Company Quick10K Filing
Quick10K
Neos Therapeutics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$2.13 50 $106
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-01-29 Officers
8-K 2018-12-21 Enter Agreement, Other Events, Exhibits
8-K 2018-12-11 Other Events, Exhibits
8-K 2018-11-29 Exit Costs, Officers, Regulation FD, Exhibits
8-K 2018-11-08 Other Events
8-K 2018-11-06 Enter Agreement, Other Events, Exhibits
8-K 2018-11-05 Enter Agreement, Earnings, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-10-23 Enter Agreement, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-06-27 Officers, Regulation FD, Exhibits
8-K 2018-06-20 Shareholder Vote
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-04-27 Officers
8-K 2018-03-15 Earnings, Exhibits
BAP Credicorp 17,960
FMC FMC 10,490
PJC Piper Jaffray 1,130
NOG Northern Oil & Gas 877
MSC Hexion 612
SVRA Savara 384
MMAC MMA Capital Management 179
AMRK A-Mark Precious Metals 81
MTFB Motif Bio 36
RTE Red Trail Energy 0
NEOS 2019-03-31
Part I-Financial Information
Item 1. Condensed Financial Statements.
Note 1. Organization and Nature of Operations
Note 2. Summary of Significant Accounting Policies
Note 3. Net Loss per Share
Note 4. Fair Value of Financial Instruments
Note 5. Inventories
Note 6. Sale-Leaseback Transaction
Note 7. Accrued Expenses
Note 8. Long-Term Debt
Note 9. Leases
Note 10. Common Stock
Note 11. Share-Based Compensation
Note 12. Treasury Stock
Note 13. Commitments and Contingencies
Note 14. License Agreements
Note 15. Related Party Transactions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-10.1 a19-7702_1ex10d1.htm
EX-10.2 a19-7702_1ex10d2.htm
EX-31.1 a19-7702_1ex31d1.htm
EX-31.2 a19-7702_1ex31d2.htm
EX-32.1 a19-7702_1ex32d1.htm

Neos Therapeutics Earnings 2019-03-31

NEOS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7702_110q.htm 10-Q

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 MARCH 31, 2019

 

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 every Interactive Data File required to be submitted 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 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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

 

 

Emerging growth company x

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which
registered

Common stock, par value $0.001 per share

 

NEOS

 

The NASDAQ Global Market

 

The number of shares outstanding of the registrant’s common stock as of May 6, 2019: 49,722,516 shares.

 

 

 


Table of Contents

 

NEOS THERAPEUTICS, INC.

 

INDEX

 

 

 

Page No.

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

8

 

Condensed Consolidated Statements of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

Item 2

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

33

Item 3

Quantitative and Qualitative Disclosures about Market Risk

49

Item 4

Controls and Procedures

49

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

51

Item 1A

Risk Factors

51

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

84

Item 3

Defaults Upon Senior Securities

85

Item 4

Mine Safety Disclosures

85

Item 5

Other Information

85

Item 6

Exhibits

85

 

 

 

SIGNATURES

87

 

2


Table of Contents

 

Special note regarding forward-looking statements

 

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

 

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

 

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

 

·                  our ability to maintain our license for NT0502, to successfully complete clinical development of this molecule, to file for and obtain regulatory approval of NT0502 and to otherwise realize the intended benefits of this license;

 

·                  the effect of the amendment to our facility agreement with Deerfield Private Design Fund III, L.P. and Deerfield Special Situations Fund, L.P. and our ability to satisfy the repayment obligations thereunder;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  our entry into the settlement and licensing agreement with Teva Pharmaceuticals USA, Inc. (“Teva”) the effect of our agreement with Teva on its ANDA and with the FDA for a generic version of Cotempla XR-ODT, and the expected timing of the manufacture and marketing of Teva’s generic version of Cotempla XR-ODT under the ANDA;

 

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

 

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

 

·                  our ability to achieve profitability;

 

3


Table of Contents

 

·                  our staffing needs; and

 

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

 

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

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

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

 

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

 

4


Table of Contents

 

PART I—FINANCIAL INFORMATION

ITEM 1.                                                CONDENSED FINANCIAL STATEMENTS.

