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, 2016

 

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

Smaller reporting company o

 

 

(Do not check if a

 

 

 

smaller reporting company)

 

 

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 9, 2016: 16,060,996 shares.

 

 

 



Table of Contents

 

NEOS THERAPEUTICS, INC.

 

INDEX

 

 

 

Page No.

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Comprehensive Income

7

 

Condensed Consolidated Statements of Stockholders’ Equity

8

 

Condensed Consolidated Statements of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

Item 2

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

27

Item 3

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4

Controls and Procedures

45

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

45

Item 1A

Risk Factors

46

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3

Defaults Upon Senior Securities

73

Item 4

Mine Safety Disclosures

73

Item 5

Other Information

74

Item 6

Exhibits

74

 

 

 

SIGNATURES

75

 

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Special note regarding forward-looking statements

 

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

 

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

 

·                  our ability to develop and commercialize Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future product or product candidate;

 

·                  the timing, cost or other aspects of the commercial launch and future sales of Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future product or product candidate;

 

·                  our ability to increase our manufacturing and distribution capabilities for Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future product or product candidate;

 

·                  the attention deficit hyperactivity disorder patient market size and market adoption of Adzenys XR-ODT and, if approved, Cotempla XR-ODT or NT-0201, by physicians and patients;

 

·                  the therapeutic benefits, effectiveness and safety of Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future product or product candidate;

 

·                  our expectations regarding the commercial supply of our Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future products, and our generic Tussionex;

 

·                  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, for Cotempla XR-ODT, NT-0201, and any other future 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 Cotempla XR-ODT and whether we will be able to address the issues that may relate to those deficiencies;

 

·                  the New Drug Application resubmission date for Cotempla XR-ODT and submission date for NT-0201;

 

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

 

·                  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.

 

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.

 

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

 

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

 

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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,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

43,489

 

$

90,763

 

Short-term investments

 

16,547

 

 

Accounts receivable, net of allowances of $1,193 and $1,039, respectively

 

4,263

 

3,903

 

Inventories

 

5,683

 

2,520

 

Other current assets

 

1,980

 

1,058

 

Total current assets

 

71,962

 

98,244

 

 

 

 

 

 

 

Property and equipment, net

 

6,952

 

5,124

 

Intangible assets, net

 

15,969

 

16,672

 

Other assets

 

2,552

 

2,470

 

 

 

 

 

 

 

Total assets

 

$

97,435

 

$

122,510

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

7,808

 

$

4,824

 

Accrued expenses

 

7,860

 

3,141

 

Deferred revenue

 

2,558

 

 

Current portion of long-term debt

 

3,188

 

7,973

 

 

 

 

 

 

 

Total current liabilities

 

21,414

 

15,938

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

58,524

 

26,271

 

Earnout liability

 

355

 

214

 

Deferred gain on leaseback

 

60

 

547

 

Deferred rent

 

1,184

 

1,166

 

 

 

 

 

 

 

Total long-term liabilities

 

60,123

 

28,198

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2016 and December 31, 2015

 

 

 

Common stock, $0.001 par value, 100,000,000 authorized at September 30, 2016 and December 31, 2015; 16,079,902 and 16,070,705 issued and outstanding at September 30, 2016, respectively; 16,025,155 and 16,015,958 issued and outstanding at December 31, 2015, respectively

 

16

 

16

 

Treasury stock, at cost, 9,197 shares at September 30, 2016 and December 31, 2015

 

(171

)

(171

)

Additional paid-in capital

 

197,789

 

195,314

 

Accumulated deficit

 

(181,745

)

(116,785

)

Accumulated other comprehensive income

 

9

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

15,898

 

78,374

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

97,435

 

$

122,510

 

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

1,583

 

$

221

 

$

5,651

 

$

2,133

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

2,289

 

1,172

 

7,301

 

4,070

 

Gross loss

 

(706

)

(951

)

(1,650

)

(1,937

)

 

 

 

 

 

 

 

 

 

 

Research and development

 

2,910

 

2,658

 

8,722

 

8,965

 

Selling and marketing expenses

 

16,977

 

1,399

 

39,630

 

2,370

 

General and administrative expenses

 

3,140

 

1,967

 

9,600

 

4,891

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(23,733

)

(6,975

)

(59,602

)

(18,163

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,130

)

(1,044

)

(4,746

)

(2,685

)

Loss on debt extinguishment

 

 

 

(1,187

)

 

Other income, net

 

155

 

518

 

716

 

623

 

Change in fair value of earnout and warrant liabilities

 

(98

)

(1,867

)

(141

)

(1,452

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(25,806

)

(9,368

)

(64,960

)

(21,677

)

Preferred stock accretion to redemption value

 

 

(99

)

 

(1,169

)

Preferred stock dividends

 

 

(138

)

 

(1,221

)

Net loss attributable to common stock

 

$

(25,806

)

$

(9,605

)

$

(64,960

)

$

(24,067

)

 

 

 

 

 

 

 

 

 

 

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

 

16,070,705

 

12,403,182

 

16,048,801

 

4,767,479

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(1.61

)

$

(0.77

)

$

(4.05

)

$

(5.05

)

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(25,806

)

$

(9,368

)

$

(64,960

)

$

(21,677

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on short-term investments

 

(26

)

 

12

 

 

Reclassification of gains included in net loss

 

(3

)

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

$

(29

)

$

 

$

9

 

$

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(25,835

)

$

(9,368

)

$

(64,951

)

$

(21,677

)

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine months Ended September 30, 2016

(In thousands, except shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 

$

 

16,025,155

 

$

16

 

(9,197

)

$

(171

)

$

195,314

 

$

(116,785

)

$

 

$

78,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of options and warrants

 

 

 

54,747

 

 

 

 

13

 

 

 

13

 

Share-based compensation expense

 

 

 

 

 

 

 

2,462

 

 

 

2,462

 

Net unrealized gain on investments

 

 

 

 

 

 

 

 

 

9

 

9

 

Net loss

 

 

 

 

 

 

 

 

(64,960

)

 

(64,960

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2016

 

 

$

 

16,079,902

 

$

16

 

(9,197

)

$

(171

)

$

197,789

 

$

(181,745

)

$

9

 

$

15,898

 

 

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 September 30,

 

 

 

2016

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(64,960

)

$

(21,677

)

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

 

 

 

 

 

Share-based compensation expense

 

2,462

 

552

 

Depreciation and amortization of property and equipment

 

1,307

 

1,277

 

Amortization of intangible assets

 

1,203

 

1,121

 

Changes in fair value of earnout and warrant liabilities

 

141

 

1,452

 

Amortization of patents

 

36

 

17

 

Amortization of senior debt fees

 

331

 

426

 

Amortization of short-term investment purchase discounts

 

(137

)

 

Deferred interest on debt

 

2,695

 

372

 

Loss on debt extinguishment

 

942

 

 

Gain on sale of equipment

 

(487

)

(623

)

Change in deferred rent

 

18

 

(26

)

Realized gain on sale of short-term investments

 

(3

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(360

)

