerfield, and if either (a) the Company does not meet certain quarterly sales milestones specified in the Amendment or (b) the Company has not received and publicly announced FDA approval of the new drug applications on or before the applicable Prescription Drug User Fee Act (the “PDUFA”) goal date as set forth on the schedules to Amendment. Per the Amendment, the Company will prepay all of the outstanding obligations under the Facility and the Convertible Notes upon the occurrence of a change in control or a sale of substantially all of the Company’s assets and liabilities. The Amendment increased the staggered prepayment fees for prepayments due upon a change of control or any other prepayment made or required to be made by the Company by 300 basis points from June 1, 2017 through the period ending prior to May 11, 2020 for the change in control prepayment fees and through the period ending prior to May 11, 2022 for any other prepayments, respectively (the “Prepayment Premiums”). Such Prepayment Premiums, as amended, range from 12.75% to 2%.

 

The $6.6 million of Convertible Notes may be converted into shares of the Company’s common stock at the noteholder’s option at any time up to the close of business on the date that is five days prior to the PIK Maturity Date. The per share conversion price will be the greater of (a) 95% of the average of the volume weighted average prices per share of the Company’s common stock on the NASDAQ Global Market for the three trading day period immediately preceding such conversion, and (b) $7.00. Deerfield cannot own more than 9.985% of the Company’s outstanding shares at any one time, and the aggregate conversion cannot exceed 19.9% of the Company’s outstanding common stock as of June 1, 2017.

 

In conjunction with the Amendment to the Facility and the related issuance of the Convertible Notes, the Company entered into a Registration Rights Agreement (“Registration Agreement”) which required the Company to file a registration statement with the SEC to register the shares of common stock issued or issuable upon conversion of the Convertible Notes (“Conversion Shares”) (subject to certain adjustment for stock split, dividend or other distribution, recapitalization or similar events, “Registrable Securities”) within 30 days from June 1, 2017, which is to become effective per the SEC no later than 75 days thereafter. Such filing was made on June 30, 2017 and became effective on July 11, 2017. This filing covered 940,924 shares, which is the number of shares that would be issued at the floor conversion rate of $7.00 per share. The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with any Financial Industry Regulatory Authority (“FINRA “) requests. The Company’s obligations with respect to each registration end at the date which is the earlier of (a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its transferee or assignee under the Registration Agreement cease to hold any Registrable Securities. For each registration, the Company shall bear all reasonable expenses, other than underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company currently expects to satisfy all of its obligations under this Registration Agreement and does not expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded (see Note 11).

 

The Company has accounted for the Amendment as a debt modification as the instruments were not substantially different; therefore, the remaining debt discount on the original Facility is being amortized using the effective interest method over the remaining term of the modified debt. The Company evaluated the Amendment together with the Convertible Notes to determine if those contracts or embedded components of those contracts qualified as derivatives requiring separate recognition. This evaluation identified a derivative liability of $2.0 million for the fair value of the change in control and other accelerated payment features as the prepayment fees resulted in premiums that were greater than 10% (see Note 4). As the change in control and other accelerated payments terms, including the prepayment fees, were applied to the entire debt per the terms of the amended Facility, the corresponding debt discount will be amortized using the effective interest method over the remaining term of the Facility. The fees paid to or on behalf of the creditor for the debt modification totaled $40,000 and were recorded as additional debt discount on the amended Facility to be amortized to interest expense using the effective interest method over the term of the Facility. The Company’s evaluation also determined that the embedded conversion options should not be bifurcated as derivatives from the Convertible Notes host instruments.

 

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Therefore, the Company recorded a $0.6 million discount to the convertible notes for the intrinsic value of the embedded conversion option based upon the difference between the fair value of the underlying common stock on June 1, 2017 and the effective conversion price embedded in the Convertible Notes, which will be amortized using the effective interest method to interest expense over the one-year term of the Convertible Notes. The Company recorded a $0.6 million corresponding credit to a beneficial conversion feature classified as additional paid in capital in stockholders’ equity (deficit) in the Company’s financial statements.

 

In connection with the Facility, the Company paid a $1,350,000 yield enhancement fee to Deerfield,  approximately $173,000 of legal costs to the Company’s attorneys and $58,000 of legal costs on behalf of Deerfield’s attorneys, all of which were recorded as debt discount and amortized over the six-year term of the Facility, using the effective interest method. Borrowings under the Facility are collateralized by substantially all of the Company’s assets, except the Company’s assets under capital lease, and the Company will maintain cash on deposit of not less than $5.0 million.

 

Pursuant to the Convertible Notes, if the Company shall fail to provide the number of conversion shares, then the Company shall pay damages to Deerfield or subsequent holder or any designee (“Holder”) for each day after the third business day after receipt of notice of conversion (“Share Delivery Date”) that such conversion is not timely effected. The Facility also contains certain customary nonfinancial covenants, including limitations on the Company’s ability to transfer assets, engage in a change of control, merge or acquire with or into another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the lenders may declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its security interests and other rights. As of September 30, 2017, the Company was in compliance with the covenants under the Facility and the Convertible Notes.

 

Debt discount amortization for the Facility, including the Amendment after June 1, 2017, was calculated using the effective interest rates of 15.03% on the original facility debt and 25.35% on the Convertible Notes, charged to interest expense and totaled $365,000 and $610,000 for the three and nine months ended September 30, 2017, respectively, and $70,000 and $106,000 for the three and nine months ended September 30, 2016, respectively.

 

Senior debt:  In March 2014, the Company entered into the LSA, which was subsequently amended in August 2014, September 2014, December 2014 and June 2015. As amended, the LSA provided a total commitment of $25.0 million, available in four draws. Borrowings under the LSA were collateralized by substantially all of the Company’s assets, except the Company’s intellectual property and assets under capital lease. The first draw of $10.0 million, (“Tranche 1”), was issued during March 2014 and was used in its entirety to repay outstanding principal under a previous credit facility. The second draw of $5.0 million, (“Tranche 2”), was issued during September 2014.  The third draw (“Tranche 3”) in the amount of $5.0 million was issued in March 2015.  In June 2015, the fourth and final draw of $5.0 million, (“Tranche 4”), was issued prior to meeting the Tranche 4 milestones, which were met in July 2015.

