Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended SEPTEMBER 30, 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 x  No o

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 13, 2015: 15,942,546 shares.

 

 

 



Table of Contents

 

NEOS THERAPEUTICS, INC.

INDEX

 

 

Page No.

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Stockholders’ Equity (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

48

Item 4

Controls and Procedures

48

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

49

Item 1A

Risk Factors

49

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

 

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Special note regarding forward-looking statements

 

This Quarterly Report on Form 10Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other 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 the U.S. Food and Drug Administration, or 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;

 

·                 deficiencies the FDA has identified in its Complete Response Letter and may identify with respect to NT-0102 and whether we will be able to address the issues that may relate to those deficiencies;

 

·                 the Prescription Drug User Fee Act goal dates  for NT-0102 and NT-0202, and  the New Drug Application 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 attention deficit hyperactivity disorder  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 U.S. Patent and Trademark Office 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.

 

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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 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.

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1.      CONDENSED FINANCIAL STATEMENTS.

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

102,896

 

$

13,343

 

Short term investments

 

 

3,000

 

Accounts receivable, net of allowances of $1 and $204, respectively

 

50

 

367

 

Inventories

 

2,661

 

2,031

 

Other current assets

 

819

 

264

 

Total current assets

 

106,426

 

19,005

 

 

 

 

 

 

 

Property and equipment, net

 

5,210

 

5,831

 

Intangible assets, net

 

17,046

 

18,167

 

Other assets

 

2,427

 

2,227

 

 

 

 

 

 

 

Total assets

 

$

131,109

 

$

45,230

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

2,376

 

$

1,257

 

Accrued expenses

 

5,086

 

2,715

 

Current portion of long-term debt

 

5,775

 

1,653

 

 

 

 

 

 

 

Total current liabilities

 

13,237

 

5,625

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

28,579

 

23,121

 

Earnout liability

 

353

 

756

 

Deferred gain on leaseback

 

760

 

1,383

 

Deferred rent

 

1,163

 

1,189

 

Warrant liabilities

 

 

1,789

 

 

 

 

 

 

 

Total long-term liabilities

 

30,855

 

28,238

 

 

 

 

 

 

 

Redeemable Preferred Stock, $0.001 par value

 

 

 

 

 

Series A - 1,170,000 authorized; issued and outstanding; liquidation preference of $5,850 at December 31, 2014; no shares authorized, issued or outstanding as of September 30, 2015

 

 

1,068

 

Series B - 4,000,000 authorized; 3,113,099 issued and outstanding; liquidation preference of $15,565 at December 31, 2014; no shares authorized, issued or outstanding as of September 30, 2015

 

 

14,559

 

Series B-1 - 8,830,000 authorized; 5,461,802 issued and outstanding; liquidation preference of $61,647 at December 31, 2014; no shares authorized, issued or outstanding as of September 30, 2015

 

 

32,391

 

Series C - 13,500,000 authorized; 8,753,547 issued and outstanding at December 31, 2014 ; liquidation preference of $43,768 at December 31, 2014; no shares authorized, issued or outstanding as of September 30, 2015

 

 

42,131

 

 

 

 

90,149

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2015; no shares authorized, issued or outstanding as of December 31, 2014

 

 

 

Common stock, $0.001 par value, 100,000,000 authorized; 15,839,064 issued and outstanding as of September 30, 2015 and 35,000,000, 938,859 and 882,954 authorized, issued and outstanding at December 31, 2014, respectively

 

16

 

1

 

Additional paid-in capital

 

194,682

 

4,831

 

Accumulated deficit

 

(107,681

)

(83,614

)

 

 

 

 

 

 

Total stockholders’ equity ( deficit)

 

87,017

 

(78,782

)

 

 

 

 

 

 

Total liabilities, redeemable preferred stock and stockholders’ equity (deficit)

 

$

131,109

 

$

45,230

 

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product

 

$

221

 

$

(120

)

$

2,133

 

$

(120

)

Manufacturing

 

 

 

 

113

 

Development

 

 

67

 

 

160

 

Profit sharing

 

 

28

 

 

169

 

 

 

 

 

 

 

 

 

 

 

 

 

221

 

(25

)

2,133

 

322

 

Cost of goods sold

 

1,079

 

782

 

3,833

 

2,225

 

 

 

 

 

 

 

 

 

 

 

Gross loss

 

(858

)

(807

)

(1,700

)

(1,903

)

 

 

 

 

 

 

 

 

 

 

Research and development

 

2,701

 

2,727

 

9,123

 

8,195

 

Selling and marketing expenses

 

1,343

 

106

 

2,271

 

117

 

General and administrative expenses

 

2,073

 

1,245

 

5,069

 

4,196

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(6,975

)

(4,885

)

(18,163

)

(14,411

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(1,044

)

(562

)

(2,685

)

(2,199

)

Other income, net

 

518

 

208

 

623

 

618

 

Change in fair value of earnout and warrant liabilities

 

