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 JUNE 30, 2015

 

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  o   No  x

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x
(Do not check if a
smaller reporting company)

Smaller reporting company o

 

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 September 1, 2015: 15,836,285 shares.

 

 

 



Table of Contents

 

NEOS THERAPEUTICS, INC.

 

INDEX

 

 

 

Page No.

 

 

PART I — FINANCIAL INFORMATION

5

 

 

Item 1

Financial Statements (Unaudited):

5

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Stockholders’ Deficit

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2

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

30

Item 3

Quantitative and Qualitative Disclosures about Market Risk

47

Item 4

Controls and Procedures

48

 

 

 

PART II — OTHER INFORMATION

48

 

 

Item 1

Legal Proceedings

48

Item 1A

Risk Factors

48

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

82

Item 3

Defaults Upon Senior Securities

82

Item 4

Mine Safety Disclosures

82

Item 5

Other Information

82

Item 6

Exhibits

83

SIGNATURES

 

84

 

2



Table of Contents

 

Special note regarding forward-looking statements

 

This Quarterly Report on Form 10Q contains forward-looking statements within the meaning of the federal securities laws, and these statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. 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 prospectus include, but are not limited to, statements about:

 

·                  our ability to receive, and the timing of any receipt of, FDA approvals, or other regulatory action in the United States and elsewhere, to develop and commercialize NT-0102, NT-0202, NT-0201, or any other future product or product candidate;

 

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

 

·                  the PDUFA goal dates for NT-0102 and NT-0202, and the NDA submission date for NT-0201;

 

·                 the timing,  cost or other aspects of the commercial launch and future sales of NT-0102, NT-0202, NT-0201, or any other future product or product candidate;

 

·                 our ability to increase our manufacturing and distribution capabilities for NT-0102, NT-0202, NT-0201, or any other future product or product candidate;

 

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

 

·                 the ADHD patient market size and market adoption of NT-0102, NT-0202, or NT-0201 by physicians and patients;

 

·                 the therapeutic benefits,  effectiveness and safety of NT-0102, NT-0202, NT-0201, or any other future product or product candidate;

 

·                 our expectations regarding the commercial supply of our NT-0102, NT-0202 or NT-0201 product candidates or our generic Tussionex;

 

·                 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 USPTO and other governmental patent agencies;

 

·                  our ability to achieve profitability; and

 

·                  our staffing needs.

 

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. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors

 

3



Table of Contents

 

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.

 

4



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)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

25,631

 

$

13,343

 

Short term investments

 

 

3,000

 

Accounts receivable, net of allowances of $2,579 and $204, respectively

 

2,096

 

367

 

Inventories

 

1,703

 

2,031

 

Other current assets

 

235

 

264

 

Total current assets

 

29,665

 

19,005

 

 

 

 

 

 

 

Property and equipment, net

 

5,334

 

5,831

 

Intangible assets, net

 

17,420

 

18,167

 

Other assets

 

3,471

 

2,227

 

 

 

 

 

 

 

Total assets

 

$

55,890

 

$

45,230

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

1,333

 

$

1,257

 

Accrued expenses

 

2,430

 

2,715

 

Current portion of long-term debt

 

3,257

 

1,653

 

 

 

 

 

 

 

Total current liabilities

 

7,020

 

5,625

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

31,198

 

23,121

 

Earnout liability

 

356

 

756

 

Deferred gain on leaseback

 

967

 

1,383

 

Deferred rent

 

1,172

 

1,189

 

Warrant liabilities

 

3,934

 

1,789

 

 

 

 

 

 

 

Total long-term liabilities

 

37,627

 

28,238

 

 

 

 

 

 

 

Redeemable Preferred Stock, $0.001 par value

 

 

 

 

 

Series A - 1,170,000 authorized; issued and outstanding; liquidation preference of $5,850 as of June 30, 2015 and at December 31, 2014

 

1,068

 

1,068

 

Series B - 4,000,000 authorized; 3,113,099 issued and outstanding; liquidation preference of $15,565 as of June 30, 2015 and at December 31, 2014

 

14,730

 

14,559

 

Series B-1 - 8,830,000 authorized; 5,461,802 issued and outstanding; liquidiation preference of $62,731 as of June 30, 2015 and $61,647 at December 31, 2014

 

33,803

 

32,391

 

Series C - 13,500,000 authorized; 11,528,483 issued and outstanding as of June 30, 2015 and 8,753,547 issued and outstanding at December 31, 2014 ; liquidation preference of $57,642 at June 30, 2015 and $43,768 at December 31, 2014

 

54,648

 

42,131

 

 

 

104,249

 

90,149

 

Stockholders’ Deficit:

 

 

 

 

 

Common stock, $0.001 par value, 35,000,000 authorized; 887,414 issued and outstanding as of June 30, 2015 and 938,859 and 882,954 issued and outstanding at December 31, 2014, respectively

 

1

 

1

 

Additional paid-in capital

 

5,069

 

4,831

 

Accumulated deficit

 

(98,076

)

(83,614

)

 

 

 

 

 

 

Total stockholders’ deficit

 

(93,006

)

(78,782

)

 

 

 

 

 

 

Total liabilities, redeemable preferred stock and stockholders’ deficit

 

$

55,890

 

$

45,230

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

Product

 

$

1,484

 

$

 

$

1,912

 

$

 

Manufacturing

 

 

 

 

113

 

Development

 

 

25

 

 

93

 

Profit Sharing

 

 

30

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

1,484

 

55

 

1,912

 

347

 

Cost of Goods Sold

 

1,659

 

638

 

2,754

 

1,443

 

 

 

 

 

 

 

 

 

 

 

Gross loss

 

(175

)

(583

)

(842

)

(1,096

)

 

 

 

 

 

 

 

 

 

 

Research and development

 

2,102

 

3,183

 

6,422

 

5,468

 

Selling and marketing Expenses

 

602

 

8

 

928

 

11

 

General and administrative Expenses

 

1,659

 

1,404

 

2,996

 

2,951

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(4,538

)

(5,178

)

(11,188

)

(9,526

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(884

)

(618

)

(1,641

)

(1,637

)

Other income, net

 

208

 

208

 

415

 

410

 

Change in fair value of earnout and warrant liabilities

 

(539

)

 

105

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,753

)

$

(5,588

)

$

(12,309

)

$

(10,753

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(5,753

)

(5,588

)

(12,309

)

(10,753

)

Preferred stock accretion to redemption value

 

(586

)

(265

)

(1,070

)

(582

)

Preferred stock dividends

 

(544

)

(544

)

(1,083

)

(1,083

)

Net loss attributable to common stock

 

$

(6,883

)

$

(6,397

)

$

(14,462

)

$

(12,418

)

 

 

 

 

 

 

 

 

 

 

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

 

887,397

 

873,060

 

886,323

 

872,176

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stock, basic and diluted

 

$

(7.76

)

$

(7.33

)

$

(16.32

)

$

(14.24

)

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

Six Months Ended June 30, 2015

(In thousands, except shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Deficit

 

Balance, December 31, 2014

 

938,859

 

$

1

 

(55,905

)

$

 

$

4,831

 

$

(83,614

)

$

(78,782

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of options and warrants

 

4,460

 

 

 

 

4

 

 

4

 

Share-based compensation expense

 

 

 

 

 

234

 

 

234

 

Cancellation of treasury stock

 

(55,905

)

 

55,905

 

 

 

 

 

Series B Preferred Stock accretion to redemption value

 

 

 

 

 

 

(171

)

(171

)

Series B-1 Preferred Stock accretion to redemption value

 

 

 

 

 

 

(329

)

(329

)

Series B-1 accrued dividend

 

 

 

 

 

 

(1,083

)

(1,083

)

Series C Preferred Stock accretion to redemption value

 

 

 

 

 

 

(570

)

(570

)

Net loss

 

 

 

 

 

 

(12,309

)

(12,309

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2015

 

887,414

 

$

1

 

 

$

 

$

5,069

 

$

(98,076

)

$

(93,006

)

 

See notes to condensed consolidated financial statements.