317

 

Inventories

 

(3,163

)

(630

)

Other current assets

 

(922

)

(555

)

Other assets

 

(118

)

(217

)

Accounts payable

 

2,984

 

919

 

Accrued expenses

 

4,719

 

2,356

 

Deferred revenue

 

2,558

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

(50,754

)

(14,919

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of short-term investments

 

(51,396

)

 

Sales and maturities of short-term investments

 

34,998

 

3,000

 

Capital expenditures

 

(3,135

)

(656

)

Intangible asset license

 

(500

)

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

(20,033

)

2,344

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from Deerfield debt note, net of fees

 

58,419

 

 

Proceeds from senior debt note

 

 

10,000

 

Prepayment of senior debt and fee

 

(26,063

)

 

Net proceeds from issuance of stock

 

13

 

18,119

 

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

 

 

77,004

 

Payments made on borrowings

 

(8,856

)

(1,217

)

Payments of initial public offering costs

 

 

(1,778

)

 

 

 

 

 

 

Net cash provided by financing activities

 

23,513

 

102,128

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(47,274

)

89,553

 

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning

 

90,763

 

13,343

 

Ending

 

$

43,489

 

$

102,896

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Transactions:

 

 

 

 

 

Initial public offering costs included in accounts payable and accrued expenses

 

$

 

$

213

 

Issuance of stock warrants

 

$

 

$

2,131

 

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

 

Preferred stock dividend

 

$

 

$

1,221

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

2,830

 

$

1,820

 

 

See notes to condensed consolidated financial statements.

 

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Neos Therapeutics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and nature of operations

 

Neos Therapeutics, Inc., a Delaware corporation, and its subsidiaries (the “Company”), is a fully integrated pharmaceutical company. The Company has developed a broad, proprietary modified-release drug delivery technology that enables the manufacture of single and multiple ingredient extended-release pharmaceuticals in patient- and caregiver-friendly orally disintegrating tablet and liquid suspension dosage forms. The Company has a pipeline of extended-release pharmaceuticals including one approved product and two proprietary product candidates in late stage development for the treatment of attention deficit hyperactivity disorder (“ADHD”). Adzenys XR-ODT was approved by the US Food and Drug Administration (the “FDA”), on January 27, 2016 and launched commercially on May 16, 2016. In addition, the Company manufactures and markets a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release liquid suspension for the treatment of cough and upper respiratory symptoms of a cold.

 

Note 2. Summary of significant accounting policies

 

Basis of Presentation:  The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), for reporting on Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows.  In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results of operations for and financial condition as of the end of the interim period have been included.  Results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 or any period thereafter.  The audited consolidated financial statements as of and for the year ended December 31, 2015 included information and footnotes necessary for such presentation and were included in the Neos Therapeutics, Inc. Annual Report on Form 10-K and filed with the SEC on March 18, 2016. 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, 2015.

 

Principles of consolidation:  At September 30, 2016, 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 debt securities that have original maturities greater than three months but less than or equal to one year and are classified as available-for-sale securities. Such securities are carried at estimated fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as accumulated other comprehensive income, which is a separate component of stockholders’ equity. Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in other income (expense) in the consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income are recognized in other income when earned. The cost of securities sold is calculated using the specific identification method. The Company places all investments with government agencies, or corporate institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date, if any, as non-current assets.

 

Fair value of financial instruments:  The carrying value of the Company’s financial instruments, including cash and cash equivalents, 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 short-term investments and its earnout and warrant liabilities are disclosed in Note 4.

 

Inventories:  Inventories are stated at the lower of actual cost including labor and manufacturing overhead (which approximates first-in, first-out) or market, net of a reserve for obsolete inventory. Increases in the reserve are recorded as charges to cost of goods sold. Inventories consist of raw materials, work in process, finished goods and deferred cost of goods. Cost of sales includes the cost of

 

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inventory sold or reserved, which includes manufacturing and supply chain costs, product shipping and handling costs, and product royalties.  The cost of sales associated with the deferred product revenues are recorded as deferred costs, which are included in inventory until such time as the deferred revenue is recognized. As the Company has little experience of obtaining approval for and launching its drug products, the Company treats any pre-launch inventory that is manufactured for clinical trials or other purposes as research and development expense until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable. Therefore, all manufacturing costs for the production of Adzenys XR-ODT incurred after the January 27, 2016 FDA approval date are being capitalized into inventory.

 

Deferred contract sales organization fees: The Company records fees billed in accordance with its commercial sales organization contract for services not yet performed as deferred contract sales organization fees which are included in other current assets in the Company’s balance sheet. Such fees are recorded as selling and marketing expenses when the services are provided.

 

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 New Drug Application (“Tussionex ANDA”), are recorded at cost and amortized over the estimated lives of the assets, which primarily range from 10 to 20 years.

 

Revenue recognition:  Revenue is generated from product sales, recorded on a net sales basis. Product revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid for the product, or the buyer is obligated to pay for the product and the obligation is not contingent on resale of the product, (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 and Adzenys XR-ODT to pharmaceutical wholesalers, all subject to rights of return. Pharmaceutical wholesalers buy drug products directly from manufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are assumed by the wholesaler (freight on board destination). These wholesalers then resell the product to retail customers such as food, drug and mass merchandisers.

 

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

 

Net product sales

 

Net product sales for the Company’s products represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments include savings offers, prompt payment discounts, wholesaler fees and estimated allowances for product returns, rebates and chargebacks to be incurred on the selling price of the respective product sales. Wholesale distribution fees based on definitive contractual agreements are incurred on the management of these products by wholesalers and are recorded within net sales for generic Tussionex and as deferred wholesale distribution fees in other current assets for Adzenys XR-ODT. The deferred wholesale distribution fees for Adzenys XR-ODT are later recorded within net product sales when revenue associated with those fees is recognized. The Company estimates and records gross to net sales adjustments for product returns, rebates and chargebacks based upon analysis of third-party information, including information obtained from the Company’s third party logistics providers (“3PLs”), with respect to its inventory levels and sell-through to the wholesalers’ customers, for savings offers from data available from third parties regarding savings offers processed for prescriptions written for the Company’s products, and, for generic Tussionex, experience reported by the Company’s 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. Wholesale distribution fees and the allowance for prompt pay discounts are recorded at the time of shipment and such fees and allowances and all other accruals are recorded in the same period that the related revenue is recognized.

 

Savings offers

 

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

 

Product returns

 

Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in

 

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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.

 

Rebates

 

The Company’s products are subject to commercial managed care and government-managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Estimated rebates payable under such programs are recorded as a reduction of revenue at the time revenues are recorded. Calculations related to these rebate accruals are estimated based on information from third-party providers. Historical trend of such rebates will be continually monitored and may result in future adjustments to such estimates.

 

Wholesaler Chargebacks

 

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

 

Advertising costs: Advertising costs are comprised of print and electronic media placements that are expensed as incurred. The Company recognized advertising costs of $7.0 million and $7.2 million during the three and nine months ended September 30, 2016, respectively. There were no advertising costs incurred during the three and nine months ended September 30, 2015.