(1,867

)

 

(1,452

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,368

)

$

(5,239

)

$

(21,677

)

$

(15,992

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(9,368

)

(5,239

)

(21,677

)

(15,992

)

Preferred stock accretion to redemption value

 

(99

)

(268

)

(1,169

)

(850

)

Preferred stock dividends

 

(138

)

(551

)

(1,221

)

(1,634

)

Net loss attributable to common stock

 

$

(9,605

)

$

(6,058

)

$

(24,067

)

$

(18,476

)

 

 

 

 

 

 

 

 

 

 

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

 

12,403,182

 

878,929

 

4,767,479

 

874,480

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.77

)

$

(6.89

)

$

(5.05

)

$

(21.13

)

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Nine months Ended September 30, 2015

(In thousands, except shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Stockholders’

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Equity

 

 

 

Shares

 

Amount

 

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

 

 

 

 

 

139,201

 

 

 

 

 

 

 

72

 

 

72

 

Share-based compensation expense

 

 

 

 

 

 

 

552

 

 

552

 

Cancellation of treasury stock

 

 

 

(55,905

)

 

55,905

 

 

 

 

 

Series B Preferred Stock accretion to redemption value

 

 

 

 

 

 

 

 

(192

)

(192

)

Series B-1 Preferred Stock accretion to redemption value

 

 

 

 

 

 

 

 

(370

)

(370

)

Series B-1 accrued dividend

 

 

 

 

 

 

 

 

(1,221

)

(1,221

)

Series C Preferred Stock accretion to redemption value

 

 

 

 

 

 

 

 

(607

)

(607

)

Conversion of Redeemable Preferred Stock

 

 

 

 

 

9,217,983

 

9

 

 

 

 

 

110,767

 

 

110,776

 

Cashless exercise of Series C warrants issued with Series C financing

 

 

 

 

 

78,926

 

 

 

 

 

 

2,842

 

 

 

2,842

 

Reclassification of Series C warrants issued with senior debt

 

 

 

 

 

 

 

 

 

 

 

 

 

611

 

 

 

611

 

Net proceeds from issuance of common stock in IPO

 

 

 

 

 

5,520,000

 

6

 

 

 

 

 

75,007

 

 

75,013

 

Net loss

 

 

 

 

 

 

 

 

(21,677

)

(21,677

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2015

 

 

$

 

15,839,064

 

$

16

 

 

$

 

$

194,682

 

$

(107,681

)

$

87,017

 

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Nine Months Ended Sept 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(21,677

)

$

(15,992

)

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

 

 

 

 

 

Depreciation and amortization of property and equipment

 

1,277

 

1,228

 

Amortization of intangible assets

 

1,121

 

664

 

Changes in fair value of warrant and earnout liabilities

 

1,452

 

 

Amortization of patents

 

17

 

 

Amortization and write-off of senior debt fees

 

426

 

487

 

Gain on sale of equipment

 

(623

)

(616

)

Provision for bad debts

 

 

(204

)

Share-based compensation expense

 

552

 

136

 

Interest accrued on note payable

 

372

 

414

 

Change in deferred rent

 

(26

)

49

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

317

 

558

 

Inventories

 

(630

)

(1,174

)

Other current assets

 

(555

)

(1

)

Other assets

 

(217

)

(136

)

Accounts payable

 

919

 

35

 

Accrued expenses

 

2,356

 

1,087

 

 

 

 

 

 

 

Net cash used in operating activities

 

(14,919

)

(13,465

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

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

 

3,000

 

4,499

 

Capital expenditures

 

(656

)

(105

)

Intangible asset acquisition

 

 

(6,283

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

2,344

 

(1,889

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from senior debt note

 

10,000

 

15,000

 

Proceeds from sale of equipment

 

 

795

 

Net proceeds from issuance of common and preferred stock

 

18,119

 

9,906

 

Net proceeds from initial public offering, net of underwriting discounts and commissions

 

77,004

 

 

Payments of initial public offering costs

 

(1,778

)

 

Payments made on borrowings

 

(1,217

)

(11,293

)

Deferred financing costs

 

 

(563

)

 

 

 

 

 

 

Net cash provided by financing activities

 

102,128

 

13,845

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

89,553

 

(1,509

)

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning

 

13,343

 

11,947

 

 

 

 

 

 

 

Ending

 

$

102,896

 

$

10,438

 

 

 

 

 

 

 

Supplemental Noncash Investing and Financing Activities:

 

 

 

 

 

Earnout liability incurred in connection with intangible asset acquistion

 

$

 

$

589

 

Initial public offering costs included in accounts payable and accrued expenses

 

$

213

 

$

 

Issuance of stock warrants

 

$

2,131

 

$

372

 

Exercise of Series C warrants for Series C Preferred Stock

 

$

2,322

 

 

Cashless exercise of Series C warrants from Series C financing in IPO closing

 

$

2,842

 

$

 

Conversion of redeemable preferred stocks into common stock

 

$

110,776

 

$

 

Reclassification of Series C warrants issued with senior debt upon IPO closing

 

$

611

 

$

 

Preferred stock accretion

 

$

1,169

 

$

850

 

Preferred stock dividend

 

$

1,221

 

$

1,634

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

1,820

 

$

1,314

 

 

See notes to condensed consolidated financial statements.