 

Each draw was to be repaid in monthly installments, comprised of interest-only monthly payments until May 2016, when installments of interest and principal calculated over a thirty-month amortization period commenced. A balloon payment of the entire principal balance outstanding on October 1, 2017 and all accrued but unpaid interest thereunder was due and payable on October 1, 2017. The interest rate was 9% per annum for Tranche 1 and Tranche 4 and 10.5% per annum for Tranche 2 and Tranche 3. An end of term charge of $1.1 million was payable at the earliest to occur of (1) October 1, 2017, (2) the date the Company prepaid its outstanding Secured Obligations, as defined therein, or (3) the date the Secured Obligations became due and payable. As such, the end of term charge of $1.1 million was paid on May 11, 2016 when the Company prepaid its outstanding Secured Obligations, as defined therein.

 

In connection with the LSA, the Company issued the Hercules Warrants which consisted of 60,000 Series C warrants in March 2014 and 110,000 Series C warrants in September 2014 at the then current price of $5.00 per share. The Hercules Warrants became warrants with a term of five years for the purchase of 70,833 shares of common stock at a price of $12.00 per share upon the closing of the Company’s IPO and were therefore reclassified from warrant liability to Additional Paid in Capital within Stockholders’ Equity at July 22, 2015.

 

LSA end of term charge amortization totaled $121,000 for the nine months ended September 30, 2016, LSA debt discount amortization charged to interest expense totaled $104,000 for the nine months ended September 30, 2016.

 

The early prepayment of the LSA with some of the proceeds from the Facility resulted in a $1,187,000 loss on debt extinguishment which is separately shown in the consolidated statement of operations for the nine months ended September 30, 2016.

 

10% subordinated related party note:  The Company had a Note in the aggregate principal amount of $5.9 million that was issued by the Company to Essex which was to mature in March 2017.  Interest was to be accrued and added to the principal balance until such time as the Company achieved positive EBITDA for three consecutive months. During the nine months

 

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ended September 30, 2016, interest expense of $263,000 was accrued. On May 11, 2016, the Company prepaid the $5.9 million outstanding aggregate principal and $1.3 million in accrued and unpaid interest.

 

Capital lease obligations to related party:  Through September 2017, the Company entered into agreements with a related party for the sale-leaseback of existing and newly acquired assets with a total capitalized cost of $3.2 million, $795,000 and $5.5 million, respectively, which are classified as capital leases. The approximate imputed interest rate on these leases is 14.9%, 14.5% and 14.5%, respectively. Interest expense on these leases was $115,000 and $157,000 for the three and nine months ended September 30, 2017, respectively, and $39,000 and $178,000 for the three and nine months ended September 30, 2016, respectively.

 

Future principal payments of long-term debt including capital leases are as follows:

 

Period ending:

 

September 30,

 

 

 

(in thousands)

 

 

 

 

 

2018

 

$

7,451

 

2019

 

16,002

 

2020

 

16,017

 

2021

 

15,000

 

2022

 

15,000

 

 

 

 

 

Future principal payments

 

$

69,470

 

 

 

 

 

Less unamortized debt discount related to long-term debt

 

(3,551

)

Less current portion of long-term debt

 

(6,949

)

 

 

 

 

Total long-term debt

 

$

58,970

 

 

Note 8. Common stock

 

On February 8, 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share, which included 750,000 shares of its common stock resulting from the underwriters’ exercise of their over-allotment option on February 17, 2017. Deerfield, the Company’s senior lender, participated in the purchase of the Company’s common shares as part of this public offering, and as a result, is now classified as a related party. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were approximately $26.7 million.

 

On June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of the its common stock at a public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of its common stock which was exercised in full on July 26, 2017. The net proceeds to the Company through July 26, 2017 from this offering, after deducting offering expenses payable by the Company, were approximately $34.3 million.

 

The shares of common stock for both the June 2017 and February 2017 offerings were offered pursuant to a shelf registration statement on Form S-3, including a base prospectus, filed by us on August 1, 2016, and declared effective by the SEC, on August 12, 2016. This shelf registration statement covers the offering, issuance and sale by the Company of up to an aggregate of $125.0 million of its common stock, preferred stock, debt securities, warrants and/or units (the “Shelf”).  The Company simultaneously entered into a sales agreement with Cowen and Company, LLC, as sales agent, to provide for the offering, issuance and sale by the Company of up to $40.0 million of its common stock from time to time in “at-the-market” offerings under the Shelf (the “Sales Agreement”).

 

During the three-month period ended March 31, 2017, the Company sold an aggregate 749,639 shares of common stock under the Sales Agreement, at an average sale price of approximately $5.01 per share in February 2017 for gross proceeds of $3.7 million and net proceeds of $3.6 million and paying total compensation to the sales agent of approximately $0.1 million. No sales have been made under the Sales Agreement during both of the three-month periods ended June 30, 2017 and September 30, 2017. As of  September 30, 2017, $58.0 million of the Company’s common stock, preferred stock, debt securities, warrants and/or units remained available to be sold pursuant to the Shelf, including $36.2 million of the

 

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Company’s common stock which remained available to be sold under the Sales Agreement, subject to certain conditions specified therein.

 

Note 9. Share-based Compensation

 

Share-based Compensation Plans

 

In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan (“2015 Plan”) which became effective immediately prior to the closing of the IPO and initially had 767,330 shares of common stock reserved for issuance. On January 1, 2016 and each January 1 thereafter, the number of shares of common stock reserved and available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of shares of stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the administrator of the 2015 Plan. Accordingly, on January 1, 2017 and 2016, the Company added 803,049 shares and 800,797 shares, respectively, to the option pool. The 2015 Plan superseded the Neos Therapeutics, Inc. 2009 Equity Plan (“2009 Plan”), originally adopted in November 2009 and which had 1,375,037 shares reserved and available for issuance. Effective upon closing of the IPO, the Company’s board of directors determined not to grant any further awards under the 2009 Plan.

 

The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be added to the shares of common stock available under the 2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The 2015 Plan is administered by the Company’s compensation committee. The Company’s compensation committee has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company’s compensation committee may delegate authority to grant certain awards to the Company’s chief executive officer. Through September 30, 2017, the Company has granted options, restricted stock and RSUs. The exercise price per share for the stock covered by a stock award granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised stock awards under the 2015 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment.