 

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

 

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

 

Management evaluates the Company’s tax positions in accordance with guidance on accounting for uncertainty in income taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination.  As of September 30, 2016 and December 31, 2015, the Company had no material 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 September 30, 2016 and December 31, 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.

 

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

 

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 initial public offering (“IPO”), the Company’s warrants for the

 

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Company’s Series C redeemable convertible preferred stock (“Series C warrants”) were determined to be derivative liabilities and they were revalued at each subsequent balance sheet date. Upon closing the IPO, the Series C warrants issued in conjunction with the Series C redeemable convertible preferred stock (“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 with a term of five years 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.

 

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. After the closing of the Company’s IPO, the Company’s board of directors has determined the fair value of each share of underlying common stock based on the closing price of the Company’s common stock as reported by the NASDAQ Global Market on the date of grant. 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. Beginning in July 2016, the Company began recording stock compensation expense in the same income statement line as the cash compensation of the employee with the option in accordance with SAB 14 due to the increased number and amount of options and option compensation. The Company has reclassed all prior quarters amounts out of general and administrative expense to the appropriate income statement line in accordance with this approach.

 

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 2015 and the three and nine months ended September 30, 2016, 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 Adzenys XR-ODT or, if approved, one or more of its ADHD product candidates. Management believes the Company presently has sufficient liquidity to continue to operate for at least the next 12 months.

 

Recent accounting pronouncements: In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU was designed to reduce the diversity in practice of how the eight specified items are presented and classified in the statement of cash flows, including debt prepayment or debt extinguishment costs. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, 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 March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting (Topic 718). For public companies, areas of accounting for share-based payment that this ASU was designed to simplify include: the income tax consequences, the accounting policy for forfeitures, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The amendments in this ASU are effective for public companies 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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The 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 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of

 

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transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The FASB has issued several ASUs to clarify the requirements and application of ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers — Principal versus Agent Considerations (Reporting Revenue Gross versus Net, ASU No. 2016-10, Revenue from Contracts with Customers — Identifying Performance Obligations and Licensing, ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. The FASB has voted to approve a one-year deferral, changing the effective date to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. The amendments in ASU 2016-08, 2016-10, 2016-11 and 2016-12 have the same effective date and transition requirements as ASU 2014-09. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. Presently, the Company is assessing what effect the adoption of ASU 2014-09 and the related amendments will have on the Company’s consolidated financial statements and accompanying notes and has not yet selected a method of adoption.

 

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 either are not applicable or 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.

 

Note 3. Net loss per share

 

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities which include redeemable convertible preferred stock, warrants and outstanding stock options under the stock option plan have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

 

The following potentially dilutive securities outstanding as of September 30, 2016 and 2015 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, 2016 and 2015, respectively, because including them would have been anti-dilutive:

 

 

 

September 30,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

70,833

 

70,833

 

Common Stock Warrants

 

 

235,695

 

Stock options

 

2,121,274

 

1,224,227

 

 

Note 4. 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.

 

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·                                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:

 

 

 

Fair Value as of September 30, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,489

 

$

 

$

 

$

43,489

 

Short-term investments

 

 

16,547

 

 

16,547

 

Earnout liability

 

 

 

355

 

355

 

 

 

$

43,489

 

$

16,547

 

$

355

 

$

60,391

 

 

 

 

Fair Value as of December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash-and cash equivalents

 

$

90,763

 

$

 

$

 

$

90,763

 

Earnout liability

 

 

 

214

 

214

 

 

 

$

90,763

 

$

 

$

214

 

$

90,977

 

 

The Company’s Level 1 assets include cash and cash equivalents. Cash and cash equivalents include bank deposits, certificates of deposit, money market funds and corporate debt securities with a maturity of 90 days or less whose values are considered to approximate fair value at September 30, 2016 and December 31, 2015 due to the short-term nature of the instruments and/or the current interest rates payable in relation to current market conditions.

 

The Company’s Level 2 assets include short-term investments which are classified as available-for-sale securities and have a maturity greater than 90 days, but less than 1 year, with quoted prices in active markets. Level 2 securities primarily consisted of commercial paper and bonds issued by domestic and foreign corporations. The estimated fair values of these securities are determined by third parties using various calculations and valuation techniques that incorporate standard observable inputs and assumptions such as quoted prices for similar assets, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

 

The Company’s cash and cash equivalents and short-term investments had quoted prices at September 30, 2016 as shown below:

 

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September 30, 2016

 

 

 

Amortized

 

Unrealized

 

Market

 

 

 

Cost

 

Gain / (Loss)

 

Value

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Bank deposits and money market funds

 

$

41,515

 

$

 

$

41,515

 

 

 

 

 

 

 

 

 

Financial and corporate debt securities

 

18,512

 

9

 

18,521

 

 

 

 

 

 

 

 

 

 

 

$

60,027

 

$

9

 

$

60,036

 

 

Level 3 liabilities included the fair value of the earnout liability at September 30, 2016 and December 31, 2015. The fair value of the earnout liability was determined using the Monte Carlo method as done previously.

 

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

 

 

 

Earnout

 

 

 

Liability

 

 

 

(in thousands)

 

Balance at December 31, 2015

 

$

214

 

Change in fair value (unaudited)

 

43

 

 

 

 

 

Balance at June 30, 2016 (unaudited)

 

$

257

 

 

 

 

 

Change in fair value (unaudited)

 

$

98

 

 

 

 

 

Balance at September 30, 2016 (unaudited)

 

$

355

 

 

Note 5. Inventories

 

Inventories at the indicated dates consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

Raw materials

 

$

1,599

 

$

1,211

 

Work in progress

 

2,570

 

175

 

Finished goods

 

1,750

 

1,189

 

Deferred cost of goods sold

 

160

 

 

 

 

 

 

 

 

Inventory at cost

 

6,079

 

2,575

 

Inventory reserve

 

(396

)

(55

)

 

 

 

 

 

 

 

 

$

5,683

 

$

2,520

 

 

The deferred cost of goods sold will be recognized upon release of the product to patients.

 

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Note 6. 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. The two February 2013 leases for a total of $3.5 million of assets expired in July 2016 and the related $2.6 million gain was fully amortized at that time and the $385,000 lease buy-out option liability was fully satisfied. For the three months ended September 30, 2016 and 2015, approximately $72,000 and $208,000, respectively, and for the nine months ended September 30, 2016 and 2015, approximately $487,000 and $623,000, respectively, of the net gain was recognized in other income on the consolidated statements of operations.

 

Note 7. Intangible assets, net

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

 

(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

 

784

 

284

 

 

 

 

 

 

 

 

 

23,256

 

22,756

 

Accumulated amortization

 

(7,287

)

(6,084

)

 

 

 

 

 

 

 

 

$

15,969

 

$

16,672

 

 

The $15.6 million of proprietary modified-release drug delivery technology is being amortized over 20 years. Amortization expense of $195,000 was recorded in both the three months ended September 30, 2016 and 2015 and amortization expense of $585,000 was recorded for both the nine months ended September 30, 2016 and 2015.