 

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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 nine months ended September 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 product 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 (“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 1-for-2.4 reverse stock split of the Company’s common stock which also 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 its Series C redeemable

 

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convertible preferred stock (“Series C preferred stock”) to several existing investors upon the exercise of warrants to purchase Series C preferred stock (“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 redeemable convertible 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

 

With the closing of the Company’s IPO, the Company is no longer accruing preferred stock dividends or accreting the redeemable preferred stock to its redemption value as these Preferred Shares were retired and cancelled as stated above. There have been no other 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 September 30, 2015, the consolidated financial statements include the accounts of the Company and its four 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 all such remaining capital stock was acquired by the Company on June 29, 2015, and NTX was merged with and into the Company.  The amounts attributable to the noncontrolling interest were not material to the consolidated financial statements. On September 16, 2015, the Company established two new wholly-owned subsidiaries, Neos Therapeutics Brands, LLC and Neos Therapeutics Commercial, LLC. 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

 

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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.

 

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 former 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 (“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 former commercialization partner and from actual experience as reported by retailers. Historical trend of returns will be continually monitored and may result in future adjustments to such estimates. On August 26, 2014, the U.S. Drug Enforcement Agency (“DEA”) 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 products are 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,

 

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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 former commercialization partner. Historical trend of Medicaid rebates will be continually monitored and may result in future adjustments to such estimates.

 

Wholesaler Chargebacks

 

The Company’s products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to the Company. Chargebacks are accounted for by establishing an accrual in an amount equal to the Company’s estimate of chargeback claims at the time of product sale based on information provided by 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 former 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 former 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 former commercial partner, net of discounts, returns and allowances incurred by the Company’s former 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 September 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 September 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.

 

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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.

 

Warrants:  The Company accounts for its warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument. Warrants classified as derivative liabilities are recorded on the Company’s balance sheet at their fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized as increases or reductions to other income (expense) in the statements of operations. The Company estimates the fair value of its derivative liabilities using third party valuation analysis that utilizes option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life, yield, and risk-free interest rate. Prior to the closing of the IPO, the Company’s Series C warrants were determined to be derivative liabilities and they were revalued at each subsequent balance sheet date. Upon closing the IPO, the warrants issued in conjunction with the Series C preferred stock financing were exchanged in a cashless exercise for 947,185 shares of Series C preferred stock which converted into 78,926 shares of the Company’s common stock.  The remaining Series C warrants issued with the senior debt to purchase 170,000 pre-split shares of Series C preferred stock (“Hercules Warrants”) were converted into warrants to purchase 70,833 shares of the Company’s common stock and the warrant liability was reclassified to Additional Paid in Capital within Stockholders’ Equity (Deficit).

 

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 previous lack of a public market for the trading of its common stock and a lack of company-specific historical and implied volatility data, the Company has, prior to the IPO, 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 nine months ended September 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 (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.

 

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Recent accounting pronouncements:  In July 2015, the Financial Accounting Standards Board (the “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.

 

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Series A Redeemable Convertible Preferred Stock (as converted)

 

 

487,494

 

Series B Redeemable Convertible Preferred Stock (as converted)

 

 

1,297,100

 

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

 

 

2,275,733

 

Series C Redeemable Convertible Preferred Stock (as converted)

 

 

3,022,306

 

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

70,833

 

70,833

 

Common Stock Warrants (as converted)

 

235,695

 

337,133

 

Stock options

 

1,224,227

 

523,184

 

 

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:

 

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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 September 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,896

 

$

 

$

 

$

102,896

 

Earnout liability

 

 

 

353

 

353

 

 

 

$

102,896

 

$

 

$

353

 

$

103,249

 

 

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 included the fair values of the earnout liability and the outstanding Series C warrants at December 31, 2014.  There were no outstanding warrants to purchase preferred stock as of September 30, 2015.