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

32,760

 

$

46,478

 

Short-term investments

 

7,205

 

 

Accounts receivable, net of allowances for chargebacks and cash discounts of $2,164 and $1,865, respectively

 

23,222

 

27,801

 

Inventories

 

11,276

 

10,367

 

Other current assets

 

2,555

 

4,032

 

Total current assets

 

77,018

 

88,678

 

 

 

 

 

 

 

Property and equipment, net

 

7,532

 

7,914

 

Operating lease right-of-use assets

 

3,381

 

 

Intangible assets, net

 

14,016

 

14,616

 

Other assets

 

149

 

149

 

 

 

 

 

 

 

Total assets

 

$

102,096

 

$

111,357

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

8,552

 

$

12,730

 

Accrued expenses

 

34,118

 

35,818

 

Current portion of operating lease liabilities

 

571

 

 

Current portion of long-term debt

 

8,615

 

8,557

 

 

 

 

 

 

 

Total current liabilities

 

51,856

 

57,105

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

43,266

 

43,217

 

Operating lease liabilities

 

3,775

 

 

Derivative liability

 

1,888

 

2,017

 

Deferred rent

 

 

989

 

Other long-term liabilities

 

183

 

184

 

 

 

 

 

 

 

Total long-term liabilities

 

49,112

 

46,407

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at March 31, 2019 and December 31, 2018

 

 

 

Common stock, $0.001 par value, 100,000,000 authorized at March 31, 2019 and December 31, 2018; 49,756,317 and 49,722,516 issued and outstanding, respectively, at March 31, 2019; 49,710,104 and 49,676,303 issued and outstanding, respectively, at December 31, 2018

 

50

 

50

 

Treasury stock, at cost, 33,801 shares at March 31, 2019 and December 31, 2018

 

(352

)

(352

)

Additional paid-in capital

 

326,014

 

325,130

 

Accumulated deficit

 

(324,583

)

(316,983

)

Accumulated other comprehensive loss

 

(1

)

 

 

 

 

 

 

 

Total stockholders’ equity

 

1,128

 

7,845

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

102,096

 

$

111,357

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenues:

 

 

 

 

 

Net product sales

 

$

14,634

 

$

10,729

 

 

 

 

 

 

 

Cost of goods sold

 

6,396

 

5,221

 

Gross profit

 

8,238

 

5,508

 

 

 

 

 

 

 

Research and development expenses

 

3,197

 

1,691

 

Selling and marketing expenses

 

7,069

 

12,990

 

General and administrative expenses

 

3,793

 

3,345

 

 

 

 

 

 

 

Loss from operations

 

(5,821

)

(12,518

)

 

 

 

 

 

 

Interest expense

 

(2,115

)

(2,220

)

Other income, net

 

336

 

302

 

 

 

 

 

 

 

Net loss

 

$

(7,600

)

$

(14,436

)

 

 

 

 

 

 

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

 

49,703,563

 

28,996,956

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.15

)

$

(0.50

)

 

See notes to condensed consolidated financial statements.

 

6


Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Net loss

 

$

(7,600

)

$

(14,436

)

Other comprehensive loss:

 

 

 

 

 

Net unrealized (loss) gain on short-term investments

 

(1

)

3

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

$

(1

)

$

3

 

 

 

 

 

 

 

Comprehensive loss

 

$

(7,601

)

$

(14,433

)

 

See notes to condensed consolidated financial statements.

 

7


Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except shares)

(unaudited)

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Equity (Deficit)

 

Balance, December 31, 2018

 

 

$

 

49,710,104

 

$

50

 

(33,801

)

$

(352

)

$

325,130

 

$

(316,983

)

$

 

$

7,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon RSU conversion

 

 

 

11,006

 

 

 

 

 

 

 

 

Shares issued for exercise of stock options

 

 

 

35,207

 

 

 

 

11

 

 

 

11

 

Payroll tax withheld for RSU releases

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Share-based compensation expense

 

 

 

 

 

 

 

874

 

 

 

874

 

Net unrealized loss on investments

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Net loss

 

 

 

 

 

 

 

 

(7,600

)

 

(7,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2019

 

 

$

 

49,756,317

 

$

50

 

(33,801

)