 

Prior to the August 28, 2014 acquisition of the rights to Tussionex ANDA from Cornerstone Biopharma, Inc. (“Cornerstone”) and Coating Place, Inc. (“CPI”), the Company, Cornerstone and CPI shared profits generated by the sale and manufacture of the product under a development and manufacturing agreement, and Cornerstone had commercialization rights to the product. The Company paid $4.2 million to Cornerstone and $90,000 of legal fees to buy out its rights to commercialize and derive future profits from the product and entered into an asset acquisition agreement whereby Cornerstone transferred certain assets associated with the product to the Company. In addition, the Company paid $2.0 million to CPI and $43,000 of legal fees 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.  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, 2016, resulting in a $98,000 and $141,000, respectively, increase in the estimated fair value of the earnout which is recorded as expense in other income (expense), net in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2016.  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.  These two intangible assets have an expected life of ten years and are being amortized on a straight-line basis beginning September 2014. Total amortization expense related to these intangible assets was $171,000 for each of the three months ended September 30, 2016 and 2015, respectively, and $515,000 for each of the nine months ended September 30, 2016 and 2015, respectively.

 

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Note 8. Other assets

 

Other assets at the indicated dates consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Patents

 

$

2,362

 

$

2,273

 

Deposits

 

190

 

197

 

 

 

 

 

 

 

 

 

$

2,552

 

$

2,470

 

 

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. Patents utilized in the manufacturing of Adzenys XR-ODT which total $459,000 are being amortized over their expected useful life of approximately 16 years, beginning with the PDUFA approval of Adzenys XR-ODT on January 27, 2016. Patent amortization expense of $13,000 and $5,000 was recorded for the three months ended September 30, 2016 and 2015, respectively, and patent amortization expense of $36,000 and $17,000, was recorded for the nine months ended September 30, 2016 and 2015, respectively.

 

Note 9. Long-term debt

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

Deerfield senior secured credit facility, net of discount of $1,476

 

$

60,956

 

$

 

Senior debt, net of discount of $1,167

 

 

24,895

 

10% subordinated note payable to a related party

 

 

6,994

 

Capital leases, maturing through August 2017

 

756

 

2,355

 

 

 

 

 

 

 

 

 

61,712

 

34,244

 

Less current portion

 

(3,188

)

(7,973

)

 

 

 

 

 

 

Long-term debt

 

$

58,524

 

$

26,271

 

 

On May 11, 2016, the Company entered into a $60 million senior secured credit facility (“Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of loan) and Deerfield Special Situations Fund, L.P. (33 1/3% of Loan) (“Deerfield”), as lenders.  Principal on the new facility is due in three equal annual installments beginning in May 2019 and continuing through May 2021, with a final payment of principal, interest and all other obligations under the facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of 12.95% per year. The Company has an option to defer payment of each of the first four interest payments until June 1, 2017. The Company exercised the option to defer the first two interest payments during the nine months ended September 30, 2016 and exercised the option to defer the third interest payment due December 1, 2016 on October 28, 2016, adding such amounts to the outstanding loan principal until they are paid on June 1, 2017. In connection with the Facility, the Company paid a $1,350,000 yield enhancement fee to Deerfield,  approximately $173,000 of legal costs to the Company’s attorneys and $58,000 of legal costs on behalf of Deerfield’s attorneys, all of which were recorded as debt discount and amortized over the six-year term of the Facility, using the effective interest method. Borrowings under the Facility are collateralized by substantially all of the Company’s assets, except the Company’s assets under capital lease, and the Company will maintain cash on deposit of not less than $5 million. Approximately $33 million of the $60 million Facility proceeds was used to prepay the existing $24.3 million principal and $0.1 million of accrued

 

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interest related to the senior Loan and Security Agreement (“LSA”), the $1.1 million LSA end of term fee, an LSA prepayment charge of $243,000 and the $5.9 million of principal and $1.3 million of interest on the 10% related party amended and restated subordinated note (the “Note”) that was issued by the Company to Essex Capital Corporation (“Essex”), which were otherwise payable in 2016 and 2017.

 

The Facility, also contains certain customary nonfinancial covenants, including limitations on the Company’s ability to transfer assets, engage in a change of control, merge or acquire with or into another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the lender may declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its security interests and other rights. As of September 30, 2016, the Company was in compliance with the covenants under the Facility.

 

Debt discount amortization for the Facility was calculated using the effective interest rate, charged to interest expense and totaled $70,000 and $106,000 for the three and nine months ended September 30, 2016, respectively.

 

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

 

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

 

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

 

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.

 

LSA end of term charge amortization totaled $121,000 for the nine months ended September 30, 2016, and $79,000 and $230,000 for the three and nine months ended September 30, 2015, respectively.  LSA debt discount amortization charged to interest expense totaled $104,000 for the nine months ended September 30, 2016, and $67,000 and $196,000 for the three and nine months ended September 30, 2015, respectively.  At the end of the three and nine months ended September 30, 2015, the Hercules warrant fair values were remeasured and the changes in fair value of approximately $38,000 and $157,000, respectively, were recorded in other income (expense), net in the Company’s consolidated statements of operations.

 

The early prepayment of the LSA resulted in a $1,187,000 loss on debt extinguishment (due to recording the $243,000 LSA prepayment charge, writing off $503,000 of unamortized LSA end of term charge and the $439,000 of unamortized LSA loan cost and expensing the $2,500 of legal fees paid on behalf of Hercules) which is separately shown in the statement of operations for the nine months ended September 30, 2016.

 

10% subordinated related party note:  The Company had a Note in the aggregate principal amount of $5.9 million that was issued by the Company to Essex which was to mature in March 2017.  Interest was to be accrued and added to the principal balance until such time as the Company achieved positive EBITDA for three consecutive months.  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 15). The Company recorded this amendment as a loan modification.  On May 11, 2016, the Company prepaid the $5.9 million outstanding aggregate principal and $1.3 million in accrued and unpaid interest. At December 31, 2015, the aggregate principal amount of the Note was $5.9 million and $1.1 million in interest had been accrued through December 31, 2015.

 

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Capital lease obligations to related party:  As described in Notes 6 and 15, 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 $39,000 and $110,000 for the three months ended September 30, 2016 and 2015, respectively, and $178,000 and $371,000 for the nine months ended September 30, 2016 and 2015, respectively. The two February 2013 leases for $3.5 million of assets expired in July 2016, were fully amortized and the $385,000 lease buy-out liability was satisfied.

 

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

 

 

 

September 30,

 

Period ending:

 

2016

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

2017

 

$

3,188

 

2018

 

 

2019

 

15,000

 

2020

 

15,000

 

2021

 

15,000

 

Thereafter

 

15,000

 

 

 

 

 

Future principal payments

 

$

63,188

 

 

 

 

 

Less unamortized debt discount

 

(1,476

)

Less current portion of long-term debt

 

(3,188

)

 

 

 

 

Total long-term debt

 

$

58,524

 

 

Note 10. Common stock and redeemable convertible preferred stock

 

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 Company’s 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.