 

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 Hercules Warrants were as follows:

 

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Revalue Series C

 

Revalue Series C

 

Revalue Series C

 

Revalue Series C

 

 

 

Warrants Issued with

 

Warrants Issued with

 

Warrants Issued with

 

Warrants Issued with

 

 

 

Senior Debt at

 

Senior Debt at

 

Senior Debt at

 

Senior Debt at

 

 

 

December 31, 2014

 

March 31, 2015

 

June 30, 2015

 

July 22, 2015

 

 

 

(Dollars in thousands, except $5 and $12 Exercise Prices)

 

 

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

3/31/2015

 

6/30/2015

 

7/22/2015

 

Valuation Method

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

PWERM and Option Pricing

 

Black-Scholes-Merton Option-Pricing

 

Dividend yield (per share)

 

0

 

0

 

0

 

0

 

Exercise price

 

$

5

 

$

5

 

$

5

 

$

12

 

Volatility (annual)

 

60%

 

60%

 

60%

 

60%

 

Risk-free rate (annual)

 

.25% - 2.47%

 

.19% - 2.31%

 

.14% - 2.83%

 

1.78%

 

Contractual term (years)

 

1 - 5

 

.75 - 5

 

.5 - 5

 

5

 

Number of warrants

 

170,000

 

170,000

 

170,000

 

70,833

 

 

 

 

 

 

 

 

 

 

 

Fair value of liability at valuation date

 

$

454

 

$

486

 

$

573

 

$

611

 

 

As the Hercules Warrants converted into warrants for common stock, with a term of five years from the IPO date, it was determined that the Black-Scholes-Merton Option-Pricing model would provide a better indication of the fair value as it was designed to calculate the value of a put or call option over time.

 

The methodologies and significant inputs used in the determination of the fair value of the Series C warrants issued with the Series C preferred stock were as follows:

 

 

 

Initial Valuation of

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Initial Valuation

 

Initial Valuation

 

Revalue All Warrants

 

Revalue All Warrants

 

Revalue All Warrants

 

 

 

Warrants Issued

 

of January 2015

 

of February 2015

 

Issued With Series C

 

Issued With Series C

 

Issued With Series C

 

 

 

With Series C

 

Warrants Issued With

 

Warrants Issued With

 

Redeemable Preferred

 

Redeemable Preferred

 

Redeemable Preferred

 

 

 

Redeemable

 

Series C Redeemable

 

Series C Redeemable

 

Stock at

 

Stock at

 

Stock at

 

 

 

Preferred Stock

 

Preferred Stock

 

Preferred Stock

 

March 31, 2015

 

June 30, 2015

 

July 22, 2015

 

 

 

(Dollars in thousands, except $5 and $12 Exercise Prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

1/31/2015

 

2/28/2015

 

3/31/2015

 

6/30/2015

 

7/22/2015

 

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

 

0

 

Exercise price

 

$

5

 

$

5

 

$

5

 

$

5

 

$

5

 

$

12

 

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

 

1,347,185

 

Fair value of liability at valuation date

 

$

1,335

 

$

1,052

 

$

1,079

 

$

3,233

 

$

3,361

 

$

4,042

 

 

Immediately after the July 22, 2015 revaluation, the Series C warrants issued with the Series C preferred stock were exchanged in a post-split net exercise whereby the option to purchase one share of Series C preferred stock plus the adjusted exercise price of $12.00 was exchanged for one share of common stock with an initial “price to the public” of $15.00; therefore, the value of these Series C warrants was determined to be its intrinsic value of $3.00 per share.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

December 31, 2014

 

March 31, 2015

 

June 30, 2015

 

September 30, 2015

 

 

 

Earnout Liability

 

Earnout Liability

 

Earnout Liability

 

Earnout Liability

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Date of Valuation

 

12/31/2014

 

3/31/2015

 

6/30/2015

 

9/30/2015

 

Valuation Method

 

Monte Carlo

 

Monte Carlo

 

Monte Carlo

 

Monte Carlo

 

Volatility (annual)

 

50%

 

50%

 

50%

 

50%

 

Risk-free rate (annual)

 

.15% - 3.21%

 

.14% - 3.00%

 

.09% - 3.51%

 

.15% - 3.21%

 

Time period from valuation until end of earnout

 

.5 - 9.5

 

.375 - 9.375

 

.25 - 9.0

 

.125 - 8.75

 

Earnout Target 1

 

$

13,700

 

$

13,700

 

$

13,700

 

$

13,700

 

Earnout Target 2

 

$

18,200

 

$

18,200

 

$

18,200

 

$

18,200

 

Discount rate

 

7.96% - 11.03%

 

8.18% - 11.04%

 

7.96% - 11.39%

 

8.16% - 11.22%

 

Fair value of liability at valuation date

 

$

756

 

$

314

 

$

356

 

$

353

 

 

Significant changes to these assumptions would result in increases/decreases to the fair value of the earnout liability and the outstanding Series C warrants for the periods presented.

 

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

 

(403

)

157

 

1,698

 

Warrants exercised

 

 

 

(2322

)

Cashless warrant exercise due to IPO

 

 

 

(2842

)

Conversion to common stock warrant

 

 

(611

)

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2015

 

$

353

 

$

 

$

 

 

The reductions in fair value of the earnout liability shown above resulted from new information regarding the projected impact of the 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 weighting of the IPO scenario in the PWERM model.