 

The 2009 Plan allowed the Company to grant options to purchase shares of the Company’s common stock and to grant restricted stock awards to members of its management and selected members of the Company’s board of directors. Restricted stock awards are recorded as deferred compensation and amortized into compensation expense, on a straight-line basis over a defined vesting period ranging from 1 to 48 months. Options were granted to officers, employees, nonemployee directors and consultants, and independent contractors of the Company. The Company also granted performance based awards to selected management. The performance options vested over a three-year period based on achieving certain operational milestones and the remaining options vest in equal increments over periods ranging from two to four years. Unexercised options under the 2009 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment. All terminated options are available for reissuance under the 2015 Plan. Since the inception of the 2015 Plan through December 31, 2016, 7,500 shares related to forfeited 2009 Plan options and 18,906 shares related to the surrender of restricted stock were added to the shares available under the 2015 Plan. During the nine months ended September 30, 2017, 971 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. As of September 30, 2017, 586,687 shares of common stock remain available for grant under the 2015 Plan.

 

Share-based Compensation Expense

 

The Company has reported share-based compensation expense for the three and nine months ended September 30, 2017 and 2016, respectively, in its condensed consolidated statements of operations as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

116

 

$

92

 

$

287

 

$

233

 

Research and development

 

114

 

89

 

298

 

223

 

Selling and marketing expenses

 

247

 

192

 

660

 

514

 

General and administrative expenses

 

684

 

660

 

1,849

 

1,492

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,161

 

$

1,033

 

$

3,094

 

$

2,462

 

 

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The total share based compensation expense included in the table above is attributable to stock options, RSUs and restricted stock of $1.1 million, $31,000 and $23,000, for the three months ended September 30, 2017, respectively and $3.0 million, $52,000, $68,000, for the nine months ended September 30, 2017, respectively. The total share based compensation expense included in the table above is attributable to stock options and restricted stock of $1.0 million and $23,000, for the three months ended September 30, 2016, respectively, and $2.5 million and $68,000, for the nine months ended September 30, 2016, respectively.

 

As of September 30, 2017, there was $7.4 million of compensation costs adjusted for any estimated forfeitures, related to non-vested stock options, RSUs, and restricted stock granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.2 years for stock options, 3.6 years for RSUs, and 1.0 month for restricted stock.

 

Stock Options

 

During the nine months ended September 30, 2017, the Company’s board of directors granted 554,182 options.

 

The Company estimates the fair value of all stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. Prior to the IPO, given the absence of an active market for the Company’s common stock prior to its IPO, the Company’s board of directors was required to estimate the fair value of its common stock at the time of each option grant primarily based upon valuations performed by a third-party valuation firm.

 

The weighted-average key assumptions used in determining the fair value of options granted during the period indicated are as follows:

 

 

 

Nine Months

 

 

 

Ended September 30,
2017

 

 

 

 

 

Estimated dividend yield

 

0.00

%

Expected stock price volatility

 

60.00

%

Weighted-average risk-free interest rate

 

2.00

%

Expected life of option in years

 

6.05

 

Weighted-average option fair value at grant

 

$

4.05

 

 

A summary of outstanding and exercisable options as of September 30, 2017 and December 31, 2016 and the activity from December 31, 2016 through September 30, 2017, is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Number of

 

Average

 

Intrinsic

 

 

 

Options

 

Exercise Price

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

2,107,344

 

$

12.17

 

$

1,128

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2016

 

595,424

 

$

9.72

 

$

881

 

 

 

 

 

 

 

 

 

Granted

 

554,182

 

$

7.17

 

 

 

Exercised

 

 

 

 

 

Expired, forfeited or cancelled

 

(205,971

)

10.54

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

2,455,555

 

$

11.18

 

$

3,509

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2017

 

1,047,390

 

$

11.18

 

$

2,019

 

 

The weighted-average remaining contractual life of options outstanding and exercisable on September 30, 2017 was 8.1 and 7.4 years, respectively. The option exercise prices for all options granted January 1, 2017 through September 30, 2017 ranged from $7.00 per share to $7.65 per share. The weighted-average remaining contractual life of options outstanding and

 

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exercisable on December 31, 2016 was 8.5 and 7.6 years, respectively. The option exercise price for all options granted in the year ended December 31, 2016 ranged from $8.84 to $10.96 per share.

 

Restricted Stock Units:

 

On May 1, 2017, the Company granted 78,750 RSUs to members of its management which vest in four equal annual installments, beginning May 1, 2018. The Company had not issued any RSUs previously.

 

A summary of outstanding RSUs as of September 30, 2017 and December 31, 2016 and the activity from December 31, 2016 through September 30, 2017, is presented below:

 

 

 

 

 

Weighted-

 

 

 

Number of

 

Average

 

 

 

RSUs

 

Fair Value

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

 

$

 

 

 

 

 

 

 

Granted

 

78,750

 

$

7.00

 

Exercised

 

 

 

Expired, forfeited or cancelled

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

78,750

 

$

7.00

 

 

The weighted-average remaining contractual life of RSUs outstanding on September 30, 2017 was 9.6 years.

 

Restricted stock:

 

The Company did not issue any shares of restricted stock for the nine months ended September 30, 2017, or for the year ended December 31, 2016. No vested restricted stock awards were settled during the nine months ended September 30, 2017.

 

The Company had 35,513 shares of unvested restricted stock with a weighted average fair value of $2.55 as of September 30, 2017 and December 31, 2016.  For the nine months ended September 30, 2017, there were no shares of restricted stock granted or forfeited.

 

Note 10. Treasury stock

 

The Company has the authority to repurchase common stock from former employees, officers, directors or other persons who performed services for the Company at the lower of the original purchase price or the then-current fair market value. On October 17, 2016, 9,709 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock and such shares were added back into the treasury stock of the Company, increasing total treasury stock to 18,906 shares as of such date (see Note 14).