 

7



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(12,309

)

$

(10,753

)

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

 

 

 

 

 

Depreciation and amortization of property and equipment

 

843

 

814

 

Amortization of intangible assets

 

747

 

404

 

Changes in fair value of warrant and earnout liabilities

 

(105

)

 

Amortization of patents

 

12

 

 

Amortization and write-off of senior debt fees

 

280

 

436

 

Gain on sale of equipment

 

(416

)

(408

)

Provision for bad debts

 

 

(49

)

Share-based compensation expense

 

234

 

77

 

Interest accrued on note payable

 

198

 

305

 

Change in deferred rent

 

(17

)

58

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,729

)

(53

)

Inventories

 

328

 

134

 

Other current assets

 

29

 

(79

)

Other assets

 

(124

)

(80

)

Accounts payable

 

(211

)

5

 

Accrued expenses

 

(556

)

182

 

 

 

 

 

 

 

Net cash used in operating activities

 

(12,796

)

(9,007

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Net proceeds from sale (purchase) of short-term investments

 

3,000

 

(7,000

)

Capital expenditures

 

(346

)

(72

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

2,654

 

(7,072

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from senior debt note

 

10,000

 

10,000

 

Proceeds from sale of equipment

 

 

795

 

Net proceeds from issuance of stock

 

13,801

 

9,905

 

Payments made on borrowings

 

(797

)

(10,930

)

Payments of initial public offering costs

 

(574

)

 

Deferred financing costs

 

 

(398

)

 

 

 

 

 

 

Net cash provided by financing activities

 

22,430

 

9,372

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

12,288

 

(6,707

)

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning

 

13,343

 

11,947

 

 

 

 

 

 

 

Ending

 

$

25,631

 

$

5,240

 

 

 

 

 

 

 

Supplemental Noncash Investing and Financing Activities:

 

 

 

 

 

Initial public offering costs included in accounts payable and accrued expenses

 

$

558

 

$

 

Issuance of stock warrants

 

$

2,131

 

$

 

Preferred Stock Dividend

 

$

1,083

 

$

1,083

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

1,106

 

$

907

 

 

See notes to condensed consolidated financial statements.

 

8



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. 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 six months ended June 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 or any period thereafter.  The audited consolidated financial statements as of and for the year ended December 31, 2014 included information and footnotes necessary for such presentation and were included in the Neos Therapeutics, Inc. final prospectus dated as of July 22, 2015 and filed with the SEC, on July 24, 2015 (“Final Prospectus”). 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, 2014.

 

Note 2. 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 proprietary drug candidates for the treatment of attention deficit hyperactivity disorder (“ADHD”) which are in late-stage development and/or regulatory review. 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. These products are developed and manufactured using the Company’s proprietary and patented modified-release drug delivery technology. The Company’s 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, the Company 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 the Company on June 29, 2015.  Historically, the Company was primarily engaged in the development and contract manufacturing of unapproved or Drug Efficacy Study Indication, or DESI, pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The unapproved or DESI pharmaceuticals contract business was discontinued in 2007 and the manufacturing of nutraceuticals for third parties was discontinued in March 2013.

 

On August 28, 2014, the Company completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug Application (“Tussionex ANDA”), which included the rights to produce, develop, market and sell, as well as all the profits from such selling activities, the Company’s generic Tussionex, which the Company 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. (“CPI”), a supplier of the resins for the product (see Note 8). Prior to the acquisition, the Company, Cornerstone and CPI shared profits generated by the sale and manufacture of the product under a development and manufacturing agreement with those companies.

 

On July 28, 2015, the Company closed its initial public offering (“IPO”) whereby the Company sold 5,520,000 shares of common stock, at a public offering price of $15.00 per share, which includes 720,000 shares of common stock resulting from the underwriters’ exercise of their over-allotment option at the IPO price on July 23, 2015.  Proceeds from the Company’s IPO, net of underwriting discounts and commissions and other offering costs, were $75.0 million.

 

In connection with the IPO, the Company’s Board of Directors approved a one-for-2.4 reverse stock split of the Company’s common stock (that resulted in a proportional adjustment to the conversion ratios of the preferred stock and the preferred stock warrants).  All references to common stock and per share amounts in these condensed financial statements and accompanying footnotes have been retroactively adjusted for all periods presented to give effect to this reverse stock split.

 

Between June 30, 2015 and July 27, 2015, the Company issued a total of 1,000,000 shares of their Series C preferred stock to

 

9



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

several existing investors upon the exercise of Series C warrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $5.0 million.  On the IPO closing date, all outstanding shares of redeemable preferred stock converted into 9,217,983 shares of common stock and all remaining outstanding Series C warrants issued in conjunction with purchases of Series C preferred stock were net exercised at the IPO price for 78,926 shares of common stock. Upon the closing of the Company’s IPO, all of the shares of the Company’s preferred stock (“Preferred Shares”) were retired and cancelled and shall not be reissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receive undeclared accumulated dividends. These transactions produced a significant increase in the number of shares outstanding which will impact the year-over-year comparability of the Company’s loss per share calculations. Additionally, in connection with the closing of the IPO, the Company amended and restated its certificate of incorporation to increase the number of authorized shares of common stock to 100,000,000 and to authorize 5,000,000 shares of undesignated preferred stock.

 

Note 3. Summary of significant accounting policies

 

There have been no material changes to the significant accounting policies previously disclosed in the Company’s Final Prospectus for the year ended December 31, 2014.

 

Principles of consolidation:  At June 30, 2015, the consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries.  At December 31, 2014, Neos Therapeutics, Inc. owned, directly or indirectly, 100% of two of its subsidiaries and 99.9% of the third subsidiary, Neostx, Inc. (“NTX”).  The remaining 0.1% ownership of NTX was held by a third party and was acquired by the Company on June 29, 2015.  The amounts attributable to the noncontrolling interest were not material to the consolidated financial statements.  All significant intercompany transactions have been eliminated.

 

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.

 

Short-term investments:  Short-term investments consist of U.S. Treasury Bills that have original maturities greater than three months but less than or equal to one year and are classified as available-for-sale securities. These investments are recorded at fair value. Realized gains and losses are reported in the consolidated statements of operations. Unrealized gains and losses are immaterial.

 

Fair value of financial instruments:  The carrying value of the Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable, accrued expenses, and debt, approximates fair value due to the short-term nature of the instruments and/or the current interest rates payable in relation to current market conditions. The fair value of the Company’s warrants and earnout liabilities is disclosed in Note 5.

 

Inventories:  Inventories, comprised of raw materials, labor, and manufacturing overhead, as well as finished goods inventory, are stated at the lower of cost (actual, which approximates first-in, first-out) or market, net of an allowance for obsolete inventory.

 

Intangible assets:  Intangible assets subject to amortization, which principally include proprietary modified-release drug delivery technology and the costs to acquire the rights to Tussionex ANDA, are recorded at cost and amortized over the estimated lives of the assets ranging from 10 to 20 years.

 

Deferred Offering Costs: The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs (non-current) until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the financing.

 

10



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue recognition:  Revenue is generated from product sales, recorded on a net sales basis, and historically, manufacturing, development and profit sharing from a development and manufacturing agreement. 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, (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 generic Tussionex to a limited number of pharmaceutical wholesalers. 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 expects that manufacturing, profit sharing and development revenue will end as the Company has terminated the Company’s development and manufacturing agreement. As a result of the Company’s acquisition of the rights to commercialize and derive future profits from the Tussionex ANDA, the Company will utilize its manufacturing capability to derive revenue directly from sales made by the Company, rather than through the Company’s commercial partner.

 

Net product sales

 

Net product sales for the Company’s generic Tussionex product represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments include wholesaler fees and estimated allowances for product returns, government rebates, chargebacks and prompt-payment discounts to be incurred on the selling price of the respective product sales. Wholesale distribution fees are incurred on the management of these products by wholesalers and are recorded within net product sales based on definitive contractual agreements. The Company estimates gross to net sales adjustments for allowances for product returns, government rebates and chargebacks based upon analysis of third-party information, including information obtained from the Company’s third party logistics provider, or 3PL, with respect to its inventory levels and sell-through to the wholesalers’ customers, data available from third parties regarding prescriptions written for the Company’s products, as well as actual experience as reported by the Company’s customers and previous commercialization partners. 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. Allowances and accruals are recorded in the same period that 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 previous 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. On August 26, 2014, the U.S. Drug Enforcement Agency reclassified the Company’s generic Tussionex from a Schedule III controlled substance to a Schedule II controlled substance which had the effect of requiring unsold product at the wholesalers and the 3PL to either be relabeled or returned. This new ruling was effective October 6, 2014. As such, the Company established reserves for the estimated returns of such product outstanding at the wholesalers as of October 6, 2014. The Company had no inventory labeled as Schedule III at the 3PL as of the effective date.

 

Medicaid rebates

 

The Company’s product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. Estimated rebates payable under governmental programs, including Medicaid, are recorded as a reduction of revenue at the time revenues are recorded. Calculations related to these rebate accruals are estimated based on sales of the Company’s product by its previous commercialization partner. Historical trend of Medicaid rebates will be continually monitored and may result in future adjustments to such estimates.