$

(352

)

$

326,014

 

$

(324,583

)

$

(1

)

$

1,128

 

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

(Loss)

 

Equity (Deficit)

 

Balance, December 31, 2017

 

 

$

 

29,030,757

 

$

29

 

(33,801

)

$

(352

)

$

274,584

 

$

(265,308

)

$

(6

)

$

8,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

967

 

 

 

967

 

Net unrealized gain on investments

 

 

 

 

 

 

 

 

 

3

 

3

 

Net loss

 

 

 

 

 

 

 

 

(14,436

)

 

(14,436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

 

$

 

29,030,757

 

$

29

 

(33,801

)

$

(352

)

$

275,551

 

$

(279,744

)

$

(3

)

$

(4,519

)

 

See notes to condensed consolidated financial statements.

 

8


Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2019

 

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(7,600

)

$

(14,436

)

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

 

 

 

 

 

Share-based compensation expense

 

874

 

967

 

Depreciation and amortization of property and equipment

 

549

 

421

 

Amortization of patents and other intangible assets

 

618

 

434

 

Changes in fair value of earnout, derivative and warrant liabilities

 

(129

)

(186

)

Amortization of senior debt discounts

 

357

 

209

 

Amortization of short-term investment purchase discounts

 

(16

)

(35

)

Gain on sale of equipment

 

(1

)

(1

)

Other adjustments

 

 

(24

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,579

 

(5,971

)

Inventories

 

(909

)

(1,667

)

Other assets

 

1,477

 

1,154

 

Accounts payable

 

(4,178

)

(1,205

)

Accrued expenses

 

(1,700

)

7,636

 

Operating lease liabilities

 

(24

)

 

 

 

 

 

 

 

Net cash used in operating activities

 

(6,103

)

(12,704

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of short-term investments

 

(7,190

)

(10,951

)

Sales and maturities of short-term investments

 

 

16,993

 

Capital expenditures

 

(167

)

(286

)

Intangible asset expenditures

 

(18

)

(17

)

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

(7,375

)

5,739

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

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

 

11

 

 

Payments made on borrowings

 

(250

)

(227

)

Payment of payroll taxes withheld for releases of restricted stock units

 

(1

)

 

 

 

 

 

 

 

Net cash used in financing activities

 

(240

)

(227

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(13,718

)

(7,192

)

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning

 

46,478

 

31,969

 

Ending

 

$

32,760

 

$

24,777

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Transactions:

 

 

 

 

 

Prepaid assets included in accounts payable

 

$

 

$

407

 

Acquired equipment under capital lease

 

$

 

$

105

 

Capital lease liability from purchase of equipment

 

$

 

$

105

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

1,764

 

$

2,040

 

 

See notes to condensed consolidated financial statements.

 

9


Table of Contents

 

Neos Therapeutics, Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and nature of operations

 

Neos Therapeutics, Inc., a Delaware corporation, and its subsidiaries (the “Company”) is a fully integrated pharmaceutical company. The Company has developed a broad, proprietary modified-release drug delivery technology that enables the manufacture of single and multiple ingredient extended-release (“XR”) pharmaceuticals in patient- and caregiver-friendly orally disintegrating tablet (“ODT”) and liquid suspension dosage forms. The Company has a pipeline of extended-release pharmaceuticals including three approved products for the treatment of attention deficit hyperactivity disorder (“ADHD”). Adzenys XR-ODT was approved by the U.S. Food and Drug Administration (the “FDA”) in January 2016 and launched commercially in May 2016. The Company received approval from the FDA for Cotempla XR-ODT, its methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017, and launched commercially in September 2017. Also, the Company received approval from the FDA for Adzenys ER oral suspension (“Adzenys ER”) on September 15, 2017 and launched this product in February 2018. In addition, the Company manufactures and markets a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release liquid suspension for the treatment of cough and upper respiratory symptoms of a cold. In addition to its marketed products, the Company is developing NT-0400, its XR-ODT product candidate for nausea and vomiting, and NT0502, its product candidate for the treatment of sialorrhea.

 

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 months ended March 31, 2019 are not necessarily indicative of the results for the year ending December 31, 2018 or any period thereafter.  The audited consolidated financial statements as of and for the year ended December 31, 2018 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, 2019. 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, 2018.