 

Note 11. Commitments and contingencies

 

Registration Payment Arrangement— On June 1, 2017, in conjunction with the Amendment to the Facility and the related issuance of the Convertible Notes, the Company entered into the Registration Agreement which required the Company to file a registration statement with the SEC to register the Registrable Securities (see Note 7) within 30 days from June 1, 2017, which is to become effective per the SEC no later than 75 days thereafter. Such filing was made on June 30, 2017 and became effective on July 11, 2017. This filing covered 940,924 shares, which is the number of shares that would be issued at the floor conversion rate of $7.00 per share. The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with any FINRA requests. Upon any Registration Failure, the Company shall pay additional damages to the Holder for each 30-day period (prorated for any partial period) after the date of such Registration Failure in an amount in cash equal to two percent of the original principal amount of the Convertible Notes. The Company’s obligations with respect to each registration end at the date which is the earlier of (a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its transferee or assignee under the Registration Agreement cease to hold any of the Registrable Securities. For each registration filing, the Company shall bear all reasonable expenses, other than underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company currently expects to satisfy all of its obligations

 

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under the Registration Agreement and does not expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded.

 

In accordance with the Convertible Notes, if the Company shall fail to provide the number of conversion shares, then the Company shall pay damages to the Holders for each day after the third business day after the Share Delivery Date that such conversion is not timely effected. The damages, as stated in the Convertible Notes, are an amount equal to two percent of the product of (I) the number of Conversion Shares not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is entitled and (II) the volume weighted average price of the Company’s common stock on the Share Delivery Date. Alternatively, in lieu of the foregoing damages, at the written election of the Holder, if, on or after the applicable date of delivery via facsimile or electronic mail of a notice of conversion, the Holder purchases shares of the Company’s common stock to deliver in satisfaction of a sale by such Holder of Conversion Shares that such Holder anticipated receiving from the Company (such purchased shares, “Buy-In Shares”), the Company shall be obligated to promptly pay to such Holder (in addition to all other available remedies that the Holder may otherwise have), 110% of the amount by which (A) such Holder’s total purchase price (including brokerage commissions, if any) for such Buy-In Shares exceeds (B) the net proceeds received by such Holder from the sale of the number of shares equal to up to the number of Conversion Shares such Holder was entitled to receive but had not received on the Share Delivery Date. If the Company fails to pay the additional damages within five (5) Business Days of the date incurred, then the Holder entitled to such payments shall have the right to require the Company, upon written notice, to immediately issue, in lieu of such cash damages, the number of Shares equal to the quotient of (X) the aggregate amount of the damages payments described herein divided by (Y) the Conversion Price specified by the Holder in the notice of conversion.

 

Patent infringement litigation: On July 25, 2016, the Company received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising the Company that Actavis has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, the Company filed a patent infringement lawsuit in federal district court in the District of Delaware against Actavis, Inc. This case alleges that Actavis infringed the Company’s Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Actavis’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier.

 

On October 17, 2017, the Company entered into a Settlement and Licensing Agreement (“Agreement”) with Actavis. This Agreement resolves all ongoing litigation involving our Adzenys XR-ODT patents and Actavis’s ANDA.  Under the Agreement, the Company granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Agreement has been submitted to the applicable governmental agencies (see Note 14).

 

Operating lease:  The Company leases its Grand Prairie, Texas office space and manufacturing facility under an operating lease which expires in 2024. In addition, in December 2015, the Company executed a 60-month lease for office space in Blue Bell, Pennsylvania for its commercial operations, which commenced on May 1, 2016. The Company accounts for rent expense on long-term operating leases on a straight-line basis over the life of the lease resulting in a deferred rent balance of $1.1 million at September 30, 2017 and $1.2 million at December 31, 2016, respectively. The Company is also liable for a share of operating expenses for both premises as defined in the lease agreements. The Company’s share of these operating expenses was $60,000 and $181,000 for the three and nine months ended September 30, 2017, respectively, and $56,000 and $172,000 for the three and nine months ended September 30, 2016, respectively. Rent expense, excluding the share of operating expenses, for the three and nine months ended September 30, 2017 was $253,000 and $757,000, respectively, and $254,000 and $759,000 for the three and nine months ended September 30, 2016, respectively.

 

Cash incentive bonus plan: In July 2015, the Company adopted the Senior Executive Cash Incentive Bonus Plan (“Bonus Plan”).  The Bonus Plan provides for cash payments based upon the attainment of performance targets established by the Company’s compensation committee.  The payment targets will be related to financial and operational measures or objectives with respect to the Company, or corporate performance goals, as well as individual targets. The Company has recorded $316,000 and $934,000 of bonus expense for the three and nine months ended September 30, 2017 and has reduced bonus expense by $86,000 for the three months ended September 30, 2016 and had recorded $457,700 of bonus expense for the nine months ended September 30, 2016.

 

Note 12. License agreements

 

On October 17, 2017, the Company entered into a Settlement and Licensing Agreement with Actavis. Under the Licensing Agreement, the Company granted Actavis a non-exclusive license to certain patents owned by the Company by which

 

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Actiavis has the right to manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on September 1, 2025, or earlier under certain circumstances. The Licensing Agreement has been submitted to the applicable governmental agencies (see Note 14).

 

On July 23, 2014, the Company entered into a Settlement Agreement and an associated License Agreement (the “2014 License Agreement”) with Shire LLC (“Shire”) for a non-exclusive license to certain patents for certain activities with respect to the Company’s New Drug Application (the “NDA”) No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet. In accordance with the terms of the 2014 License Agreement, following the receipt of the approval from the FDA for Adzenys XR-ODT, the Company paid a lump sum, non-refundable license fee of an amount less than $1.0 million on February 26, 2016. The Company is paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents.

 

On January 26, 2017, the Company sent a letter to Shire, notifying Shire that the Company has made a Paragraph IV certification to the FDA that in the Company’s opinion and to the best of its knowledge, the patents owned by Shire that purportedly cover the Company’s Adzenys ER are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Adzenys ER. On March 6, 2017, the Company entered into a License Agreement (the “2017 License Agreement”) with Shire, pursuant to which Shire granted the Company a non-exclusive license to certain patents owned by Shire for certain activities with respect to the Company’s NDA No. 204325 for an extended-release amphetamine liquid suspension. In accordance with the terms of the 2017 License Agreement, following the receipt of the approval from the FDA for Adzenys ER on September 15, 2017, the Company recorded a lump sum, non-refundable license fee of an amount less than $1.0 million that was paid in October 2017. The Company will also pay a single digit royalty on net sales of Adzenys ER during the life of the relevant Shire patents.