 

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:

 

·                     Following the 1-for-2.4 reverse stock split of the Company’s common stock effected on July 10, 2015 each share of Series C preferred stock converted into 0.41667 shares of common stock resulting in the conversion of all outstanding shares of convertible preferred stock into 9,217,983 shares of the Company’s common stock;

 

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·                     the conversion of the Hercules Warrants to purchase 170,000 shares of Series C 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; 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 connection with the sale of shares of the Company’s Series B-1 Redeemable Convertible Preferred Stock (“Series B-1 preferred stock”), the Series B-1 investors also received warrants to purchase 389,474 shares of common stock at an exercise price of $0.0024 per share (“Series B-1 warrants”). In 2015, the Company issued a total of 286,968 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. During the six months ended June 30, 2016, the Company issued a total of 43,861 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. The remaining Series B-1 warrants to purchase 6,297 shares of common stock expired on June 10, 2016.

 

Between December 2014 and February 2015, the Company closed on an additional Series C preferred stock 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 warrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $4.25 million.

 

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

 

Dividends:  From and after the date of the issuance of the Company’s Series B-1 redeemable convertible 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 were 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 Redeemable Convertible Preferred Stock (“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.

 

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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 each of the Series C preferred stock, Series B-1 preferred stock and Series B preferred stock for the three months ended September 30, 2015 was $37,000, $41,000 and $21,000, respectively. The amount of accretion recorded for each of the Series C preferred stock, Series B-1 preferred stock and Series B preferred stock for the nine months ended September 30, 2015 was $607,000, $370,000 and $192,000, 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 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 was recorded in other income (expense), net in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015, respectively. 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 11. Stock Based Compensation

 

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

 

The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be added to the shares of common stock available under the 2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The 2015 Plan is administered by the Company’s compensation committee. The Company’s compensation committee has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company’s compensation committee may delegate authority to grant certain awards to the Company’s chief executive officer. 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. Unexercised options under the 2015 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment.

 

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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 vested over a three-year period based on achieving certain operational milestones and the remaining options vest in equal increments over a four-year period. Unexercised options under the 2009 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment. All terminated options are available for reissuance under the 2015 Plan. Since the inception of the 2015 Plan through December 31, 2015, 1,389 shares related to forfeited 2009 Plan options and 9,197 shares related to the surrender of restricted stock were added to the shares available under the 2015 Plan. During the nine months ended September 30, 2016, 5,556 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. As of September 30, 2016, 186,960 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.

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

Estimated dividend yield

 

0

%

Expected stock price volatility

 

60

%

Weighted-average risk-free interest rate

 

1.18

%

Expected life of option in years

 

6.15

 

Weighted-average option fair value at grant

 

$

5.80

 

 

The Company has reported share-based compensation expense for stock options granted to employees for the three and nine months ended September 30, 2016 and 2015, respectively, in its consolidated statements of operations as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

92

 

$

30

 

$

233

 

$

51

 

Research and development

 

89

 

19

 

223

 

28

 

Selling and marketing

 

192

 

56

 

514

 

99

 

General and administrative

 

637

 

186

 

1,424

 

302

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,010

 

$

291

 

$

2,394

 

$

480

 

 

At September 30, 2016, there was $9.8 million of unrecognized compensation cost, which is expected to be recognized over a weighted-average period of 3.0 years.  For the nine months ended September 30, 2016, the Company issued 10,886 shares of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $13,000 and realized no tax benefit from the exercised stock options.

 

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A summary of outstanding and exercisable options as of September 30, 2016 and December 31, 2015 and the activity from December 31, 2015 through September 30, 2016, is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Number of

 

Average

 

Intrinsic

 

 

 

Options

 

Exercise Price

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2015

 

1,352,283

 

$

13.607

 

$

964

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2015

 

229,000

 

$

3.385

 

$

2,504

 

 

 

 

 

 

 

 

 

Granted (unaudited)

 

859,257

 

$

10.385

 

 

 

Exercised (unaudited)

 

(10,886

)

1.231

 

 

 

Expired, forfeited or cancelled (unaudited)

 

(79,380

)

18.986

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016 (unaudited)

 

2,121,274

 

$

12.164

 

$

1,357

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2016 (unaudited)

 

500,844

 

$

9.917

 

$

908

 

 

The weighted-average remaining contractual life of options outstanding and exercisable on September 30, 2016 was 8.8 and 7.7 years, respectively. The option exercise price for all options granted January 1, 2016 through September 30, 2016 ranged from $8.84 to $10.96 per share. The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2015 was 8.9 and 7.3 years, respectively. The option exercise price for all options granted in the year ended December 31, 2015 ranged from $9.32 to $25.50 per share.

 

Restricted stock:  Under the 2009 Plan, the Company granted restricted stock awards to members of its management and selected members of the Company’s board of directors. Restricted stock awards are recorded as deferred compensation and amortized into compensation expense, on a straight-line basis over a defined vesting period ranging from 1 to 48 months.

 

The Company did not issue any shares of restricted stock for the nine months ended September 30, 2016, or for the year ended December 31, 2015. Restricted stock compensation cost of $23,000 and $68,000 for the three and nine months ended September 30, 2016, respectively, and $27,000 and $72,000 for the three and nine months ended September 30, 2015, respectively, has been charged to general and administrative expenses.  At September 30, 2016, there was $94,000 of unrecognized compensation cost related to restricted stock, which is expected to be recognized over 12.5 months. No vested restricted stock awards were settled during the nine months ended September 30, 2016. On October 16, 2015, the Company settled in cash certain vested restricted stock awards having a value of $658,000 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 71,025 shares of unvested restricted stock with a weighted average fair value of $2.55 as of September 30, 2016 and December 31, 2015.  For the nine months ended September 30, 2016, there were no shares of restricted stock granted, vested or forfeited.

 

Note 12. 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. Shares of restricted stock totaling 9,197 on October 16, 2015 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 on October 19, 2015.

 

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Note 13. Commitments and contingencies

 

Patent Infringement Litigation: On July 25, 2016, the Company received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising the Company that Actavis has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. The certification notice alleges that the four U.S. patents listed in the FDA’s Orange Book for Adzenys XR-ODT, one with an expiration date in April 2026 and three with expiration dates in June 2032, will not be infringed by Actavis’s proposed product, are invalid and/or are unenforceable. On September 1, 2016, the Company filed a patent infringement lawsuit in federal district court against Actavis. This case alleges that Actavis infringed the Company’s Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the expiration of the Company’s patents. This lawsuit automatically stayed, or barred, the FDA from approving Actavis’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier. Neos intends to vigorously enforce its intellectual property rights relating to Adzenys XR-ODT. The Company cannot predict the timing or outcome of these proceedings.