 

Principles of consolidation:  At March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018, the consolidated financial statements include the accounts of the Company and its four wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

 

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

 

Liquidity:  During 2018 and the three months ended March 31, 2019, the Company produced operating losses and used cash to fund operations. Management intends to achieve profitability through revenue growth from its currently marketed pharmaceutical products. The Company does not anticipate it will be profitable until such time as revenues from Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER increase substantially over current levels. In November 2018, the Company completed an offering of its common stock and restructured its outstanding debt to reduce and possibly delay the amount of principal payable in cash. Accordingly, management has performed the review required for going concern accounting and believes the Company presently has sufficient liquidity to continue to operate for the next twelve months after the filing of this Report on Form 10-Q.

 

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

 

10


Table of Contents

 

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

 

Inventories: Inventories are measured at the lower of cost (first in, first out) or net realizable value. Inventories have been reduced by an allowance for excess and obsolete inventories. Cost elements include material, labor and manufacturing overhead. Inventories consist of raw materials, work in process and finished goods.

 

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

 

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

 

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

 

Intangible assets:  Intangible assets subject to amortization, which principally include proprietary modified-release drug delivery technology, the costs to acquire the rights to Tussionex Abbreviated New Drug Application and patents, are recorded at cost and amortized over the estimated lives of the assets, which primarily range from 10 to 20 years. The Company estimates that the patents it has filed have a future beneficial value. Therefore, costs associated with filing for its patents are capitalized. Once the patent is approved and commercial revenue realized, the costs associated with the patent are amortized over the useful life of the patent. If the patent is not approved, the costs will be expensed. For new product candidates, patent applications and related expenses are expensed as incurred.

 

Revenue recognition:  Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company makes estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler fees, wholesaler chargebacks and estimated rebates) to be incurred on the selling price of the respective product sales, and recognizes the estimated amount as revenue when it transfers control of the product to its customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated

 

11


Table of Contents

 

with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint will require the use of significant management judgment and other market data. The Company provides for prompt payment discounts, wholesaler fees and wholesaler chargebacks based on customer contractual stipulations. The Company analyzes recent product return history and other market data obtained from its third party logistics providers (“3PLs”) to determine a reliable return rate. Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions dispensed for Adzenys XR ODT, Cotempla XR ODT and Adzenys ER and information obtained from third party providers to determine these respective variable considerations.

 

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

 

The Company views its operations and manages its business in one operating segment, which is the development, manufacturing and commercialization of pharmaceuticals.

 

Disaggregation of revenue

 

The following table disaggregates the Company’s net product sales by product:

 

 

 

Three months ended March 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Adzenys XR-ODT

 

$

6,657

 

$

4,992

 

Cotempla XR-ODT

 

5,773

 

3,647

 

Adzenys ER

 

185

 

203

 

Generic Tussionex

 

2,019

 

1,887

 

 

 

$

14,634

 

$

10,729

 

 

Net branded product sales

 

Net product sales represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments for branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER include savings offers, prompt payment discounts, wholesaler fees, estimated rebates to be incurred on the selling price of the respective product sales and estimated allowances for product returns.

 

Gross to net sales adjustments for generic Tussionex include prompt payment discounts, estimated allowances for product returns, wholesaler fees, estimated government rebates and estimated chargebacks to be incurred on the selling price of generic Tussionex related to the respective product sales.

 

The Company recognizes total gross product sales less gross to net sales adjustments as revenue based on shipments from 3PLs to the Company’s wholesaler customers.

 

Savings offers for branded products

 

The Company offers savings programs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The Company records the amount of redeemed savings offers based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustments at the time revenue is recognized.

 

Prompt payment discounts

 

Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustments at the time revenue is recognized.

 

12


Table of Contents

 

Wholesale distribution fees

 

Wholesale distribution fees are based on definitive contractual agreements for the management of the Company’s products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.

 

Rebates

 

The Company’s branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER 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. Calculations related to rebate accruals of branded products are estimated based on information from third-party providers.

 

The Company’s generic Tussionex product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. Generic Tussionex government rebates are estimated based upon rebate payment data available from sales of the Company’s generic Tussionex product over the past three years.