 

Such license fees are capitalized as an intangible asset and are amortized into cost of goods sold over the life of the longest associated patent. The royalties are recorded as cost of goods sold in the same period as the net sales upon which they are calculated.

 

Additionally, each of the 2014 and 2017 License Agreements contains a covenant from Shire not to file a patent infringement suit against the Company alleging that Adzenys XR-ODT or Adzenys ER, respectively, infringes the Shire patents.

 

Note 13. Related party transactions

 

As described in Note 6, in February 2017, the Company entered into an agreement with a related party for the sale-leaseback of newly acquired assets of up to $5.0 million to finance the Company’s capital expenditures. Each lease under this master agreement will be for an initial term of 36 months and will have an option to purchase the equipment at the end of the respective lease that management considers to be bargain purchase option. Under this master agreement, the Company entered into leases and sold assets with a total capitalized cost of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on February 13, 2017 and June 30, 2017, respectively. Also, in 2012, the Company negotiated financing arrangements with the same related party that provided for the sale-leaseback of up to $6.5 million of the Company’s property and equipment. From the 2012 financing arrangements, the Company has no lease obligation remaining at September 30, 2017 and has a lease obligation of $445,000 at December 31, 2016. The total lease obligation under all related party financing arrangements was $2,883,000 and $445,000 at September 30, 2017 and December 31, 2016, respectively.

 

On February 8, 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share, which includes 750,000 shares of the Company’s common stock resulting from the underwriters’ exercise of their over-allotment option at the public offering price on February 17, 2017 (see Note 8). On June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of its common stock at a public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of its common stock (see Note 8).  Deerfield, the Company’s senior lender, participated in the purchase of the Company’s common shares as part of both public offerings, and as a result, is now classified as a related party. The Company is obligated under a $60.0 million senior secured credit Facility that was issued by the Company to Deerfield. On June 1, 2017, the Company and Deerfield entered into an Amendment to the Company’s existing Facility with Deerfield which extended the date to repay the Accrued Interest under the Facility to June 1, 2018, which may be extended to June 1, 2019 at the election of the Company if certain conditions have been met as specified in the Amendment. The right to payment of the Accrued Interest was memorialized in the form of Convertible Notes issued to Deerfield on the Amendment Date (see Note 7).

 

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Note 14. Subsequent events

 

On October 16, 2017, the Company settled in cash certain vested restricted stock awards having a value of $284,000. Additionally, 14,895 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock. The fair value of such shares was determined to be $8.00 per share, the closing price of the Company’s stock on such date. The surrendered shares of restricted stock were added to the shares available under the 2015 Plan, increasing the total shares of common stock available for grant under the 2015 Plan to 601,582.

 

On October 17, 2017, the Company entered into an Agreement with Actavis. This Agreement resolves all ongoing litigation involving our Adzenys XR-ODT patents and Actavis’s ANDA. Under the Agreement, the Company granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Agreement has been submitted to the applicable governmental agencies.

 

On October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible Notes into shares of the Company’s common stock at a conversion price of $7.08 per share. The conversion price was based on 95% of the average of the volume weighted average prices per share of the Company’s common stock on the NASDAQ Global Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967 shares of the Company’s common stock to Deerfield on this date.

 

On October 26, 2017, the Company announced that it received an unsolicited proposal from PDL BioPharma, Inc. (“PDL”) to acquire all of our outstanding shares for $10.25 per share in cash.  On October 30, 2017, after a comprehensive review conducted in consultation with its financial and legal advisors, the Company announced that the board of directors of the Company had unanimously rejected the October 26, 2017 proposal from PDL.

 

On October 31, 2017, the Company received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. (“Teva”) advising us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT. The Company has new product exclusivity for a three-year period from the date of approval for Cotempla XR-ODT. The certification notice alleges that the three U.S. patents listed in the FDA’s Orange Book for Cotempla XR-ODT, one with an expiration date in April 2026 and two with expiration dates in June 2032, will not be infringed by Teva’s proposed product, are invalid and/or are unenforceable. The Company is evaluating the paragraph IV certification and intends to vigorously enforce its intellectual property rights relating to Cotempla XR-ODT. The Company has 45 days from the receipt of the paragraph IV certification to commence a patent infringement lawsuit against Teva that would automatically stay, or bar, the FDA from approving Teva’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents, whichever is earlier.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements for the years ended December 31, 2016 and 2015 and notes thereto included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2017. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q.

 

OVERVIEW

 

We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our proprietary modified-release drug delivery technology platform, which we have already used to develop Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, for the treatment of attention deficit hyperactivity disorder (“ADHD”). Our products and product candidates are extended-release (“XR”), medications in patient-friendly, orally disintegrating tablets (“ODT”) or liquid suspension dosage forms. Our proprietary modified-release drug delivery platform has enabled us to create novel, extended-release ODT and liquid suspension dosage forms. We received approval from the U.S. Food and Drug Administration (“FDA”), for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27, 2016 and launched the commercialization of this product on May 16, 2016. We received approval from the FDA for Cotempla XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017, initiating an early experience program with limited product availability on September 5, 2017 before launching this product nationwide on October 2, 2017. Also, we received approval from the FDA for Adzenys ER, our amphetamine extended-release liquid suspension, on September 15, 2017, and plan to launch this product in January 2018. We believe Adzenys XR-ODT and Cotempla XR-ODT are the first amphetamine XR-ODT and the first methylphenidate XR-ODT, respectively, for the treatment of ADHD on the market.

 

On July 25, 2016, we received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising us that Actavis has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, we filed a patent infringement lawsuit in federal district court in the District of Delaware against Actavis, Inc. This case alleges that Actavis infringed our Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Actavis’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier. On October 17, 2017, we entered into a Settlement and Licensing Agreement (“Agreement”) with Actavis. This Agreement resolves all ongoing litigation involving our Adzenys XR-ODT patents and Actavis’s ANDA.  Under the Agreement, we have granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Agreement has been submitted to the applicable governmental agencies (see Note 14 to the notes to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional details).

 

On October 31, 2017, we received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. (“Teva”) advising us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT. We are evaluating the paragraph IV certification and intend to vigorously enforce our intellectual property rights relating to Cotempla XR-ODT. Should we determine that litigation is warranted, we anticipate incurring increasing amounts of legal fees in the enforcement of our intellectual property rights.