 

Note 6. Inventories

 

Inventories at the indicated dates consist of the following:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Raw materials

 

$

1,149

 

$

646

 

Work in progress

 

86

 

82

 

Finished goods

 

1,506

 

1,499

 

 

 

 

 

 

 

Inventory at cost

 

2,741

 

2,227

 

Inventory reserve

 

(80

)

(196

)

 

 

 

 

 

 

 

 

$

2,661

 

$

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 September 30, 2015 and 2014, approximately $207,000 and $208,000, respectively, and for the nine months ended September 30, 2015 and 2014 approximately $623,000 and $616,000, 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:

 

 

 

September 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

 

(5,710

)

(4,589

)

 

 

 

 

 

 

 

 

$

17,046

 

$

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 for both the three months ended September 30, 2015 and 2014 and amortization expense of $585,000 was recorded for both the nine months ended September 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 generated by the sale and manufacture of the product under a development and manufacturing agreement, and Cornerstone

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

had commercialization rights to the product. The Company paid $4.2 million to Cornerstone to buy out its 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 September 30, 2015, resulting in a $3,000 decrease 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 September 30, 2015. The net decrease of $403,000 for the nine months ended September 30, 2015 resulted from new information regarding the projected impact of the 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 its 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 $172,000 and $515,000 for the three and nine months ended September 30, 2015, respectively, and $57,000 and $57,000 for the three and nine months ended September 30, 2014, respectively.

 

Note 9. Other assets

 

Other assets at the indicated dates consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Patents

 

$

2,244

 

$

2,051

 

Deposits

 

183

 

176

 

 

 

 

 

 

 

 

 

$

2,427

 

$

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 nine months ended September 30, 2015, $5,000 and $17,000, respectively, of patent amortization expense was recorded.  There was no patent amortization expense for the three and nine months ended September 30, 2014. After consummation of the Company’s IPO, the $1,991,000 balance of Deferred IPO Offering Costs incurred in 2015 was reclassified to stockholders’ equity (deficit) as a reduction of additional paid-in capital.

 

Note 10. Long-term debt

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Senior debt, net of discount of $1,317 and $1,743

 

$

24,745

 

$

14,320

 

10% subordinated note payable to a related party

 

6,818

 

6,446

 

Capital leases, maturing through August 2017

 

2,791

 

4,008

 

 

 

 

 

 

 

 

 

34,354

 

24,774

 

Less current portion

 

(5,775

)

(1,653

)

 

 

 

 

 

 

Long-term debt

 

$

28,579

 

$

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, (“Tranche 1”), was issued during March 2014 and was used in its entirety to repay outstanding principal under a previous credit facility. The second draw of $5.0 million, (“Tranche 2”), was issued during September 2014.  The third draw (“Tranche 3”) in the amount of $5.0 million was issued in March 2015.  In June 2015, the fourth and final draw of $5.0 million, (“Tranche 4”), was issued prior to meeting the Tranche 4 milestones.  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 September 30, 2015, the Company was in compliance with the covenants under the LSA, as amended.

 

In connection with the LSA, the Company issued the Hercules Warrants which consisted of 60,000 Series C warrants in March 2014 and 110,000 Series C warrants in September 2014 at the then current price of $5.00 per share. The Hercules Warrants became warrants 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 and were therefore reclassified from warrant liability to Additional Paid in Capital within Shareholders’ Equity (Deficit).

 

The fair value of the 60,000 Hercules 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 Hercules 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.

 

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End of term charge amortization totaled $79,000 and $230,000 for the three and nine months ended September 30, 2015, respectively.  End of term charge amortization totaled $22,000 and $53,000 for the three and nine months ended September 30, 2014, respectively.  Debt discount amortization to interest expense for the senior debt totaled $67,000 and $196,000 for the three and nine months ended September 30, 2015, respectively.  Debt discount amortization to interest expense for the senior debt totaled $36,000 and $64,000 for the three and nine months ended September 30, 2014, respectively.  As of July 22, 2015, the fair values of the Hercules Warrants were remeasured and the change in fair value of approximately $38,000 for the three months ended September 30, 2015 has been recorded in other income (expense), net in the Company’s consolidated statements of operations and cumulatively for the nine months ended September 30, 2015, a total of $157,000 has been recorded in other income (expense), net in the Company’s consolidated statements of operations.

 

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 nine months ended September 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 (“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 June 28, 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 September 30, 2015, the aggregate principal amount of the Note was $5.9 million, and $511,000 and $883,000 in interest had been accrued through the year ended December 31, 2014 and through the nine months ended September 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 $110,000 and $371,000 for the three months ended September 30, 2015 and September 30, 2014, respectively, and $169,000 and $507,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

September 30,

 

Period ending:

 

2015

 

 

 

(in thousands)

 

 

 

 

 

2015

 

$

436

 

2016

 

7,973

 

2017

 

27,262

 

 

 

 

 

Future principal payments

 

$

35,671

 

 

 

 

 

Less unamortized debt discount

 

(1,317

)

Less current portion of long-term debt

 

(5,775

)

 

 

 

 

Total long-term debt

 

$

28,579

 

 

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 September 30, 2015 and December 31, 2014. All shares have a par value of $0.001 per share:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