 

11



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 the distributor. 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.

 

Manufacturing

 

Manufacturing revenue is derived from product manufactured by the Company and sold by the Company’s commercial partner under a development and manufacturing agreement. Manufacturing revenue is derived from a contractual supply price paid to the Company by the Company’s commercial partners.

 

Profit sharing

 

Profit sharing revenue is recorded as the product is sold by the Company’s commercial partner. The profit share is the Company’s share of the net profits after taking into account net revenue, which is gross product sales by the Company’s commercial partner, net of discounts, returns and allowances incurred by the Company’s commercial partner, less collaboration expenses.

 

Development revenue

 

Development revenue from the development and manufacturing agreement has been recognized as the related services are completed. Development revenue in the form of milestone payments is recognized upon achievement of the related milestones and provided that collectability is reasonably assured and other revenue recognition criteria are met. Amounts received under cost reimbursement arrangements for production and research and development are recorded as offsets to the costs incurred and not recognized as revenue.

 

Research and development costs:  Research and development costs are charged to operations when incurred and include salaries and benefits, facilities costs, overhead costs, clinical trial costs, contract services, fees paid to regulatory authorities for review and approval of the Company’s product candidates and other related costs.

 

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 December 31, 2014 and June 30, 2015, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are 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 December 31, 2014 and June 30, 2015, 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. 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.

 

At December 31, 2014, the Company had a net operating loss carry-forward of $86,551,000 and research and development credits of $2,029,000, which begin to expire in 2024. The Company analyzed the impact of any ownership change(s) under Section 382 of the Internal Revenue Code and determined that there would not be a material limitation in the utilization of the net operating loss carry-forwards and credits due to any ownership changes.

 

12



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Warrants:  Certain warrants to purchase the Company’s redeemable convertible preferred stock are classified as liabilities and are recorded at fair value as estimated by the Company using third party valuation analyses. These warrants are revalued at each subsequent balance sheet date with fair value changes recognized as reductions or increases in other income (expense), net in the Company’s consolidated statement of operations.

 

Share-based compensation:  Share-based compensation awards, including grants of employee stock options and restricted stock 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 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 has historically utilized third party valuation analyses to determine the fair value.  Forfeitures are estimated at the time of grant and revised, if necessary, 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.

 

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.

 

Segment information:  Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the development, manufacturing and commercialization of pharmaceuticals.

 

Liquidity:  During 2014 and the three and six months ended June 30, 2015 and 2014, 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 launch of one or more of its ADHD product candidates. With the completion of the Company’s IPO in July 2015, management believes the Company presently has sufficient liquidity to continue to operate for at least the next 12 months.

 

Application of revised accounting standards:  In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.  The Company has irrevocably elected not to avail itself of this extended transition period and, as a result, will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

 

Recent accounting pronouncements:  In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Inventory—Simplifying the Measurement of Inventory (Topic 330). The amendments in this ASU require an entity to measure inventory that is not measured using the last-in, first-out (LIFO) or retail inventory methods at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company is evaluating this ASU and has not determined the effect of this standard on its ongoing financial reporting.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

13



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of this standard will have a material impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016.  Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of this standard will have a material impact on the Company’s financial statements.

 

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.

 

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

 

Subsequent events:  The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

 

Note 4. 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 redeemable convertible preferred stock, warrants and outstanding stock options under the stock option plan 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.

 

The following potentially dilutive securities were excluded from consideration in the computation of diluted net loss per share of common stock for the three and six months ended June 30, 2015 and 2014, respectively, because including them would have been anti-dilutive:

 

14



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Series A Redeemable Convertible Preferred Stock (as converted)

 

487,494

 

487,494

 

Series B Redeemable Convertible Preferred Stock (as converted)

 

1,297,100

 

1,297,100

 

Series B-1 Redeemable Convertible Preferred Stock (as converted)

 

2,275,733

 

2,275,733

 

Series C Redeemable Convertible Preferred Stock (as converted)

 

4,803,492

 

3,022,306

 

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

819,650

 

25,000

 

Common Stock Warrants (as converted)

 

337,133

 

337,133

 

Stock options

 

776,910

 

404,175

 

 

Note 5. Fair value of financial instruments

 

Financial instruments are categorized into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization of the financial instrument is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

 

Financial assets recorded at fair value on the Company’s consolidated balance sheets are categorized 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 2 inputs include the following:

                   Quoted prices for similar assets in active markets.

                   Quoted prices for identical or similar assets in nonactive markets.

                   Inputs other than quoted market prices that are observable.

                   Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

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:

 

15



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Fair Value as of December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,343

 

$

 

$

 

$

13,343

 

Short term investments

 

3,000

 

 

 

3,000

 

Earnout liability

 

 

 

756

 

756

 

Series C Redeemable Preferred Stock Warrants

 

 

 

1,789

 

1,789

 

 

 

$

16,343

 

$

 

$

2,545

 

$

18,888

 

 

 

 

Fair Value as of June 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,631

 

$

 

$

 

$

25,631

 

Short term investments

 

 

 

 

 

Earnout liability

 

 

 

356

 

356

 

Series C Redeemable Preferred Stock Warrants

 

 

 

3,934

 

3,934

 

 

 

$

25,631

 

$

 

$

4,290

 

$

29,921

 

 

The Company’s Level 1 assets include bank deposits, U.S. Treasury bills and money market funds with quoted prices in active markets.

 

Level 3 liabilities include the fair values of the earnout liability and the outstanding warrants to purchase Series C Redeemable Convertible Preferred Stock. Various methodologies were utilized to value the Level 3 liabilities including Black-Scholes, Probability-Weighted Expected Return (“PWERM”), Option Pricing and Monte Carlo. The methodologies and significant inputs used in the determination of the fair value of the Series C Redeemable Convertible Preferred Stock Warrants issued with the senior debt were as follows:

 

16



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Revalue Series C

 

Revalue Series C

 

Revalue Series C

 

 

 

Warrants Issued with

 

Warrants Issued with

 

Warrants Issued with

 

 

 

Senior Debt at

 

Senior Debt at

 

Senior Debt at

 

 

 

December 31, 2014

 

March 31, 2015

 

June 30, 2015

 

 

 

(Dollars in thousands, except $5 Exercise Price)

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

3/31/2015

 

6/30/2015

 

Valuation Method

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

Dividend yield (per share)

 

0

 

0

 

0

 

Exercise price

 

$5

 

$5

 

$5

 

Volatility (annual)

 

60%

 

60%

 

60%

 

Risk-free rate (annual)

 

.25% - 2.47%

 

.19% - 2.31%

 

.14% - 2.83%

 

Contractual term (years)

 

1 - 5

 

.75 - 5

 

.5 - 5

 

Number of warrants

 

170,000

 

170,000

 

170,000

 

 

 

 

 

 

 

 

 

Fair value of liability at valuation date

 

$

454

 

$

486

 

$

573

 

 

The methodologies and significant inputs used in the determination of the fair value of the Series C Redeemable Convertible Preferred Stock Warrants issued with the Series C Redeemable Preferred Stock were as follows:

 

 

 

Initial Valuation of

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Initial Valuation

 

Initial Valuation

 

Revalue All Warrants

 

Revalue All Warrants

 

 

 

Warrants Issued

 

of January 2015

 

of February 2015

 

Issued With Series C

 

Issued With Series C

 

 

 

With Series C

 

Warrants Issued With

 

Warrants Issued With

 

Redeemable Preferred

 

Redeemable Preferred

 

 

 

Redeemable

 

Series C Redeemable

 

Series C Redeemable

 

Stock at

 

Stock at

 

 

 

Preferred Stock

 

Preferred Stock

 

Preferred Stock

 

March 31, 2015

 

June 30, 2015

 

 

 

(Dollars in thousands, except $5 Exercise Price)

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

1/31/2015

 

2/28/2015

 

3/31/2015

 

6/30/2015

 

Valuation Method

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

Dividend yield (per share)

 

0

 

0

 

0

 

0

 

0

 

Exercise price

 

$5

 

$5

 

$5

 

$5

 

$5

 

Volatility (annual)

 

60%

 

60%

 

60%

 

60%

 

60%

 

Risk-free rate (annual)

 

.25% - 2.47%

 

.25% - 2.47%

 

.25% - 2.47%

 

.19% - 2.31%

 

.14% - 2.83%

 

Contractual term (years)

 

1 - 5

 

1 - 5

 

1 - 5

 

.75 - 5

 

.5 - 5

 

Number of warrants

 

749,967

 

590,906

 

606,312

 

1,947,185

 

1,797,185

 

Fair value of liability at valuation date

 

$1,335

 

$1,052

 