 

We are commercializing Adzenys XR-ODT and Cotempla XR-ODT and plan to commercialize Adzenys ER in the United States using our own commercial infrastructure. We are manufacturing Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in our current Good Manufacturing Practice (“cGMP”) and U.S. Drug Enforcement Administration (“DEA”)-registered manufacturing facilities, thereby obtaining our products at cost without manufacturer’s margins and better controlling supply quality and timing. We also currently use these facilities to manufacture our generic equivalent to the

 

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branded product, Tussionex, an XR liquid suspension of hydrocodone and chlorpheniramine indicated for the relief of cough and upper respiratory symptoms of a cold (“generic Tussionex”).

 

Our predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. and subsequently changed its name to Neostx, Inc. On June 15, 2009, we completed a reorganization pursuant to which substantially all of the capital stock of Neostx, Inc. was acquired by a newly formed Delaware corporation, named Neos Therapeutics, Inc. The remaining capital stock of Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged with and into Neos Therapeutics, Inc. Historically, we were primarily engaged in the development and contract manufacturing of unapproved or Drug Efficacy Study Implementation (“DESI”), pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The unapproved or DESI pharmaceuticals contract business was discontinued in 2007, and the manufacture of nutraceuticals for third parties was discontinued in March 2013.

 

Since our reorganization in 2009, we have devoted substantially all of our resources to funding our manufacturing operations and to our commercial products and product candidates which consist of implementation of our commercialization strategies, research and development activities, clinical trials for our product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. Prior to our initial public offering of our common stock in July 2015, we funded our operations principally through private placements of our common stock, redeemable convertible preferred stock, bank and other lender financings and through payments received under collaborative arrangements.

 

On August 28, 2014, we completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug Application (“Tussionex ANDA”), which include the rights to produce, develop, market and sell, as well as all the profits from such selling activities, our generic Tussionex, which we previously owned the rights to manufacture, but which was marketed and sold by the generic drug division of Cornerstone Biopharma, Inc. (“Cornerstone”). These rights were acquired from the collaboration of the Company, Cornerstone and Coating Place, Inc. Prior to the acquisition, we shared profits generated by the sale and manufacture of the product under a development and manufacturing agreement with those companies.

 

We have incurred significant losses in each year since our reorganization in 2009. Our net losses were $52.0 million and $83.3 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016, we had an accumulated deficit of approximately $252.1 million and $200.1 million, respectively. We expect to continue to incur significant expenses and increasing operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

·                  build and operate commercial infrastructure to support sales and marketing for Adzenys XR-ODT, Cotempla XR-ODT, and Adzenys ER;

 

·                  continue research and development activities for new product candidates;

 

·                  conduct post-marketing approval research activities for our approved products;

 

·                  manufacture supplies for our preclinical studies and clinical trials;

 

·                  continue to enforce our intellectual property rights; and

 

·                  operate as a public company.

 

FINANCIAL OPERATIONS OVERVIEW

 

Revenue

 

During 2015 and 2016, our revenue was generated primarily from product sales of our generic Tussionex recorded on a net sales basis. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season. We launched commercialization of Adzenys XR-ODT on May 16, 2016 and initiated an early experience program with Cotempla XR-ODT with limited product availability on September 5, 2017 before launching this product nationwide on October 2, 2017. We sell our products to drug wholesalers in the United States. We have also established indirect contracts with drug, food and mass retailers that order and receive our generic Tussionex product through wholesalers. As a result of our acquisition of all of the rights to commercialize and derive future profits from the Tussionex ANDA, the continuing commercialization of Adzenys XR-ODT and Cotempla XR-ODT, and the planned commercial launch of Adzenys ER, we expect our future revenue to increase from historical levels.

 

We expect the number of prescriptions filled for Adzenys XR-ODT and Cotempla XR-ODT to continue to increase in 2017 and in subsequent years. Data from IMS shows 50,697 and 648 equivalent unit prescriptions for Adzenys XR-ODT and Cotempla XR-ODT, respectively, for the three months ended September 30, 2017, and 124,948 and 648 equivalent unit prescriptions for Adzenys XR-

 

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ODT and Cotempla XR-ODT, respectively, for the nine months ended September 30, 2017. From the launch of Adzenys XR-ODT in May 2016 through December 31, 2016, data from IMS showed 30,339 equivalent unit prescriptions.

 

In the future, we will seek to generate additional revenue from product sales of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. We have little Adzenys XR-ODT and Cotempla XR-ODT sales history and have determined that at this time we cannot reliably estimate expected returns of the products at the time of shipment to wholesalers. Accordingly, we defer recognition of revenue on product shipments of Adzenys XR-ODT and Cotempla XR-ODT until the right of return no longer exists, which occurs at the earlier of the time Adzenys XR-ODT and Cotempla XR-ODT units are dispensed through patient prescriptions or expiration of the right of return. We calculate patient prescriptions of Adzenys XR-ODT and Cotempla XR-ODT dispensed using an analysis of third-party information. If we fail to successfully market Adzenys XR-ODT and Cotempla XR-ODT, successfully launch and market Adzenys ER in a timely manner or obtain regulatory approval for them, our inability to generate future revenue from product sales may adversely affect our results of operations and financial position.

 

Research and development

 

We expense research and development costs as they are incurred. Research and development expenses consist of costs incurred in the discovery and development of our product candidates, and primarily include:

 

·                  expenses, including salaries and benefits, which includes share-based compensation expense, of employees engaged in research and development activities;

 

·                  expenses incurred under third party agreements with contract research organizations (“CROs”), and investigative sites that conduct our clinical trials and a portion of our pre-clinical activities;

 

·                  cost of raw materials, as well as manufacturing cost of our materials used in clinical trials and other development testing;

 

·                  cost of facilities, depreciation and other allocated expenses;

 

·                  fees paid to regulatory authorities for review and approval of our product candidates; and

 

·                  expenses associated with obtaining and maintaining patents.

 

Direct development expenses associated with our research and development activities are allocated to our product candidates. Indirect costs related to our research and development activities that are not allocated to a product candidate are included in “Other Research and Development Activities” in the table below.