 

Operating lease:  The Company leases its Grand Prairie, Texas office space and manufacturing facility under an operating lease which expires in 2024. In addition, in December 2015, the Company executed a 60-month lease for office space in Blue Bell, Pennsylvania for its commercial operations which commenced on May 1, 2016. The Company accounts for rent expense on long-term operating leases on a straight-line basis over the life of the lease resulting in a deferred rent balance of $1.2 million at both September 30, 2016 and December 31, 2015. The Company is also liable for a share of operating expenses for both premises as defined in the lease agreements. The Company’s share of these operating expenses was $56,000 and $172,000 for the three and nine months ended September 30, 2016, respectively, and $59,000 and $178,000 for the three and nine months ended September 30, 2015, respectively. Rent expense, excluding the share of operating expenses, for the three and nine months ended September 30, 2016 was $254,000 and $759,000, respectively, and $218,000 and $654,000 for the three and nine months ended September 30, 2015, 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 reduced bonus expense by $86,000 for the three months ended September 30, 2016 and has recorded $457,000 of bonus expense for the nine months ended September 30, 2016, and $295,000 and $673,000 of bonus expense for the three and nine months ended September 30, 2015, respectively.

 

Note 14. License agreements

 

On July 23, 2015, 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”). In accordance with the terms of the Agreement, following the receipt of the approval from the FDA for Adzenys XR-ODT, the Company paid a lump sum, non-refundable license fee of an amount less than $1.0 million on February 26, 2016. This license fee was capitalized as an intangible asset and is being amortized over the life of the longest associated patent. The Company is paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents. The royalties are being recorded as cost of goods sold in the same period as the net sales upon which they are calculated.

 

Note 15. Related party transactions

 

At December 31, 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 9 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. The Company repaid this loan and the related accrued interest on May 11, 2016 using proceeds from the new $60 million Facility (see Note 9).

 

As described in Note 6, 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. The two February 2013 leases for $3.5 million of assets expired in July 2016 and the related $2.6 million gain was fully amortized at that time and the $385,000 lease buy-out option liability was fully satisfied.

 

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Note 16. Subsequent events

 

On October 17, 2016, the Company settled in cash certain vested restricted stock awards having a value of $226,000 and the Company realized a tax benefit of $79,000. On October 17, 2016, 9,709 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock.  The fair value of such shares was determined to be $6.37 per share, the closing price of the Company’s stock on such date. On October 21, 2016, the surrendered shares of restricted stock were added to the treasury stock of the Company, increasing total treasury stock to 18,906 shares, and to the shares available under the 2015 Plan, increasing the total shares of common stock available for grant under the 2015 Plan to 196,669.

 

On October 28, 2016, the Company exercised the option to defer the third interest payment due December 1, 2016 under the Facility, and will add, when otherwise due, such amount to the outstanding loan principal until it is paid on June 1, 2017.

 

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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, 2015 and 2014 and notes thereto included in our Annual Report on Form 10-K as filed with the SEC on March 18, 2016. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q.

 

OVERVIEW

 

We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our proprietary modified-release drug delivery technology platform, which we have already used to develop Adzenys XR-ODT and our two product candidates for the treatment of attention deficit hyperactivity disorder (“ADHD”). Our product and product candidates are extended-release (“XR”), medications in patient-friendly, orally disintegrating tablets (“ODT”), or liquid suspension dosage forms. Our proprietary modified-release drug delivery platform has enabled us to create novel, extended-release ODT and liquid suspension dosage forms. We received approval from the U.S. Food and Drug Administration (“FDA”), for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27, 2016 and launched the commercialization of this product on May 16, 2016. We believe Adzenys XR-ODT is and, if approved, Cotempla XR-ODT will be the first amphetamine XR-ODT and the first methylphenidate XR-ODT, respectively, for the treatment of ADHD on the market. Cotempla XR-ODT is the provisionally accepted trade name of our methylphenidate XR-ODT. On July 25, 2016, we received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising us that Actavis has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, we filed a patent infringement lawsuit in federal district court against Actavis. This case alleges that Actavis infringed our Adzenys XR-ODT patents by submitting to the FDA an ANDA seeking to market a generic version of Adzenys XR-ODT prior to the expiration of our patents. This lawsuit automatically stayed, or barred, the FDA from approving Actavis’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier. We intend to vigorously enforce our intellectual property rights relating to Adzenys XR-ODT. We are unable to predict the timing or outcome of these proceedings at this time. We anticipate incurring increasing amounts of legal fees in the enforcement of our intellectual property rights.

 

On November 10, 2015, we announced that we received a Complete Response Letter from the FDA in its review of our New Drug Application (“NDA”) for Cotempla XR-ODT, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trial material and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. On July 28, 2016, we announced that we had completed the bridging study demonstrating that the Cotempla XR-ODT to-be-marketed drug product met all of the primary and secondary endpoints for establishing bioequivalence under fasted conditions. We expect to resubmit an NDA for Cotempla XR-ODT in the fourth quarter of 2016. In addition, we plan to submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the fourth quarter of 2016.

 

We are commercializing Adzenys XR-ODT and plan to commercialize our product candidates in the United States using our own commercial infrastructure. We are manufacturing Adzenys XR-ODT, and, if approved, intend to manufacture Cotempla XR-ODT and NT-0201 in our current Good Manufacturing Practice (“cGMP”) and U.S. Drug Enforcement Administration (“DEA”)-registered manufacturing facilities, thereby obtaining our products at cost without manufacturer’s margins and better controlling supply quality and timing. We also currently use these facilities to manufacture our generic equivalent to the 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 (“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 implementation of our commercialization strategies, research and development activities, clinical trials for our product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. Prior to our initial public offering of our common stock in July 2015, we funded our operations principally through private placements of our common stock, redeemable convertible preferred stock, bank and other lender financings and through payments received under collaborative arrangements.

 

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

 

We have incurred significant losses in each year since our reorganization in 2009. Our net losses were $65.0 million and $30.8 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, we had an accumulated deficit of approximately $181.7 million and $116.8 million, respectively. We expect to continue to incur significant expenses and increasing operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

·                  seek regulatory approval for our product candidates;

 

·                  build and operate commercial infrastructure to support sales and marketing for Adzenys XR-ODT and, if approved, our product candidates;

 

·                  continue research and development activities for new product candidates;

 

·                  manufacture supplies for our preclinical studies and clinical trials;

 

·                  continue to enforce our intellectual property rights; and.

 

·                  operate as a public company.

 

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

 

On May 11, 2016, we entered into a $60 million senior secured credit facility (“Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of loan) and Deerfield Special Situations Fund, L.P. (33 1/3% of Loan) (“Deerfield”), as lenders. Approximately $33 million of the proceeds was used to prepay the existing senior and subordinated debt (the “Note”) that was otherwise payable in 2016 and 2017.  Principal on the new debt is due in three equal annual installments beginning in May 2019 and continuing through May 2021, with a final payment of principal, interest and all other obligations under the facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of 12.95% per year. We have an option to defer payment of each of the first four interest payments until June 1, 2017. We exercised the option to defer the first three interest payments, adding such amounts to the outstanding loan principal until they are paid on June 1, 2017.