 

Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated rebates will be regularly monitored, which may result in adjustments to such estimates in the future.

 

Product returns

 

Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized.

 

The Company analyzed recent branded product return history and other market data obtained from the Company’s 3PLs, as well as data available from sales of its branded products, to determine a reliable return rate for branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. Generic Tussionex product returns were estimated based upon return data available from sales of the Company’s generic Tussionex product over the past three years.

 

Wholesaler chargebacks for generic product

 

The Company’s generic Tussionex 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. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustments at the time revenue is recognized based on information provided by third parties.

 

Due to estimates and assumptions inherent in determining the amount of generic Tussionex returns, rebates and chargebacks, the actual amount of returns, 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 are recorded in the same period that the related revenue is recognized.

 

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.

 

Advertising costs: Advertising costs are comprised of print and electronic media placements that are expensed as incurred. The Company recognized advertising costs of $0.2 million during the three months ended March 31, 2018. There were no advertising costs recognized during the three months ended March 31, 2019.

 

Share-based compensation:  Share-based compensation awards, including grants of employee stock options, restricted stock, restricted stock units (“RSUs”) and modifications to existing stock options, are recognized in the statement

 

13


Table of Contents

 

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.

 

For performance-based stock awards, compensation expense is recognized on a straight-line basis, based on the grant date fair value, over the performance period or through the vesting date, whichever is longer. Management monitors the probability of achievement of the performance conditions and adjusts stock-based compensation expense, if necessary.

 

After the closing of the Company’s IPO, the Company’s board of directors has determined the fair value of each share of underlying common stock based on the closing price of the Company’s common stock as reported by the NASDAQ Global Market on the date of grant.

 

Under ASU No. 2017-09 guidance for accounting for share-based payments, the Company has elected to continue estimating forfeitures at the time of grant and, if necessary, revise the estimate in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest. The adoption of this standard in 2017 did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

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

 

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

 

Management evaluates the Company’s tax positions in accordance with guidance on accounting for uncertainty in income taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination. As of March 31, 2019 and December 31, 2018, the Company has unrecognized tax benefits associated with uncertain tax positions in the consolidated financial statements. These uncertain tax positions were netted against net operating losses (NOLs) with no separate reserve for uncertain tax positions required.

 

Deferred tax assets should be reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized. In evaluating the objective evidence that historical results provide, the Company considered that three years of cumulative operating losses was significant negative evidence outweighing projections for future taxable income. Therefore, at March 31, 2019 and December 31, 2018, the Company determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero. The Company may not ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

 

Recent accounting pronouncements: In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The standard is effective for public entities for the fiscal years ending after December 15, 2020, with early adoption permitted for the removed disclosures and delayed adoption permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2018-13 on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement —Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA, and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for entities for fiscal years beginning after December 15, 2018 with early adoption permitted, and shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the corporate income tax rate in the TCJA is recognized. This standard became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial position.

 

14


Table of Contents

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (the “New Lease Standard”). The New Lease Standard supersedes the lease guidance under FASB Accounting Standards Codification (“ASC”) Topic 840, Leases (“Prior GAAP”), resulting in the creation of FASB ASC Topic 842, Leases. Under the new guidance, lessees are required to recognize in the statement of financial position the following for all finance and operating 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 (“ROU”) 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.

 

In January, July and December 2018, the FASB issued additional amendments to the new lease guidance relating to, transition, and clarification. The July 2018 amendment, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective transition method, which did not require the Company to adjust comparative periods.

 

The Company adopted this standard on the effective date of January 1, 2019 and elected to use the modified retrospective transition method approach at transition. Therefore, no adjustments are made to amounts in prior period financial statements.

 

In addition, the Company elected the following practical expedients:

 

1)    the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification;

 

2)    the land easements practical expedient, which allows the Company to carry forward the accounting treatment for land easements on existing agreements;

 

3)    the short-term lease practical expedient, which allows the Company to exclude short-term leases from recognition in the unaudited consolidated balance sheets; and

 

4)    the bifurcation of lease and non-lease components practical expedient, which does not require the Company to bifurcate lease and non-lease components for all classes of assets.