 

Prior to 2016 and the launch of Adzenys XR-ODT, the largest component of our total operating expenses had been our investment in research and development activities including the clinical development of our product candidates. The following table summarizes our research and development expenses for the periods indicated:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands)

 

NT-0102 Cotempla XR-ODT

 

$

110

 

$

157

 

$

1,902

 

$

1,379

 

NT-0201 Adzenys ER

 

61

 

468

 

137

 

1,285

 

NT-0202 Adzenys XR- ODT

 

159

 

160

 

456

 

377

 

Other Research and Development Activities (1)

 

1,427

 

2,096

 

4,678

 

5,564

 

 

 

$

1,757

 

$

2,881

 

$

7,173

 

$

8,605

 

 


(1) Includes unallocated product development cost, salaries and wages, occupancy and depreciation and amortization.

 

During the third quarter of 2016, we reclassified our regulatory fees out of research and development expense and into cost of sales commensurate with the commercial launch of Adzenys XR-ODT. We have reclassified all such applicable regulatory fees for prior quarters and prior years out of research and development expense and into cost of goods sold in accordance with this approach.

 

We expect that our research and development expenses will fluctuate over time as we explore new product candidates, but will decrease as a percentage of revenue if Adzenys XR-ODT is commercially successful, if Cotempla XR-ODT and

 

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Adzenys ER are successfully launched and commercialized or if any of our product candidates are approved and are commercially successful. We expect to fund our research and development expenses from our current cash and cash equivalents, a portion of the net proceeds from our public offerings of common stock and debt financing and revenues, if any, from Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER and, if approved, our product candidates.

 

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

 

Selling and marketing

 

Selling and marketing expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, commercialization activities for Adzenys XR-ODT and Cotempla XR-ODT and pre-commercialization activities for Adzenys ER, commercial sales organization costs incurred in the preparation for and in the commercialization of Adzenys XR-ODT, and in the preparation for the launch and commercialization of Cotempla XR-ODT and launch of Adzenys ER and trade sales expenses for our generic Tussionex. Other selling and marketing expenses include market research, brand development, advertising agency and other public relations costs, managed care relations, sales planning and market data and analysis.

 

We believe that our selling and marketing expenses may continue at these levels with the continuing commercialization of Adzenys XR-ODT, and the launch and commercialization of Cotempla XR-ODT and Adzenys ER in the United States.

 

General and administrative

 

General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, for our employees in executive, finance, information technology and human resources functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses or cost of goods sold, and professional fees for business development, accounting, tax and legal services. Beginning in July 2016, we began recording stock compensation expense in the same income statement line as the cash compensation of the employee with the associated stock option in accordance with Staff Accounting Bulletin (“SAB”) Topic 14 due to the increased number and amount of stock options and option compensation. We have reclassified all prior quarters’ and prior years’ amounts that relate to personnel not classified as general and administrative employees out of general and administrative expense to the appropriate income statement line in accordance with this approach.

 

We anticipate that our general and administrative expenses will increase due to increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs, as well as accounting and compliance costs to support the commercialization of Adzenys XR-ODT, and the launch and commercialization of Cotempla XR-ODT and Adzenys ER, and, if approved, our product candidates. In addition, as a result of our Paragraph IV litigation that we commenced against Actavis in September 2016, we have incurred increasing amounts of legal fees in the enforcement of our intellectual property rights. On October 17, 2017, the Company entered into an Agreement with Actavis. This Agreement resolves all ongoing litigation involving our Adzenys XR-ODT patents and Actavis’s ANDA.

 

Interest expense, net

 

On May 11, 2016, we entered into a $60.0 million senior secured credit facility (“Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of loan) and Deerfield Special Situations Fund, L.P. (33 1/3% of Loan) (“Deerfield”) as lenders.  Deerfield participated in the purchase of our common shares as part of our February 2017 public offering, and as a result, is now classified as a related party. Approximately $33.0 million of the Facility proceeds were used to prepay the existing senior Loan and Security Agreement (“LSA”) with Hercules Technology III, L.P. (“Hercules”) and the 10% related party subordinated debt (the “Note”) that was otherwise payable in 2016 and 2017. This Facility was amended on June 1, 2017 to provide a one-year deferral, with an option for a second year of deferral, of the first year accrued interest of $6.6 million, provided that we meet certain sales revenue targets and obtain FDA approval of certain of our product candidates on or before the Prescription Drug User Fee Act (the “PDUFA”) goal date (the “Amendment”). Before the Amendment, this accrued interest had been deferred until June 1, 2017 per the terms of the Facility. The right to payment of the $6.6 million of accrued interest was memorialized in the form of Senior Secured Convertible Notes issued to Deerfield on the Amendment Date. Interest is due quarterly at a rate of 12.95% per year. Deerfield has an option to convert these notes into our common stock.

 

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Interest expense to date has consisted primarily of interest expense on senior debt, including the amortization of debt discounts, the Note and the capitalized leases from a related party resulting from the sale-leaseback transactions of our existing and newly-acquired property and equipment. We amortize debt issuance costs over the life of the notes which are reported as interest expense in our consolidated statements of operations.

 

Other income (expense), net

 

Other income and expense to date has primarily consisted of amortization of the net gain recorded on the sale-leaseback of our property and equipment. The first sale-leaseback financings occurred in five separate transactions in 2013 and 2014, each with a 42-month lease term. The gains on the transactions were recognized on a straight-line basis over the respective 42-month lease term. In February 2017, we entered into an additional agreement for the sale-leaseback of newly acquired assets of up to $5.0 million to finance our capital expenditures. Under this agreement, we entered into leases and sold assets with a total capitalized cost of $481,000 and $2,742,000 at effective interest rates of 14.3% and 14.9% on February 13, 2017 and June 30, 2017, respectively. The February sale resulted in a net gain of $14,000 which has been deferred and is being amortized over the 36-month term of the lease. There was no gain or loss on the June 2017 sale. (See Notes 6 and 13 to the notes to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional details). Other income and expense also includes interest earned, accretion and gains on our cash and cash equivalents and short-term investments and changes resulting from the remeasurement of the fair value of our earnout and derivative liabilities. The primary objective of our investment policy is liquidity and capital preservation.