 

On August 1, 2016, we filed a shelf registration statement on Form S-3 with the SEC, which covers the offering, issuance and sale by us of up to an aggregate of $125.0 million of our common stock, preferred stock, debt securities, warrants and/or units (the “Shelf”).  We simultaneously entered into a Sales Agreement with Cowen and Company, LLC, as sales agent, to provide for the offering, issuance and sale by us of up to $40.0 million of our common stock from time to time in “at-the-market” offerings under the Shelf. The Shelf was declared effective by the SEC on August 12, 2016.

 

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 Adzenys XR-ODT and, if approved, any of our product candidates.

 

FINANCIAL OPERATIONS OVERVIEW

 

Revenue

 

Our revenue is generated primarily from product sales of our generic Tussionex recorded on a net sales basis. We launched commercialization of Adzenys XR-ODT on May 16, 2016. 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 generic Tussionex product through wholesalers. As a result of our acquisition of all of the rights to commercialize and derive future profits from the Tussionex ANDA, and the commercial launch of Adzenys XR-ODT, we expect our future revenue to increase from historical levels.

 

We historically had generated revenue from manufacturing, development and profit sharing from a development and manufacturing agreement until 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 have utilized 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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We expect the number of prescriptions filled for Adzenys XR-ODT to continue to increase through the end of 2016 and in subsequent years. Data from IMS shows 8,959 prescriptions filled during the three months ended September 30, 2016 as compared to the 1,050 prescriptions reported for the period from the May 16, 2016 launch date through June 30, 2016. Monthly prescriptions filled have continued to increase since the launch.

 

In the future, we will seek to generate additional revenue from product sales of Adzenys XR-ODT and, if approved, our two late-stage branded product candidates. We do not expect to generate any significant revenue unless or until we commercialize our product candidates. We have little Adzenys XR-ODT sales history and have determined that at this time we cannot reliably estimate expected returns of the product at the time of shipment to wholesalers. Accordingly, we defer recognition of revenue on product shipments of Adzenys XR-ODT until the right of return no longer exists, which occurs at the earlier of the time Adzenys XR-ODT units are dispensed through patient prescriptions or expiration of the right of return. We calculate patient prescriptions of Adzenys XR-ODT dispensed using an analysis of third-party information. If we fail to successfully market Adzenys XR-ODT or 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, which includes share-based compensation expense, of employees engaged in research and development activities;

 

·                  expenses incurred under third party agreements with contract research organizations (“CROs”), and investigative sites that 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,

 

 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

NT-0102

 

Cotempla XR-ODT

 

$

157

 

$

260

 

$

1,379

 

$

2,771

 

NT-0201

 

Amphetamine Liquid

 

468

 

58

 

1,285

 

139

 

NT-0202

 

Adzenys XR- ODT

 

160

 

38

 

377

 

185

 

Other Research and Development Activities (1)

 

2,125

 

2,302

 

5,681

 

5,870

 

 

 

$

2,910

 

$

2,658

 

$

8,722

 

$

8,965

 

 


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

 

During the third quarter of 2016, we reclassed our regulatory fees out of research and development expense and into cost of sales commensurate with the commercial launch of Adzenys XR-ODT.

 

We expect that our research and development expenses will fluctuate over time as we seek regulatory approval of our two ADHD product candidates and explore new product candidates, but will decrease as a percentage of revenue if Adzenys XR-ODT is commercially successful or any of our product candidates are approved and commercially successful. We expect to fund our research

 

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and development expenses from our current cash and cash equivalents, a portion of the net proceeds from our IPO and debt financing and revenues, if any, from Adzenys XR-ODT and, if approved, our product candidates.

 

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

 

On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our NDA for Cotempla XR-ODT, it had identified deficiencies that precluded discussion of labeling and post marketing requirements or commitments at that time. 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 the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. On July 28, 2016, we announced that we had completed the bridging study demonstrating that the Cotempla XR-ODT to-be-marketed drug product met all of the primary and secondary endpoints for establishing bioequivalence under fasted conditions. We expect to resubmit an NDA for Cotempla XR-ODT and submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the fourth quarter of 2016. Any further actions required by the FDA may result in further research and development expenses. For additional information regarding the FDA review process, including the Prescription Drug User Fee Act, see “Government Regulation—NDA and FDA review process” in our Annual Report on Form 10-K as filed with the SEC on March 18, 2016.

 

Selling and marketing

 

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

 

We believe that our selling and marketing expenses may increase with the growth in the commercialization of Adzenys XR-ODT and, if approved, our product candidates, particularly as we move to a business model in which we commercialize our own products in the United States.

 

General and administrative

 

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

 

We anticipate that our general and administrative expenses will increase due to increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs, as well as accounting and compliance costs to support the commercialization of Adzenys XR-ODT and, if approved, our product candidates. In addition, as a result of our Paragraph IV litigation that we commenced against Actavis in September 2016, we anticipate incurring increasing amounts of legal fees in the enforcement of our intellectual property rights.

 

Interest expense, net

 

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 which was repaid in May 2016 with the proceeds from the new Facility 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. An additional element of interest expense is the loss on debt extinguishment incurred upon prepaying the Loan and Security Agreement with Hercules (“LSA”) and the Note, which consisted of a prepayment charge, payment of legal fees on behalf of the lender and writing off unamortized end-of-term fees and unamortized debt discount.

 

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 (see Note 6 in the notes to our financial statements above). Other income and expense also included changes resulting from the remeasurement of the fair

 

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values of our earnout liability and our warrant liabilities through the effective date of the IPO, July 22, 2015. Due to the increasing amount of interest income and gains on sales of securities, we have reclassed such interest earned, accretion and gains on our cash and cash equivalents and short-term investments to other income, net. The primary objective of our investment policy is liquidity and capital preservation.

 

RESULTS OF OPERATIONS

 

Three months ended September 30, 2016 compared to the three months ended September 30, 2015

 

Revenues

 

The following table summarizes our revenues for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Product

 

$

1,583

 

$

221

 

$

1,362

 

616.3

%

 

Total product revenues were $1.6 million for the three months ended September 30, 2016, an increase of $1.4 million or 616.3% from the $0.2 million for the three months ended September 30, 2015. Net sales of our generic Tussionex increased $0.7 million to $0.9 million from the $0.2 million for the three months ended September 30, 2015 due to increased sales volume. Also included were $0.7 million of net sales for the first full quarter of dispensed patient prescriptions of our Adzenys XR-ODT which was launched May 16, 2016.

 

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

 

Cost of goods sold

 

The following table summarizes our cost of goods sold for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Cost of goods sold

 

$

2,289

 

$

1,172

 

$

1,117

 

95.3

%

 

The total cost of goods sold was $2.3 million for the three months ended September 30, 2016, an increase of $1.1 million or 95.3%, from the $1.2 million for the three months ended September 30, 2015. This increase was primarily due to a $0.5 million increase in product costs due to initial sales of Adzenys XR-ODT  and the increased unit sales of our generic Tussionex and a $0.8 million increase in other cost of goods sold, principally due to a $0.5 million accrual of the product and facility regulatory fees for Adzenys XR-ODT and generic Tussionex and a $0.3 million increase in raw material scrap from the increased production,  partially offset by a $0.1 million decrease in facility costs and a $0.1 million decrease in depreciation due to capitalized depreciation costs associated with the Adzenys XR-ODT inventory build.