Issued and

 

 

 

Issued and

 

 

 

Authorized

 

Outstanding

 

Authorized

 

Outstanding

 

 

 

Shares

 

Shares

 

Shares

 

Shares

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

100,000,000

 

15,839,064

 

35,000,000

 

938,859

 

Preferred Stock

 

5,000,000

 

 

 

 

Series A Preferred Stock

 

 

 

1,170,000

 

1,170,000

 

Series B Preferred Stock

 

 

 

4,000,000

 

3,113,099

 

Series B-1 Preferred Stock

 

 

 

8,830,000

 

5,461,802

 

Series C Preferred Stock

 

 

 

13,500,000

 

8,753,547

 

Total Shares Issued

 

 

 

15,839,064

 

 

 

19,437,307

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

(55,905

)

Total Outstanding Shares

 

 

 

15,839,064

 

 

 

19,381,402

 

Total Authorized Shares

 

105,000,000

 

 

 

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 1-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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Authorized Shares

 

In connection with the closing 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 the Hercules Warrants 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 Additional Paid in Capital within Stockholders’ Equity (Deficit); and

 

 

·

the net exercise of outstanding Series C warrants issued in conjunction with the Series C preferred stock financing to purchase 947,185 shares of Series C preferred stock for 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 (“Series B-1 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 year ended December 31, 2014.  During the nine months ended September 30, 2015, the Company issued a total of 101,431 shares of its common stock upon the exercise of Series B-1 warrants held by several investors at an exercise price of $0.0024 per share. As of September 30, 2015, Series B-1 warrants to purchase 235,695 shares of common stock remained outstanding, and expire in 2016.  Between October 1 and October 28, 2015, the Company issued 112,402 shares of its common stock upon the exercise of Series B-1 warrants held by several 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 nine months ended September 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 Series C warrant to purchase one additional share of Series C preferred stock at a purchase price of $5.00 per share for every two purchased shares of Series C preferred stock, provided the investor purchased its pro-rata share of the Series C preferred stock. In the event that the Company’s Series C preferred stock converted into common stock or another class of the Company’s stock (“Conversion Stock”) during the warrant exercise period, then the warrants would become exercisable for the Conversion Stock and the exercise price of those warrants was to be ratably adjusted. The Company issued Series C 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 nine months ended September 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 Series C warrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $4.25 million.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Dividends:  From and after the date of the issuance of the Company’s Series B-1 redeemable convertible preferred stock (“Series B-1 preferred stock”) until the retirement and cancellation of Series B-1 preferred stock in conjunction with the Company’s IPO, dividends at the rate per annum of 8% of the Series B-1 preferred stock original issuance price of $5.00 were accrued on such shares of Series B-1 preferred stock. Dividends accrued from day to day, whether or not declared, and were cumulative. The accruing dividends was to be payable in additional shares of Series B-1 preferred stock, valued at the Series B-1 preferred stock original issuance price, unless the board of directors of the Company elected 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 the Company’s IPO, all rights with respect to the Preferred Shares of the Company were terminated, including the right to receive undeclared dividends.  The Series B-1 preferred stock cumulative dividends were never declared by the Company’s board of directors.

 

Redemption:  Prior to the retirement and cancellation of the Company’s Preferred Shares as a result of the IPO, the holders of a majority of the outstanding shares of Series C preferred stock, Series B-1 preferred stock and Series B preferred stock, voting together as a single class, could require the Company to redeem the Series C preferred stock, Series B-1 preferred stock and Series B preferred stock 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 was to redeem, on a pro rata basis in accordance with the number of shares of Series C preferred stock, Series B-1 preferred stock and Series B preferred stock owned by each holder, that number of outstanding shares of Series C preferred stock, Series B-1 preferred stock and Series B preferred stock. If the Company did not have sufficient funds legally available to redeem on any redemption date, the Company was to redeem a pro rata portion of each holder’s Series C preferred stock, Series B-1 preferred stock and Series B preferred stock out of funds legally available.

 

The Series C preferred stock, Series B-1 preferred stock and Series B preferred stock were to be redeemable on November 1, 2017, and their carrying value was being 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 the IPO effective date. The amount of accretion recorded for the three and nine months ended September 30, 2015 and for the three and nine months ended September 30, 2014 for Series C preferred stock amounted to $37,000, $607,000, $21,000 and $66,000, respectively. The amount of accretion recorded for the three and nine months ended September 30, 2015 and for the three and nine months ended September 30, 2014 for Series B-1 preferred stock was $41,000, $370,000, $162,000 and $516,000, respectively. The amount of accretion recorded for the three and nine months ended September 30, 2015 and for the three and nine months ended September 30, 2014 for Series B preferred stock amounted to $21,000, $192,000, $84,000 and $268,000, respectively.