$1,079

 

$3,233

 

$3,361

 

 

The methodologies and significant inputs used in the determination of the fair value of the earnout liability were as follows:

 

17



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

December 31, 2014

 

March 31, 2015

 

June 30, 2015

 

 

 

Earnout Liability

 

Earnout Liability

 

Earnout Liability

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

3/31/2015

 

6/30/2015

 

Valuation Method

 

Monte Carlo

 

Monte Carlo

 

Monte Carlo

 

Volatility (annual)

 

50%

 

50%

 

50%

 

Risk-free rate (annual)

 

.15% - 3.21%

 

.14% - 3.00%

 

.09% - 3.51%

 

Time period from valuation until end of earnout

 

.5 - 9.5

 

.375 - 9.375

 

.25 - 9.0

 

Earnout Target 1

 

$

13,700

 

$

13,700

 

$

13,700

 

Earnout Target 2

 

$

18,200

 

$

18,200

 

$

18,200

 

Discount rate

 

7.96% - 11.03%

 

8.18% - 11.04%

 

7.96% - 11.39%

 

Fair value of liability at valuation date

 

$

756

 

$

314

 

$

356

 

 

Significant changes to these assumptions would result in increases/decreases to the fair value of the outstanding warrants to purchase Series C Redeemable Convertible Preferred Stock and the earnout liability.

 

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

 

 

 

 

 

Series C Warrants

 

Series C Warrants Issued

 

 

 

Earnout

 

Issued With

 

With Series C Redeemable

 

 

 

Liability

 

Senior Debt

 

Preferred Stock Financing

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

756

 

$

454

 

$

1,335

 

Additions during the period

 

 

 

2,131

 

Changes in fair value

 

(400

)

119

 

176

 

Warrants exercised

 

 

 

(281

)

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

$

356

 

$

573

 

$

3,361

 

 

The reductions in fair value of the earnout liability shown above resulted from new information regarding the projected impact of the U.S. DEA’s reclassification of Tussionex from a Schedule III controlled substance to a Schedule II controlled substance and a review of the launch dates of the Company’s three ADHD product candidates.  The increases in the fair value of the Series C warrants were due to the increased PWERM weighting of the IPO scenario.

 

Note 6. Inventories

 

Inventories at the indicated dates consist of the following:

 

18



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Raw materials

 

$

714

 

$

646

 

Work in progress

 

 

82

 

Finished goods

 

1,270

 

1,499

 

 

 

 

 

 

 

Inventory at cost

 

1,984

 

2,227

 

Inventory reserve

 

(281

)

(196

)

 

 

 

 

 

 

 

 

$

1,703

 

$

2,031

 

 

Note 7. Sale-leaseback transaction

 

In the aggregate, the Company sold groups of assets for $5.5 million and $795,000 in five separate tranches that occurred in February, July and November 2013, and March 2014, which resulted in a net gains of approximately $2.7 million and $116,000, in the years ended December 31, 2013 and 2014, 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. For the three months ended June 30, 2015 and 2014, approximately $208,000 per period, and for the six months ended June 30, 2015 and 2014 approximately $416,000 and $408,000, respectively, of the net gain was recognized in other income on the consolidated statements of operations.

 

Note 8. Intangible assets, net

 

Intangible assets, net at the indicated dates consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Proprietary modified-release drug delivery technology

 

$

15,600

 

$

15,600

 

Tussionex ANDA

 

4,829

 

4,829

 

CPI profit sharing

 

2,043

 

2,043

 

Other

 

284

 

284

 

 

 

 

 

 

 

 

 

22,756

 

22,756

 

Accumulated amortization

 

(5,336

)

(4,589

)

 

 

 

 

 

 

 

 

$

17,420

 

$

18,167

 

 

The $15.6 million of proprietary modified-release drug delivery technology is being amortized over 20 years. Amortization expense of $195,000 was recorded in both the three months ended June 30, 2015 and 2014 and amortization expense of $390,000 was recorded for both the six months ended June 30, 2015 and 2014.

 

On August 28, 2014, the Company completed an acquisition of the rights to Tussionex ANDA from Cornerstone and CPI which was accounted for as an asset acquisition. Prior to the acquisition, the Company, Cornerstone and CPI shared profits

 

19



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

generated by the sale and manufacture of the product under a development and manufacturing agreement, and Cornerstone had commercialization rights to the product. The Company paid $4.2 million to Cornerstone to buy out their rights to commercialize and derive future profits from the product and entered into an agreement whereby Cornerstone transferred certain assets associated with the product to the Company. Legal fees of $90,000 associated with this buyout agreement have been capitalized as part of the purchase price. Additional estimated earnout costs due to Cornerstone of $589,000, recorded at fair value by the Company based upon a valuation provided by a third party valuation firm, were capitalized as part of the purchase price of this intangible asset. This earnout amount was revalued at June 30, 2015, resulting in a $42,000 increase in the estimated fair value of the earnout which is recorded in other income (expense), net in the Company’s consolidated statement of operations for the three months ended June 30, 2015. The net decrease of $400,000 for the six months ended June 30, 2015 resulted from new information regarding the projected impact of the U.S. DEA’s reclassification of Tussionex from a Schedule III controlled substance to a Schedule II controlled substance.  In addition, the Company paid $2.0 million to CPI to buy out their rights to future profits from the collaboration and entered into an agreement whereby CPI will continue to supply a component of the product.  Legal fees of $43,000 associated with this buyout agreement have been capitalized as part of the purchase price of this intangible asset. These two intangible assets have an expected life of ten years and are being amortized on a straight-line basis beginning September 2014. Total amortization expense related to these intangible assets was $171,000 and $343,000, respectively, for the three and six months ended June 30, 2015 and there was no amortization for the three and six months ended June 30, 2014.

 

Note 9. Other assets

 

Other assets at the indicated dates consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Patents

 

$

2,161

 

$

2,051

 

Deposits

 

178

 

176

 

Deferred Offering Costs

 

1,132

 

 

 

 

 

 

 

 

 

 

$

3,471

 

$

2,227

 

 

Patents utilized in the manufacturing of the Company’s generic Tussionex product which total $231,000 are being amortized over their expected useful life of 10 years. For the three and six months ended June 30, 2015, $6,000 and $12,000, respectively, of patent amortization expense was recorded.  There was no patent amortization expense for the three and six months ended June 30, 2014.

 

Note 10. Long-term debt

 

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

 

20



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Senior debt, net of discount of $1,462 and $1,743

 

$

24,600

 

$

14,320

 

10% subordinated note payable to a related party

 

6,644

 

6,446

 

Capital leases, maturing through August 2017

 

3,211

 

4,008

 

 

 

 

 

 

 

 

 

34,455

 

24,774

 

Less current portion

 

(3,257

)

(1,653

)

 

 

 

 

 

 

Long-term debt

 

$

31,198

 

$

23,121

 

 

Senior debt:  In March 2014, the Company entered into a Loan and Security Agreement (“LSA”) with Hercules which was subsequently amended in August 2014, September 2014, December 2014 and June 2015. As amended, the LSA provides a total commitment of $25.0 million, available in four draws. Borrowings under the LSA are 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, or 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, or Tranche 2, was issued during September 2014.  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, or Tranche 4, was issued prior to meeting the Tranche 4 milestones.    The Company met the Tranche 4 Milestones stated in the LSA prior to July 31, 2015.

 

Each draw is 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 commence. A balloon payment of the entire principal balance outstanding on October 1, 2017 and all accrued but unpaid interest thereunder is due and payable on October 1, 2017. The interest rate is 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 is payable at the earliest to occur of (1) October 1, 2017, (2) the date the Company prepays its outstanding Secured Obligations, as defined therein, or (3) the date the Secured Obligations become due and payable.

 

The LSA, as amended, also contains certain financial and 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, repurchase or redeem stock or other equity interest other than pursuant to employee stock repurchase plans or other similar agreements, make investments and engage in transactions with affiliates. Upon an event of default, the lender may declare the unpaid principal amount of all outstanding loans and interest accrued under the loan and security agreement to be immediately due and payable, and exercise its security interests and other rights. As of December 31, 2014 and June 30, 2015, the Company was in compliance with the covenants under the LSA, as amended.

 

In connection with the LSA, the Company issued to Hercules 60,000 warrants in March 2014 and 110,000 warrants in September 2014 (“Series C Warrants”) to purchase shares of the Company’s Series C Redeemable Convertible Preferred Stock at the then current price of $5.00 per share. These warrants will become warrants for the purchase of 70,833 shares of common stock at a price of $12.00 per shares upon the closing of the Company’s IPO.