 

Research and development expenses

 

The following table summarizes our research and development expenses for three months ended September 30, 2016 and 2015:

 

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Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Research and development expenses

 

$

2,910

 

$

2,658

 

$

252

 

9.5

%

 

Research and development expenses were $2.9 million for the three months ended September 30, 2016, an increase of approximately $0.2 million or 9.5%, from the $2.7 million for the three months ended September 30, 2015. This increase was primarily due to a $0.5 million increase in clinical studies for our product candidates and a $0.1 million increase in research and development compensation expense, partially offset by a $0.2 million decrease in research and development materials to support our clinical programs, a $0.1 million decrease in facility costs and a $0.1 million decrease in depreciation expense as certain capital lease assets became fully depreciated in July 2016.

 

Selling and marketing expenses

 

The following table summarizes our selling and marketing expenses for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Selling and marketing

 

$

16,977

 

$

1,399

 

$

15,578

 

1,113.5

%

 

The total selling and marketing expenses were $17.0 million for the three months ended September 30, 2016, an increase of $15.6 million or 1,113.5%, from the approximately $1.4 million for the three months ended September 30, 2015. Commercial sales organization salesforce and sales support costs to commercialize Adzenys XR-ODT comprised $6.2 million of the increased expense. Selling and marketing professional services in support of Adzenys XR-ODT, exclusive of commercial sales organization costs, increased by $8.0 million due to advertising agency, marketing materials, managed care, pharmacy and patient assistance program management and data analysis costs incurred in 2016. Salary and compensation expense increased $1.2 million for the build out of our sales and marketing management as part of the launch of Adzenys XR-ODT. In addition, selling and marketing travel and entertainment expenses increased $0.2 million.

 

General and administrative expenses

 

The following table summarizes our general and administrative expenses for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

General and administrative

 

$

3,140

 

$

1,967

 

$

1,173

 

59.6

%

 

The total general and administrative expenses were $3.1 million for the three months ended September 30, 2016, an increase of approximately $1.1 million or 59.6%, from the $2.0 million for the three months ended September 30, 2015.  Professional fees increased $0.6 million in 2016 primarily for legal, public filing, business development and SOX compliance services. Also, salary and compensation expense increased $0.5 million in the three months ended September 30, 2016 due an increase in compensation related to share-based payments.

 

Interest expense

 

The following table summarizes interest expense for the three months ended September 30, 2016 and 2015:

 

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Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Interest expense

 

$

2,130

 

$

1,044

 

$

1,086

 

104.0

%

 

The total interest expense was $2.1 million for the three months ended September 30, 2016, an increase of $1.1 million or 104.0%, from the $1.0 million for the three months ended September 30, 2015. Interest on the senior debt was $1.3 million higher due to the increased amount of debt in 2016, partially offset primarily by $0.2 million lower interest on the subordinated debt due to the prepayment of the $5.9 million of principal and $1.3 million of interest on the 10% related party Note.

 

Other income (expense), net

 

The following table summarizes our other income (expense) for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Other income, net

 

$

57

 

$

(1,349

)

$

1,406

 

104.2

%

 

Other income, net was $0.1 million for the three months ended September 30, 2016, an absolute increase of $1.4 million or 104.2%, from the $1.3 million of net expense for the three months ended September 30, 2015. This absolute increase was primarily due to the $1.5 million 2015 year-to-date effect of the remeasurements of the fair values of the warrant and earnout liabilities, which was partially offset by a $0.1 million increase in 2016 in the fair value of the earnout liability resulting primarily from reforecast of generic Tussionex sales. In 2016, as a result of our IPO, the warrants are no longer being revalued at each balance sheet date (see Note 2 — Warrants in the notes to our financial statements above). The 2016 other income, net also included $0.1 million of investment accretion and interest income, offset by a $0.1 million decrease in the amortization of the gain on the sale leasebacks due to the expiration in July 2016 of the two February 2013 leases for $3.5 million of assets.

 

Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

 

Revenues

 

The following table summarizes our revenues for the nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Product

 

$

5,651

 

$

2,133

 

$

3,518

 

164.9

%

 

Total product revenues were $5.7 million for the nine months ended September 30, 2016, an increase of $3.5 million or 164.9% from the $2.1 million for the nine months ended September 30, 2015. Net sales of our generic Tussionex increased $2.8 million to $4.9 million from the $2.1 million for the nine months ended September 30, 2015 due to increased sales volume. Also included in product revenues for the period from May 16, 2016 through September 30, 2016 were $0.7 million of net sales of dispensed patient prescriptions of our Adzenys XR-ODT which was launched May 16, 2016.

 

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

 

Cost of goods sold

 

The following table summarizes our cost of goods sold for the nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Cost of goods sold

 

$

7,301

 

$

4,070

 

$

3,231

 

79.4

%

 

The total cost of goods sold was $7.3 million for the nine months ended September 30, 2016, an increase of $3.2 million or 79.4%, from the $4.1 million for the nine months ended September 30, 2015.  This increase was primarily due to a $1.6 million increase in product costs due to the increased unit sales of our generic Tussionex and initial sales of Adzenys XR-ODT and an increase in other cost of goods sold, principally due to a $1.4 million accrual of the product and facility regulatory fees for Adzenys XR-ODT and our generic Tussionex (which were recorded in research and development expense in 2015), a $0.3 million increase in raw material scrap from the increased production, and $0.3 million of increased lab and manufacturing supplies, partially offset by a $0.3 million decrease in facility costs and a $0.1 million decrease in depreciation due to capitalized depreciation costs associated with the Adzenys XR-ODT inventory build.

 

Research and development expenses

 

The following table summarizes our research and development expenses for nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Research and development expenses

 

$

8,722

 

$

8,965

 

$

(243

)

(2.7

)%

 

Research and development expenses were $8.7 million for the nine months ended September 30, 2016, a decrease of approximately $0.3 million or 2.7%, from the $9.0 million for the nine months ended September 30, 2015. This decrease was primarily due to $2.3 million FDA filing fee for the NDA for Cotempla XR-ODT submitted in January 2015 and a $0.3 million decrease in depreciation expense as certain capital lease assets became fully depreciated in July 2016, partially offset by a $1.9 million increase professional services principally for clinical studies for our product candidates and a $0.4 million increase in research and development compensation expense.

 

Selling and marketing expenses

 

The following table summarizes our selling and marketing expenses for the nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Increase

 

% Increase

 

 

 

2016

 

2015

 

(Decrease)

 

(Decrease)

 

 

 

(unaudited)

 

 

 

 

 

(in thousands)

 

 

 

 

 

Selling and marketing

 

$

39,630

 

$

2,370