 

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

 

Warrant liability:  In connection with the December 2014 $7.5 million additional Series C preferred stock financing (see above), the Company issued warrants to purchase an aggregate 749,967 shares of the Series C preferred stock. The proceeds from the December 2014 additional Series C preferred stock financing with Series C 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 was accounted for as a warrant liability and periodically adjusted to fair value through the statement of operations. The related preferred stock discount was 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 preferred stock as of December 2014.

 

The proceeds from the 2015 additional Series C preferred stock 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 Series C warrants was 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 preferred stock.

 

On the IPO effective date of July 22, 2015, the Series C warrant fair values were remeasured for a final time and an increase in fair value of approximately $1,522,000 and $ $1,698,000 has been recorded in other income (expense), net in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015. Upon the closing of the Company’s IPO, all of the shares of the Company’s redeemable convertible 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. 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.

 

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

 

In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan (“2015 Plan”) which became effective immediately prior to the closing of the IPO and initially had 767,330 shares of common stock reserved for issuance.  On January 1, 2016 and each January 1 thereafter, the number of shares of common stock reserved and available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of shares of stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the administrator of the 2015 Plan. The 2015 Plan superseded the Neos Therapeutics, Inc. 2009 Equity Plan (“2009 Plan”), originally adopted in November 2009 and which had 1,375,037 shares for reserved and available for issuance.  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 2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The 2015 Plan is administered by the Company’s compensation committee.  The Company’s compensation committee has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company’s compensation committee may delegate authority to grant certain awards to the Company’s chief executive officer. The exercise price per share for the stock covered by a stock option granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant.

 

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 were 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. The Board of Directors approved option grants covering a total of 445,210 shares of common stock to certain non-employee directors and employees on August 20, 2015 under the 2015 Plan. These option grants were effective September 1, 2015.  The exercise price of these option grants was equal to the market price of $25.50.

 

The 2009 Plan allowed the Company to grant options to purchase shares of the Company’s common stock. Options were granted to officers, employees, nonemployee directors and consultants, and independent contractors of the Company.  The Company also granted performance based awards to selected management. The performance options 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 under the 2015 Plan.  During the third quarter of 2015, 2,083 shares related to forfeited 2009 Plan options were transferred into the shares available under the 2015 Plan.  As of September 30, 2015, 284,620 shares of common stock remain available for grant under the 2015 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. Prior to the IPO, given the absence of an active market for the Company’s common stock prior to its IPO, the Company’s board of directors was required to estimate the fair value of its common stock at the time of each option grant primarily based upon valuations performed by a third party valuation firm.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2015

 

 

 

 

 

 

 

Estimated dividend yield

 

0

%

0

%

Expected stock price volatility

 

60

%

60

%

Weighted-average risk-free interest rate

 

1.57

%

1.60

%

Expected life of option in years

 

5

 

5

 

Weighted-average option fair value at grant

 

$

12.767

 

$

10.054

 

 

Total compensation cost that has been charged to selling, general and administrative expense related to stock options was $291,000 and $480,000 for the three and nine months ended September 30, 2015, respectively, and $36,000 and $68,000 for the three and nine months ended September 30, 2014, respectively.  At September 30, 2015, there was $7.1 million 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 9.1 years.  For the nine months ended September 30, 2015, the Company issued 37,753 shares of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $72,000 and realized no tax benefit from the exercised stock options.

 

A summary of outstanding and exercisable options as of September 30, 2015 and December 31, 2014 and the activity from December 31, 2014 through September 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

 

754,371

 

19.431

 

 

 

Exercised

 

(37,753

)

1.914

 

 

 

Expired, forfeited or cancelled

 

(4,166

)

2.498

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

1,224,227

 

$

13.446

 

$

9,260

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2015

 

181,061

 

2.912

 

$

3,277

 

 

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 September 30, 2015 was 9.1 and 7.3 years, respectively. The option exercise price for all options granted in the nine months ended September 30, 2015 ranged from $9.32 to $25.50 per share.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 $27,000 and $72,000 for the three and nine months ended September 30, 2015, respectively, and $23,000 and $68,000 for the three and nine months ended September 30, 2014, respectively, has been charged to selling, general and administrative expenses.  At September 30, 2015 and 2014, there was $185,000 and $278,000, respectively, of unrecognized compensation cost related to restricted stock. No vested restricted stock awards were settled during the nine months ended September 30, 2015. On October 16, 2015, the Company settled certain vested restricted stock awards which were settled having a value of $658,000 in cash, and the company realized a tax benefit of $224,000. On October 16, 2015, 9,197 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock.  The fair value of such shares was determined to be $18.54 per share, the closing price of the Company’s stock on such date.

 

The Company had 106,537 shares of unvested restricted stock with a weighted average fair value of $2.55 as of September 30, 2015 and December 31, 2014.  For the nine months ended September 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. On October 16, 2015, 9,197 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock and such shares were added back into the treasury stock of the Company.