 

The fair value of the 60,000 Series C Warrants issued March 28, 2014 as part of the initial draw-down described above was $124,000 and the residual proceeds of $9,876,000 were allocated to the $10.0 million interest bearing note. The fair value of the 110,000 Series C Warrants issued September 25, 2014 as part of the second draw-down described above was $248,000 and the residual proceeds of $4,752,000 were allocated to the $5.0 million interest bearing note. The warrants were recorded as a liability with a related debt discount to be amortized as interest over the term of the LSA.

 

End of term charge amortization totaled $76,000 and $151,000 for the three and six months ended June 30, 2015, respectively.  Debt discount amortization to interest expense for the senior debt totaled $65,000 and $129,000 for the three

 

21



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

and six months ended June 30, 2015, respectively.  At the end of the three and six months ended June 30, 2015, the warrant fair values were remeasured and the changes in fair value of approximately $87,000 and $119,000, respectively, have been recorded in other income (expense), net in the Company’s consolidated statements of operations.  No change in fair value of these warrants was recorded in the three and six months ended June 30, 2014.

 

Credit Agreement:  Previously, the Company had a credit agreement entered into on August 20, 2012 (the “Credit Agreement”) with a financial institution. The Credit Agreement provided for a four-year $10.0 million term loan, with an annual interest rate of 9.5% payable monthly.  In addition, a $250,000 fee payable at maturity was being amortized using the effective interest method.  The proceeds from the initial $10.0 million draw on the LSA were used to repay the outstanding $10.0 million Credit Agreement balance and $697,000 of interest expense related to the Credit Agreement in March 2014. The early prepayment of the Credit Agreement resulted in a $445,000 loss (due to recording the $98,000 prepayment penalty and writing off the $154,000 unamortized exit fee and the $193,000 of unamortized loan cost) reflected in interest expense for the six months ended June 30, 2014.

 

10% subordinated related party note:  The Company has an amended and restated subordinated note (the “Note”) in the aggregate principal amount of $5.9 million that was issued by the Company to Essex Capital Corporation, or Essex.  Interest accrues and adds to the principal balance until such time as the Company achieves positive EBITDA for three consecutive months.  On July 19, 2014, the interest rate on the Note was reduced to 6% for the period from July 19, 2014 through July 31, 2015 pursuant to an amendment to the Note entered into as consideration for the $128,000 payment made by the Company to Essex as part of the Settlement and Release of Claims Agreement with Essex and a third party (see Note 16). The Company recorded this amendment as a loan modification.  At each of December 31, 2014 and June 30, 2015, the aggregate principal amount of the Note was $5.9 million, and $511,000 and $709,000 in interest had been accrued through the year ended December 31, 2014 and through the six months ended June 30, 2015, respectively.

 

Capital lease obligations to related party:  As described in Notes 7 and 16, during the years ended December 31, 2013 and 2014, 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 $5.5 million and $795,000, respectively, which are classified as capital leases. The approximate imputed interest rate on these leases is 14.5% and interest expense on these leases was $123,000 and $172,000 for the three months ended June 30, 2015 and June 30, 2014, respectively, and $261,000 and $338,000 for the six months ended June 30, 2015 and 2014, respectively.

 

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

 

22



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

June 30,

 

Period ending:

 

2015

 

 

 

(in thousands)

 

 

 

 

 

2015

 

$

3,257

 

2016

 

17,357

 

2017

 

15,303

 

 

 

 

 

Future principal payments

 

$

35,917

 

 

 

 

 

Less unamortized debt discount

 

(1,462

)

Less current portion of long-term debt

 

(3,257

)

 

 

 

 

Total long-term debt

 

$

31,198

 

 

Note 11. Common stock and redeemable convertible preferred stock

 

The following table summarizes the authorized, issued and outstanding shares of the Company by class of stock as of June 30, 2015 and December 31, 2014. All shares have a par value of $0.001:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

Issued and

 

 

 

Issued and

 

 

 

Authorized

 

Outstanding

 

Authorized

 

Outstanding

 

 

 

Shares

 

Shares

 

Shares

 

Shares

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

35,000,000

 

887,414

 

35,000,000

 

938,859

 

Series A Preferred Stock

 

1,170,000

 

1,170,000

 

1,170,000

 

1,170,000

 

Series B Preferred Stock

 

4,000,000

 

3,113,099

 

4,000,000

 

3,113,099

 

Series B-1 Preferred Stock

 

8,830,000

 

5,461,802

 

8,830,000

 

5,461,802

 

Series C Preferred Stock

 

13,500,000

 

11,528,483

 

13,500,000

 

8,753,547

 

Total Shares Issued

 

 

 

22,160,798

 

 

 

19,437,307

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

0

 

 

 

(55,905

)

Total Outstanding Shares

 

 

 

22,160,798

 

 

 

19,381,402

 

Total Authorized Shares

 

62,500,000

 

 

 

62,500,000

 

 

 

 

Reverse Stock Split

 

On July 10, 2015, the Company filed an amendment to its amended and restated certificate of incorporation, effecting a one-for-2.4 reverse stock split of the Company’s issued and outstanding shares of common stock as approved by the board of directors on July 9, 2015.  All issued and outstanding common stock and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

 

23



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Authorized Shares

 

In connection with the completion of the Company’s IPO on July 28, 2015, the Company amended and restated its certificate of incorporation to authorize 5,000,000 shares of preferred stock, par value $0.001 per share, and 100,000,000 shares of common stock, par value $0.001 per share.

 

Public Offerings and Related Transactions

 

On July 28, 2015, the Company closed its IPO whereby the Company sold 5,520,000 shares of common stock, at a public offering price of $15.00 per share, which includes 720,000 shares of common stock resulting from the underwriters’ exercise of their over-allotment option at the IPO price on July 23, 2015.  Proceeds from the Company’s IPO, net of underwriting discounts and commissions and other offering costs, were $75.0 million. Upon the closing of the Company’s IPO, all of the Company’s Preferred Shares converted into shares of the Company’s Common Stock, all such Preferred Shares were retired and cancelled and shall not be reissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receive undeclared accumulated dividends.

 

Each of the following occurred in connection with the closing of the Company’s IPO on July 28, 2015:

 

·                                the conversion of all outstanding shares of convertible preferred stock into 9,217,983 shares of the Company’s common stock;

 

·                                the conversion of warrants issued with the LSA to purchase 170,000 shares of Series C convertible preferred stock into warrants to purchase 70,833 shares of the Company’s common stock and the resultant reclassification of the warrant liability to Stockholders’ Deficit; and

 

·                                the cashless exercise of warrants issued in conjunction with the Series C preferred stock financing to purchase 947,185 shares of Series C convertible preferred stock into 78,926 shares of the Company’s common stock.

 

The Company had classified its classes of redeemable convertible preferred stock as mezzanine equity based upon the terms and conditions which contain various redemption and conversion features.

 

In conjunction with the Company’s Series B-1 financing in 2012, the Series B-1 investors also received warrants to purchase 389,474 shares of common stock at an exercise price of $0.0024 per share. There were no exercises of Series B-1 warrants in the six months ended June 30, 2015 or in the year ended December 31, 2014. As of June 30, 2015, warrants to purchase 337,133 shares of common stock remained outstanding, and expire in 2016.  Between July 7 and August 27, 2015, the Company issued a total of 99,062 shares of its common stock to several investors upon the exercise of warrants held by those investors at an exercise price of $0.0024 per share. (See Note 17).

 

In February and March 2014, the Company closed on additional Series C financings totaling 1,986,586 shares, raising $9.9 million. Between December 2014 and February 2015, the Company closed on an additional Series C financing raising a total of $20.6 million, including $7.5 million in December 2014 and $13.1 million during the six months ended June 30, 2015.  The Company issued 1,499,935 shares in December 2014 and 2,624,936 shares during the three months ended March 31, 2015 of Series C preferred stock.  In addition, the Company issued a warrant to purchase one additional share of Series C at a purchase price of $ 5.00 per share for every two purchased shares of Series C, provided the investor purchased its pro-rata share of the Series C. In the event that the Company’s Series C is converted into common stock or another class of the Company’s stock (called “Conversion Stock”) during the warrant exercise period, then the warrants will become exercisable for the Conversion Stock and the exercise price of those warrants shall be ratably adjusted. The Company issued warrants to purchase 749,967 shares of Series C preferred stock in December 2014 and 1,197,218 shares of Series C preferred stock during the six months ended June 30, 2015 (see warrant liability section below).  On June 30, 2015, the Company issued a total of 150,000 shares of its Series C preferred stock to an investor upon the exercise of warrants held by that investor at an exercise price of $5.00 per share, for an aggregate exercise price of $750,000.  Between July 6 and July 27, 2015, the Company issued 850,000 shares of its Series C preferred stock to several investors upon the exercise of warrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $4.25 million (See Note 17).