 

RESULTS OF OPERATIONS

 

Three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

Revenues

 

The following table summarizes our revenues for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

6,695

 

$

1,583

 

$

5,112

 

322.9

%

 

Total product revenues were $6.7 million for the three months ended September 30, 2017, an increase of $5.1 million or 322.9% from the $1.6 million for the three months ended September 30, 2016. The increase was primarily due to a $4.6 million increase in net sales of Adzenys XR-ODT which launched on May 16, 2016 from $5.3 million of net sales for the three months ended September 30, 2017 versus $0.7 million of net sales for the three months ended September 30, 2016. Sales from the early experience program for Cotempla XR-ODT which commenced on September 5, 2017 were negligible. Net sales of $1.4 million of our generic Tussionex were $0.5 million higher than the $0.9 million for the three months ended September 30, 2016 primarily due to higher reorders from our large customers.

 

Cost of goods sold

 

The following table summarizes our cost of goods sold for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

2,422

 

$

2,318

 

$

104

 

4.5

%

 

The total cost of goods sold was $2.4 million for the three months ended September 30, 2017, an increase of $0.1 million or 4.5%, from the $2.3 million for the three months ended September 30, 2016. This increase was primarily due to a $1.1 million increase in product costs and an associated increase of $0.6 million of finished drug and royalty fees relating to the increased sales of Adzenys XR-ODT in 2017 which launched on May 16, 2016 and sales from the early experience program of Cotempla XR-ODT which commenced on September 5, 2017. Partially offsetting these increased costs were favorable production variances of $1.6 million relating to increased production to meet sales demand.

 

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Table of Contents

 

Research and development expenses

 

The following table summarizes our research and development expenses for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

$

1,757

 

$

2,881

 

$

(1,124

)

(39.0

)%

 

Research and development expenses were $1.8 million for the three months ended September 30, 2017, a decrease of $1.1 million or 39.0%, from the $2.9 million for the three months ended September 30, 2016. This decrease was primarily due to a $0.7 million decline in testing, materials and supply expenses coupled with $0.4 million decline in clinical expenses due to completion in 2016 of studies for Cotempla XR-ODT and Adzenys ER.

 

Selling and marketing expenses

 

The following table summarizes our selling and marketing expenses for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

12,618

 

$

16,977

 

$

(4,359

)

(25.7

)%

 

The total selling and marketing expenses were $12.6 million for the three months ended September 30, 2017, a decrease of $4.4 million or 25.7%, from the $17.0 million for the three months ended September 30, 2016. The decrease was primarily due to a decrease of $4.3 million of advertising expenses, $0.6 million of medical marketing and field aids and $0.6 million in commercial team training activities for the launch of Adzenys XR-ODT in 2016. These decreases were partially offset by $0.6 million increase in the commercial sales organization salesforce and $0.5 million increase in market access.

 

General and administrative expenses

 

The following table summarizes our general and administrative expenses for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

3,911

 

$

3,140

 

$

771

 

24.6

%

 

The total general and administrative expenses were $3.9 million for the three months ended September 30, 2017, an increase of $0.8 million or 24.6%, from the $3.1 million for the three months ended September 30, 2016.  This increase was primarily due to a $0.5 million increase in salary and compensation expense for additional corporate personnel to handle the increased compliance costs and a $0.5 million increase for legal cost for patent defense. This increase was partially offset by a $0.1 million decrease of administrative expenses.

 

Interest expense

 

The following table summarizes interest expense for the three months ended September 30, 2017 and 2016:

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,648

 

$

2,130

 

$

518

 

24.3

%

 

The total interest expense was $2.6 million for the three months ended September 30, 2017, an increase of $0.5 million or 24.3%, from the $2.1 million for the three months ended September 30, 2016. Interest on senior debt was $0.4 million higher due to interest on the convertible notes, additional debt discounts recorded in June 2017 as a result of the modification of the Facility debt and $0.1 million increase related to capital leases recorded during 2017 all of which were not present during 2016 (see Note 7 to the notes to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional details).

 

Other income (expense), net

 

The following table summarizes our other income (expense) for the three months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended
September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

$

403

 

$

57

 

$

346

 

607.0

%

 

Other income, net was $0.4 million for the three months ended September 30, 2017, an increase of $0.3 from the $0.1 million of net income for the three months ended September 30, 2016. The $0.3 million increase was primarily due to the change in fair value of the Deerfield debt derivative and the Tussionex earn-out liability. This was partially offset by a decrease in the amortization of the gain on the sale-leasebacks mainly due to the expiration in July 2016 and April 2017 of the two February 2013 leases and the November 2013 lease for $3.5 million and $1.0 million of assets, respectively.

 

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

 

Revenues

 

The following table summarizes our revenues for the nine months ended September 30, 2017 and 2016:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

17,231

 

$

5,651

 

$

11,580

 

204.9

%

 

Total product revenues were $17.2 million for the nine months ended September 30, 2017, an increase of approximately $11.5 million or 204.9% from the $5.7 million for the nine months ended September 30, 2016. The increase was primarily due to a $11.8 million increase in net sales of Adzenys XR-ODT which launched on May 16, 2016 from $12.6 million of net sales for the nine months ended September 30, 2017versus $0.8 million for the nine months ended September 30, 2016. Sales from the early experience program of Cotempla XR-ODT which commenced on September 5, 2017 were negligible. Net sales of $4.6 million of our generic Tussionex for the nine months ended September 30, 2017declined slightly by $0.3 million from $4.9 million for the nine months ended September 30, 2016 primarily due to competitive pricing pressures for this product.

 

Cost of goods sold

 

The following table summarizes our cost of goods sold for the nine months ended September 30, 2017 and 2016:

 

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Table of Contents

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

9,613

 

$

7,418

 

$

2,195

 

29.6

%

 

The total cost of goods sold was $9.6 million for the nine months ended September 30, 2017, an increase of $2.2 million or 29.6%, from the $7.4 million for the nine months ended September 30, 2016. This increase was primarily from a $2.6 million increase in product costs and an associated increase of $1.0 million of royalty fees, freight and logistics costs relating to the increased sales of Adzenys XR-ODT in 2017 which launched on May 16, 2016 and sales from the early experience program of Cotempla XR-ODT which commenced on September 5, 2017. Partially offsetting these increased costs were favorable production variances of $1.4 million relating to increased production to meet sales demand.

 

Research and development expenses

 

The following table summarizes our research and development expenses for the nine months ended September 30, 2017 and 2016:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,