 

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 $1,163,000 and $1,189,000 at September 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 $59,000 and $178,000 for the three and nine months ended September 30, 2015, respectively, and $62,000 and $188,000 for the three and nine months ended September 30, 2014, respectively. Rent expense, excluding the share of operating expenses, for the three and nine months ended September 30, 2015 was $218,000 and $654,000, respectively, and $223,000 and $678,000 for the three and nine months ended September 30, 2014, respectively.

 

Cash incentive bonus plan: In July 2015, the Company adopted the Senior Executive Cash Incentive Bonus Plan (“Bonus Plan”).  The Bonus Plan provides for cash payments based upon the attainment of performance targets established by the Company’s compensation committee.  The payment targets will be related to financial and operational measures or objectives with respect to the Company, or corporate performance goals, as well as individual targets. The Company has recorded $295,000 and $673,000 of bonus expense for the three and nine months ended September 30, 2015.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 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% beginning on July 19, 2014 until such time as the Company recovered the full amount of its payment to Essex, which ended on June 28, 2015, at which time the interest rate on the Note returned to 10%. 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 October 1 and October 28, 2015, the Company issued 112,402 shares of its common stock to several investors upon the exercise of Series B-1 warrants held by those investors at an exercise price of $0.0024 per share (see Note 11).

 

On October 16, 2015, the Company settled certain vested restricted stock awards which were settled having a value of $658,000 in cash, and the company realized a tax benefit of $224,000. In October 2015, 9,197 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock.

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements for the years ended December 31, 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 on Form 10-Q.

 

OVERVIEW

 

We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our proprietary modified-release drug delivery technology platform, which we have already used to develop 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.  NT-0102 is our methylphenidate XR-ODT, which has a provisionally accepted trade name of Cotempla XR-ODT™.  On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our New Drug Application, or NDA for NT-0102, it has identified deficiencies that preclude discussion of labeling and post marketing requirements/commitments at this time. The FDA stated that this notification does not reflect a final decision on the information under review.  On November 10, 2015, we announced that we received a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trial material and to-be-marketed drug product, including an assessment of food effect, and to provide validation and three months of stability data. On July 30, 2015, we announced that we had resubmitted a NDA to the FDA for NT-0202, our amphetamine XR-ODT and we have a Prescription Drug User Fee Act, or 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, following receipt of written feedback from the FDA to incorporate our understanding of the FDA’s expectations for the acceptance and subsequent review of such NDA. The FDA’s feedback is expected in the fourth 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, and Neostx, Inc. was merged with and into Neos Therapeutics, Inc.  Historically, we were primarily engaged in the development and contract manufacturing of unapproved or Drug Efficacy Study Implementation, 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. Prior to our recent initial public offering of our common stock, we funded our operations principally through private placements of our

 

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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 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, $9.4 million and $5.2 million for the three months ended September 30, 2015 and 2014, respectively, and $21.7 million and $16.0 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, we had an accumulated deficit of approximately $107.7 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, or 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.

 

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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 product 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.

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

NT-0102 Methylphenidate ODT

 

$

260

 

$

532

 

$

2,771

 

$

1,374

 

NT-0202 Amphetamine ODT

 

58

 

 

497

 

139

 

778

 

NT-0201 Amphetamine Liquid

 

38

 

 

16

 

185

 

775

 

Other Research and Development Activities (1)

 

2,345

 

 

1,682

 

6,028

 

5,268

 

 

 

$

2,701

 

$

2,727

 

$

9,123

 

$

8,195

 

 


(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.

 

On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our NDA for NT-0102, it has identified

 

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deficiencies that preclude discussion of labeling and post marketing requirements/commitments at this time. The FDA stated that this notification does not reflect a final decision on the information under review.  On November 10, 2015, we announced that we received a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trial material and to-be-marketed drug product, including an assessment of food effect, and to provide validation and three months of stability data. 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 have a PDUFA goal date of January 27, 2016. We expect to submit an NDA for NT-0201, our amphetamine XR liquid suspension, following receipt of written feedback from the FDA to incorporate our understanding of the FDA’s expectations for the acceptance and subsequent review of such NDA. The FDA’s feedback is expected in the fourth quarter of 2015.  Any further actions required by the FDA may result in further research and development expenses. For additional information regarding the FDA review process, see “Government Regulation—NDA and FDA review process” in the final prospectus dated as of July 22, 2015.

 

Selling and marketing

 

Selling and marketing expenses consist primarily of salaries and related costs for personnel pre-commercialization activities for our product candidates and trade sales of our generic Tussionex. Other selling and marketing expenses include market research, brand development, advertising agency and other public relations costs, managed care sales support and market data and analysis.

 

We expect that our selling and marketing 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.

 

General and administrative

 

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

 

We anticipate that our general and administrative expenses will increase due to increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs.

 

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 liability and our warrant liabilities through the effective date of the IPO, July 22, 2015.

 

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RESULTS OF OPERATIONS

 

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

 

Revenues

 

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

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

Product

 

$

221

 

$

(120

)

$

341