 

Dividends:  From and after the date of the issuance of Series B-1, dividends at the rate per annum of 8% of the Series B-1 original issuance price of $5.00 accrued on such shares of Series B-1. Dividends accrued from day to day, whether or not

 

24



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

declared, and were cumulative. The accruing dividends shall be payable in additional shares of Series B-1, valued at the Series B-1 original issuance price, unless the board of directors of the Company elects to pay all or any portion of the accruing dividends in cash.  In accordance with the conversion provision of the Company’s Third Amended and Restated Certificate of Incorporation, as amended, which was triggered upon completion of the Company’s IPO, all rights with respect to the Preferred Stock of the Company were terminated, including the right to receive undeclared dividends.  The Series B-1 cumulative dividends were never declared by the Company’s board of directors.   (See Note 17).

 

Redemption:  The holders of a majority of the outstanding shares of Series C, Series B-1 and Series B, voting together as a single class, can require the Company to redeem the Series C, Series B-1 and Series B at their original purchase price of $5.00 per share in three annual installments by giving a sixty-day notice at any time on or after March 31, 2017. On March 25, 2014, the Company amended the initial redemption date, extending it to November 1, 2017. On each redemption date, the Company shall redeem, on a pro rata basis in accordance with the number of shares of Series C, Series B-1 and Series B owned by each holder, that number of outstanding shares of Series C, Series B-1 and Series B. If the Company does not have sufficient funds legally available to redeem on any redemption date, the Company shall redeem a pro rata portion of each holder’s Series C, Series B-1 and Series B out of funds legally available.

 

The Series C, Series B-1 and Series B is redeemable on November 1, 2017,  and their carrying value will be accreted to the minimum redemption value of $5.00 per share or $57,642,000, $27,309,000 and $15,565,000, respectively, over the period from issuance through November 1, 2017 using the effective interest method for issuances through June 30, 2015. The amount of accretion recorded for the three and six months ended June 30, 2015 and for the three and six months ended June 30, 2014 for Series C amounted to $335,000, $570,000, $21,000 and $45,000, respectively. The amount of accretion recorded for the three and six months ended June 30, 2015 and for the three and six months ended June 30, 2014 for Series B-1 was $165,000, $329,000, $161,000 and $354,000, respectively. The amount of accretion recorded for the three and six months ended June 30, 2015 and for the three and six months ended June 30, 2014 for Series B amounted to $86,000, $171,000, $83,000 and $184,000, respectively.

 

In the event of a deemed liquidation event, the holders of a majority of the outstanding shares of Series C, Series B-1 and Series B can require the Company to redeem such preferred stock. Based on the June 30, 2015 and December 31, 2014 capitalization, the maximum redemption payment would be $127,826,000 and $126,831,000, respectively. Since it is presently not probable that a deemed liquidation event will occur, no additional accretion has been recorded on the Series C, Series B-1, Series B or Series A. The Company’s Third Amended and Restated Certificate of Incorporation, as amended, does not limit the amount that the Company could be required to pay upon redemption or the number of shares the entity could be required to issue at conversion.

 

In accordance with the conversion provision of the Company’s Third Amended and Restated Certificate of Incorporation, as amended, which was triggered upon completion of the Company’s IPO, all rights with respect to the Preferred Stock of the Company were terminated, including redemption rights. (See Note 17).

 

Warrant liability:  In connection with the December 2014 $7.5 million additional Series C financing (see above), the Company issued warrants to purchase an aggregate 749,967 shares of the Series C. The proceeds from the December 2014 additional Series C financing with stock purchase warrants were allocated to the two elements based on the fair value of the Series C warrants at time of issuance. The remainder of the proceeds was allocated to the redeemable convertible preferred instrument portion of the transaction, resulting in a discount. The portion of the proceeds so allocated to the warrants is accounted for as a warrant liability and periodically adjusted to fair value through the statement of operations. The related preferred stock discount is amortized as preferred stock accretion to redemption value over the remaining term until the redemption date using the effective interest method. The fair value of the 749,967 Series C Warrants was $1,335,000, with the residual $6,108,000, net of legal fees of $57,000, allocated to the 1,499,935 shares of Series C.

 

The proceeds from the 2015 additional Series C financing with stock purchase warrants were allocated to the two elements based on the fair value of the Series C warrants at time of issuance. The remainder of the proceeds was allocated to the redeemable convertible preferred instrument portion of the transaction, resulting in a discount. The portion of the proceeds so allocated to the warrants is accounted for as a warrant liability and periodically adjusted to fair value through the statement of operations. The related preferred stock discount is amortized as preferred stock accretion to redemption value over the remaining term until the redemption date using the effective interest method. The fair value of the 1,197,218 Series C Warrants was $2,131,000, with the residual $10,916,000, net of legal fees of $78,000, allocated to the 2,624,936 shares of Series C.

 

25



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At March 31, 2015, the warrant fair values were remeasured and a reduction in fair value of approximately $234,000 has been recorded in other income (expense), net in the Company’s consolidated statements of operations. At June 30, 2015, the warrant fair values were remeasured and an increase in fair value of approximately $129,000 has been recorded in other income (expense), net in the Company’s consolidated statements of operations for the second quarter, for a net reduction in the warrant fair value of $105,000 for the six months ended June 30, 2015.

 

On June 30, 2015, warrants for 150,000 shares of Series C preferred stock were exercised as described above, resulting in a $281,000 decrease in the warrant liability.

 

Note 12. Stock options, restricted stock and performance stock options

 

In November 2009, the Company adopted the Neos Therapeutics, Inc. 2009 Equity Plan (“2009 Plan”) that superseded the 1999 Incentive Stock Option Plan (“1999 Plan”) and reserved 688,059 shares for issuance under the 2009 Plan. Over time, the shares reserved for issuance under the 2009 Plan were increased to 1,375,037.  Effective upon closing of the IPO, the 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 Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan (“2015 Plan”). The board of directors adopted the 2015 Plan to be effective immediately prior to the IPO and initially reserved 767,330 shares of common stock for issuance under the 2015 Plan (See Note 17).

 

The 2009 Plan allowed the Company to grant options to purchase shares of the Company’s common stock. Options may be 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 vest over a three-year period based on achieving certain operational milestones. Unexercised options 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.  As of June 30, 2015 and December 31, 2014, 7,717 and 277,298 shares of common stock, respectively, remain available for grant under the 2009 Plan.

 

The Company estimates the fair value of all stock option awards 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. 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 periods indicated are as follows:

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2015

 

2015

 

 

 

 

 

 

 

Estimated dividend yield

 

0

%

0

%

Expected stock price volatility

 

60

%

60

%

Weighted-average risk-free interest rate

 

1.70

%

1.67

%

Expected life of option in years

 

5

 

5

 

Weighted-average option fair value at grant

 

$

5.568

 

$

5.235

 

 

Total compensation cost that has been charged to selling, general and administrative expense related to stock options was $115,000 and $189,000 for the three and six months ended June 30, 2015, respectively, and $21,000 and $32,000 for the three and six months ended June 30, 2014, respectively.  At June 30, 2015, there was $1,708,000 of unrecognized compensation cost, adjusted for estimated forfeitures, related to unamortized stock options compensation which is expected to be recognized over the weighted-average remaining contractual life of options outstanding of approximately 8.8 years.  For the six months ended June 30, 2015, the Company issued 4,443 shares of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $4,000 and realized no tax benefit from the exercised stock options.

 

26



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of outstanding and exercisable options under the 2009 Plan as of June 30, 2015 and December 31, 2014 and the activity from December 31, 2014 through June 30, 2015, is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Number of

 

Average

 

Intrinsic

 

 

 

Options

 

Exercise Price

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2014

 

511,775

 

$

3.684

 

$

2,883

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2014

 

150,109

 

$

1.467

 

$

1,179

 

 

 

 

 

 

 

 

 

Granted

 

271,661

 

10.096

 

 

 

Exercised

 

(4,443

)

0.877

 

 

 

Expired, forfeited or cancelled

 

(2,083

)

3.689

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2015

 

776,910

 

$

5.942

 

$

5,359

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2015

 

177,200

 

$

1.716

 

$

1,971

 

 

The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2014 was 8.7 and 7.3 years, respectively. The option exercise price for all options granted in 2014 ranged from $2.91 to $7.49 per share. The weighted-average remaining contractual life of options outstanding and exercisable on June 30, 2015 was 8.8 and 7.1 years, respectively. The option exercise price for all options granted in the six months ended June 30, 2015 ranged from $9.32 to $10.73 per share.

 

Restricted stock:  Under the 2009 Plan, the Company granted restricted stock awards to members of its management and selected members of the 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.

 

For the year ended December 31, 2013, the Company issued 149,244 shares of restricted stock at a grant date fair value of $2.55 per share. Of these shares, 7,195 vested immediately and the remaining 142,049 of these shares vest over 48 months in four equal tranches on the anniversary of the issue date.  Restricted stock compensation cost of $22,000 and $45,000 for the three and six months ended June 30, 2015, respectively, and $22,000 and $45,000 for the three and six months ended June 30, 2014, respectively, has been charged to selling, general and administrative expenses.  At June 30, 2015 and 2014, there was $212,000 and $301,000, respectively, of unrecognized compensation cost related to restricted stock. No vested restricted stock awards were settled during the six months ended June 30, 2015.

 

The Company had 106,537 shares of nonvested restricted stock with a weighted average fair value of $2.55 as of June 30, 2015 and December 31, 2014.  For the six months ended June 30, 2015, there were no shares granted, vested or forfeited.

 

Note 13. 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 February 19, 2015, the Company’s board of directors approved the cancellation of the Company’s 55,905 shares of treasury stock which had been repurchased at the original purchase price of $0.002 in 2013.

 

27



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14. Commitments and contingencies

 

Operating lease:  The Company leases its office space and manufacturing facility under an operating lease which expires in 2024. 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 $1,172,000 and $1,189,000 at June 30, 2015 and December 31, 2014, respectively. The Company is also liable for a share of operating expenses for the premises as defined in the lease agreement. The Company’s share of these operating expenses was $60,000 and $119,000 for the three and six months ended June 30, 2015, respectively, and $59,000 and $126,000 for the three and six months ended June 30, 2014, respectively. Rent expense, excluding the share of operating expenses, for the three and six months ended June 30, 2015 was $218,000 and $436,000, respectively, and $229,000 and $455,000 for the three and six months ended June 30, 2014, respectively.

 

Note 15. License agreements

 

On July 23, 2014, the Company entered into a Settlement Agreement and an associated License Agreement with Shire LLC for a non-exclusive license to certain patents for certain activities with respect to the Company’s New Drug Application No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet (“Neos NDA”). Under the terms of the agreement, the Company is required to pay a lump sum, non-refundable license fee of an amount less than $1.0 million no later than 30 days after receiving regulatory approval by the FDA of the Neos NDA. The Company will also pay a single digit royalty on net sales of the subject product during the life of the patents. Upon receiving such approval by the FDA, the license fee will be capitalized and amortized over the life of the patents. The royalties will be recorded as cost of goods sold in the same period as the net sales upon which they are calculated.

 

Note 16. Related party transactions

 

At December 31, 2014 and June 30, 2015, the Company was obligated under a $5,935,000 long-term subordinated note (“Note”) that was issued by the Company to Essex. See Note 10 for further details. On July 21, 2014, the Company, Essex and a third party entered into a Settlement Agreement and Release of Claims Agreement resolving certain issues and disputes whereby Essex paid $256,000 to the third party, the Company paid Essex $128,000 and Essex agreed to reduce the interest rate on the Note from 10% to 6% for the July 19, 2014 through July 31, 2015 period. The third party released both Essex and the Company from any and all claims.

 

As described in Note 7, in 2012, the Company negotiated financing arrangements with a related party that provided for the sale-leaseback of up to $6.5 million of the Company’s property and equipment. In 2013, the Company executed four transactions totaling $5.5 million and in March 2014, the Company completed the final tranche of the sale-leaseback arrangement, raising an additional $795,000.

 

Note 17. Subsequent events

 

Between July 6 and July 27, 2015, the Company issued 850,000 shares of its Series C preferred stock to several investors upon the exercise of warrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $4.25 million.

 

Between July 7 and August 27, 2015, the Company issued a total of 99,062 shares of its common stock to several investors upon the exercise of warrants held by those investors at an exercise price of $0.0024 per share.

 

On July 10, 2015, the Company filed an amendment to its amended and restated certificate of incorporation, effecting a one-for-2.4 reverse stock split of the Company’s issued and outstanding shares of common stock as approved by the board of directors on July 9, 2015. All issued and outstanding common stock and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

 

Upon the closing of the Company’s IPO, all of the Company’s Preferred Shares converted into shares of the Company’s Common Stock, all such Preferred Shares were retired and cancelled and shall not be reissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receive undeclared accumulated dividends.

 

28



Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Effective upon closing of the IPO, the board of directors determined not to grant any further awards under the 2009 Plan. The board of directors adopted the 2015 Plan to be effective immediately prior to the closing of the IPO and initially reserved 767,330 shares of common stock for issuance under the plan (See Note 12). The Board of Directors approved option grants covering a total of 37,500 shares of common stock to certain non-employee directors on July 9, 2015 under the 2015 Plan.  These option grants are to be effective immediately after the effectiveness of the Company’s registration statement.  The exercise price of these option grants was equal to the IPO price of $15.00.

 

Immediately following closing of the Company’s IPO on July 28, 2015, the Company filed the Fourth Amended and Restated Certificate of Incorporation authorizing 100,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

 

29



Table of Contents

 

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, 2014 and 2013 and notes thereto included in our final prospectus dated as of July 22, 2015. 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.

 

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 our three branded product candidates for the treatment of attention deficit hyperactivity disorder, or ADHD. Our product candidates are extended-release, or XR, medications in patient-friendly, orally disintegrating tablets, or 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. If approved, we believe our most advanced product candidates, NT-0102 and NT-0202, will be the first methylphenidate XR-ODT and the first amphetamine XR-ODT, respectively, for the treatment of ADHD on the market.  We have a Prescription Drug User Fee Act, or PDUFA, goal date of November 9, 2015 for NT-0102, our methylphenidate XR-ODT, which has a provisionally accepted trade name of Cotempla XR-ODT™.  On July 30, 2015, we announced that we had resubmitted a New Drug Application (NDA) to the FDA for NT-0202, our amphetamine XR-ODT and we have a PDUFA goal date of January 27, 2016. The NT-0202 NDA resubmission provides information to specifically address the FDA-issued Complete Response Letter received in September 2013. This includes the results from an additional pharmacokinetic study which was conducted with NT-0202 that utilized a commercial-scale manufacturing process, and the requisite stability data. This submission is a Class 2 resubmission, with a target six-month PDUFA review period. We expect to submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the third quarter of 2015.

 

If we are successful in obtaining regulatory approval for any of our three branded product candidates, we plan to focus on commercialization in the United States using our own commercial infrastructure. We intend to manufacture our ADHD products in our current Good Manufacturing Practice, or cGMP, and U.S. Drug Enforcement Administration, or DEA-registered manufacturing facilities, thereby obtaining our products at cost without manufacturer’s margins and better controlling supply quality and timing. We currently use these facilities to manufacture our generic equivalent to the branded product, Tussionex, an XR liquid suspension of hydrocodone and chlorpheniramine indicated for the relief of cough and upper respiratory symptoms of a cold.

 

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.  Historically, we were primarily engaged in the development and contract manufacturing of unapproved or Drug Efficacy Study Implementation, or 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 product candidates which consist of research and development activities, clinical trials for our product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. We have 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, or 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., or Cornerstone. These rights were acquired from the collaboration

 

30



Table of Contents

 

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 $20.8 million for the year ended December 31, 2014, $5.8 million and $5.6 million for the three months ended June 30, 2015 and 2014, respectively, and $12.3 million and $10.8 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, we had an accumulated deficit of approximately $98.1 million. 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:

 

·                  seek regulatory approval for our product candidates;

 

·                  build commercial infrastructure to support sales and marketing for our product candidates;

 

·                  continue research and development activities for new product candidates;

 

·                  manufacture supplies for our preclinical studies and clinical trials; and

 

·                  operate as a public company.

 

On July 28, 2015, we closed our initial public offering (“IPO”) whereby we sold 5,520,000 shares of common stock, at a public offering price of $15.00 per share, which includes 720,000 shares of our common stock resulting from the underwriters’ exercise of their over-allotment option at the IPO price on July 23, 2015.  The net proceeds from our IPO, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately $75.0 million. The securities described above were offered by us pursuant to a registration statement on Form S-1 declared effective by the SEC on July 22, 2015.

 

We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no assurance that such funds will be available on terms favorable to us, if at all, or that we will be able to successfully commercialize our product candidates. In addition, we may not be profitable even if we succeed in commercializing any of our product candidates.

 

FINANCIAL OPERATIONS OVERVIEW

 

Revenue

 

Our revenue is currently generated from product sales of our generic Tussionex, recorded on a net sales basis. We sell our product to drug wholesalers in the United States. We have also established indirect contracts with drug, food and mass retailers that order and receive our product through wholesalers. As a result of our acquisition of all of the rights to the Tussionex ANDA, we expect our future revenue to increase from historical levels as a result of our efforts directed toward the commercialization of our generic Tussionex.

 

We historically had generated revenue from manufacturing, development and profit sharing from a development and manufacturing agreement; however, we expect that these revenue streams will end since we terminated our development and manufacturing agreement in August 2014. As a result of our acquisition of the rights to commercialize and derive future profits from the Tussionex ANDA, we intend to utilize our manufacturing capability to derive revenue directly from sales made by us, rather than through a commercial partner. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season.

 

In the future, we will seek to generate revenue from product sales of our three late-stage branded product candidates. We do not expect to generate any significant revenue unless or until we commercialize our product candidates. If we fail to complete the development of our drug candidates 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.

 

31



Table of Contents

 

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 of employees engaged in research and development activities;

 

·                  expenses incurred under third party agreements with contract research organizations, or CROs, and investigative sites that conducted 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.

 

The largest component of our total operating expenses has historically 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 June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

NT-0102 Methylphenidate ODT

 

$

91

 

$

555

 

$

2,510

 

$

842

 

NT-0202 Amphetamine ODT

 

33

 

268

 

81

 

282

 

NT-0201 Amphetamine Liquid

 

113

 

584

 

147

 

758

 

Other Research and Development Activities (1)

 

1,865

 

1,776

 

3,684

 

3,586

 

 

 

$

2,102

 

$

3,183

 

$

6,422

 

$

5,468

 

 


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

 

We expect that our research and development expenses will fluctuate over time as we seek regulatory approval of our three ADHD product candidates and explore new product candidates, but will decrease as a percentage of revenue if any of our product candidates are approved. We expect to fund our research and development expenses from our current cash and cash equivalents, a portion of the net proceeds from our IPO and revenues, if any, from 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.

 

We have a PDUFA goal date of November 9, 2015 for NT-0102.  On July 30, 2015, we announced that we had resubmitted a NDA to the FDA for NT-0202, our amphetamine XR-ODT. The NT-0202 NDA resubmission provides information to specifically address the FDA-issued Complete Response Letter received in September 2013. This includes the results from an additional pharmacokinetic study which was conducted with NT-0202 that utilized a commercial-scale manufacturing process, and the requisite stability data. This submission is a Class 2 resubmission, and we

 

32



Table of Contents

 

have a PDUFA goal date of January 27, 2016. We expect to submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the third quarter of 2015.  Any further actions required by the FDA may result in further research and development expenses. For additional information regarding the PDUFA review process, see “Government Regulation—NDA and FDA review process” in the final prospectus dated as of July 22, 2015.

 

Selling, general and administrative

 

Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense for our employees in executive, finance, human resources and selling functions. Other SG&A expenses include facility-related costs not otherwise included in research and development expenses or cost of goods sold, and professional fees for business development, market research, accounting, tax and legal services.

 

We expect that our SG&A expenses will increase with the potential commercialization of our product candidates particularly as we move to a business model in which we commercialize our own products in the United States. We also anticipate 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.

 

Interest expense, net

 

Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is liquidity and capital preservation.

 

Interest expense to date has consisted primarily of interest expense on senior debt, including the amortization of debt discounts, a subordinated note payable to a related party and the capitalized leases 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. These sale-leaseback financings occurred in five separate transactions, each with a 42-month lease term. The gains on the transactions are being recognized on a straight-line basis over the respective 42-month lease term. Other income and expense also includes changes resulting from the remeasurement of the fair values of our earnout and warrant liabilities.

 

RESULTS OF OPERATIONS

 

Three months ended June 30, 2015 compared to the three months ended June 30, 2014

 

Revenues

 

The following table summarizes our revenues for the three months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

Product

 

$

1,484

 

$

 

$

1,484

 

not applicable

 

Profit Sharing

 

 

30

 

(30

)

not applicable

 

Development

 

 

25

 

(25

)

not applicable

 

 

 

$

1,484

 

$

55

 

$

1,429

 

2,598.2%

 

 

Total revenues were $1.5 million for the three months ended June 30, 2015, an increase of $1.4 million or 2,598.2%, from the three months ended June 30, 2014.  All $1.5 million of product revenue in the three months ended June 30, 2015 was generated from net sales of our generic Tussionex for which we acquired all commercialization and profit rights in August 2014. This was partially offset by a $0.1 million decrease in development and profit sharing revenue due to reduced

 

33



Table of Contents

 

development work related to our generic Tussionex and to the termination of our development and manufacturing agreement in August 2014.

 

Cost of goods sold

 

The following table summarizes our cost of goods sold for the three months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

$

1,659

 

$

638

 

$

1,021

 

160.0%

 

 

The total cost of goods sold was $1.7 million for the three months ended June 30, 2015, an increase of $1.0 million or 160.0%, from the three months ended June 30, 2014.  This increase was primarily due to a $0.6 million increase in raw material costs due to the increased sales of Tussionex, $0.2 million of amortization of the intangibles resulting from the acquisition of the rights to commercialize and derive future profits from Tussionex ANDA and a $0.2 million increase in other cost of goods sold, principally due to distribution costs and freight incurred for the shipment of our generic Tussionex and audits of suppliers in 2015.

 

Research and development expenses

 

The following table summarizes our research and development expenses for three months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Research & Development Expenses

 

$

2,102

 

$

3,183

 

$

(1,081

)

(34.0)%

 

 

Research and development expenses were $2.1 million for the three months ended June 30, 2015, a decrease of $1.1 million or 34.0%, from the three months ended June 30, 2014. This decrease was primarily due to a $1.1 million decrease in clinical expense, primarily as a result of the completion of our classroom study of NT-0102 and the wrapping up of clinical trials for NT-0201 and NT-0202 in 2014.

 

Selling, general and administrative expenses

 

The following table summarizes our SG&A expenses for the three months ended June 30, 2015 and 2014:

 

34



Table of Contents

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and Marketing

 

$

602

 

$

8

 

$

594

 

7,425.0%

 

General and Administrative

 

1,659

 

1,404

 

255

 

18.2%

 

Total Selling, General and Administrative Expenses

 

$

2,261

 

$

1,412

 

$

849

 

60.1%

 

 

The total SG&A expenses were $2.3 million for the three months ended June 30, 2015, an increase of $0.9 million or 60.1%, from the $1.4 million for the three months ended June 30, 2014.  Sales and marketing professional services increased by $0.3 million due to the pre-commercialization market research, advertising, publications, corporate communications and public relations expenses incurred in the first three months of 2015 for the NT-0102 and NT-0202 product candidates.  Salary and compensation expense increased $0.4 million in the three months ended June 30, 2015 primarily due to a $0.2 million increase due to the addition of personnel as part of commercialization efforts for our generic Tussionex and initial ramp up for our new product candidates, a $0.1 million increase in 2015 due to the addition of contract labor in support of our IPO and a $0.1 million increase in compensation related to share-based payments. In addition, G&A Professional Fees’ expenses increased by $0.3 million related to the engaging of consultants primarily for audit, tax, financial analysis, government pricing and business development. These increased costs were offset by a $0.2 million decrease in legal fees resulting from the termination and settlement of litigation related to the Paragraph IV certification of our NT-0202 product candidate in July 2014.

 

Interest expense

 

The following table summarizes interest expense for the three months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$

884

 

$

618

 

$

266

 

43.0%

 

 

The total interest expense was $0.9 million for the three months ended June 30, 2015, an increase of $0.3 million or 43.0%, from the $0.6 million for the three months ended June 30, 2014. This increase was principally due to higher interest in 2015 due to the increased senior debt balance.

 

Other income (expense), net

 

The following table summarizes our other income (expense) for the three months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income, net

 

$

(331

)

$

208

 

$

(539

)

(259.1)%

 

 

35



Table of Contents

 

Other income (expense), net was $(0.3) million expense for the three months ended June 30, 2015, a decrease of $0.5 million or 259.1%, from the $0.2 million for the three months ended June 30, 2014. This increase resulted from the increases in the fair values of our earnout and warrant liabilities as a result of the measurement of their fair value which gave increased PWERM weighting to the IPO scenario.

 

Six months ended June 30, 2015 compared to the six months ended June 30, 2014

 

Revenues

 

The following table summarizes our revenues for the six months ended June 30, 2015 and 2014:

 

 

 

Six Months Ended