 

The adoption of this accounting standard resulted in the recording of Operating lease ROU assets and Operating lease liabilities of $3.4 million and $4.3 million, respectively, as of January 1, 2019. The difference between the operating lease assets and liabilities was recorded as an adjustment to deferred rent for $0.9 million relating to real estate leases. The adoption of ASU 2016-02 had no impact on Accumulated Deficit.

 

The Company implemented additional internal controls to identify lease contracts and enable the preparation of financial information related to the New Lease Standard. See Note 9 for additional information.

 

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

 

Note 3. Net loss per share

 

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

 

The following potentially dilutive securities outstanding as of March 31, 2019 and 2018 were excluded from consideration in the computation of diluted net loss per share of common stock for the three months ended March 31, 2019 and 2018, respectively, because including them would have been anti-dilutive:

 

15


Table of Contents

 

 

 

March 31,

 

 

 

2019

 

2018

 

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

70,833

 

70,833

 

Stock options outstanding

 

4,793,891

 

3,027,931

 

RSUs granted, not issued or outstanding

 

63,752

 

178,750

 

 

Note 4. Fair value of financial instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

Fair Value as of March 31, 2019

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

16,792

 

$

15,968

 

$

 

$

32,760

 

Short-term investments

 

 

7,205

 

 

7,205

 

Total financial assets

 

$

16,792

 

$

23,173

 

$

 

$

39,965

 

 

 

 

 

 

 

 

 

 

 

Earnout liability

 

$

 

$

 

$

37

 

$

37

 

Derivative liability (see Note 8)

 

 

 

1,888

 

1,888

 

Total financial liabilities

 

$

 

$

 

$

1,925

 

$

1,925

 

 

 

 

Fair Value as of December 31, 2018

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

27,419

 

$

19,059

 

$

 

$

46,478

 

Total financial assets

 

$

27,419

 

$

19,059

 

$

 

$

46,478

 

 

 

 

 

 

 

 

 

 

 

Earnout liability

 

$

 

$

 

$

37

 

$

37

 

Derivative liability (see Note 8)

 

 

 

2,017

 

2,017

 

Total financial liabilities

 

$

 

$

 

$

2,054

 

$

2,054

 

 

The Company’s Level 1 assets included bank deposits, certificates of deposit and actively traded money market funds with an original maturity of 90 days or less at March 31, 2019 and December 31, 2018. Asset values were considered to approximate fair value due to their short-term nature.

 

The Company’s Level 2 assets included commercial paper and corporate bonds with maturities of less than one year that are not actively traded which were classified as available-for-sale securities. The level 2 cash equivalents consist

 

16


Table of Contents

 

of U.S. agency bonds and corporate commercial paper that mature in less than 90 days which are valued using quoted prices and other data values. The estimated fair values of these securities were determined by third parties using valuation techniques that incorporate standard observable inputs and assumptions such as quoted prices for similar assets, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

 

The Company’s cash and cash equivalents and short-term investments had quoted prices at March 31, 2019 and December 31, 2018 as shown below:

 

 

 

March 31, 2019

 

 

 

Amortized

 

Unrealized

 

Market

 

 

 

Cost

 

Gain / (Loss)

 

Value

 

 

 

(in thousands)

 

Bank deposits and money market funds

 

$

16,792

 

$

 

$

16,792

 

 

 

 

 

 

 

 

 

Financial and corporate debt securities

 

23,174

 

(1

)

23,173

 

 

 

 

 

 

 

 

 

 

 

$

39,966

 

$

(1

)

$

39,965

 

 

 

 

December 31, 2018

 

 

 

Amortized

 

Unrealized

 

Market

 

 

 

Cost

 

Gain / (Loss)

 

Value

 

 

 

(in thousands)

 

Bank deposits and money market funds

 

$

27,419

 

$

 

$

27,419

 

 

 

 

 

 

 

 

 

Financial and corporate debt securities

 

19,059

 

 

19,059

 

 

 

 

 

 

 

 

 

 

 

$

46,478

 

$

 

$

46,478

 

 

The Company’s Level 3 liability included the fair value of the earnout liability and the fair value of the Deerfield Private Design Fund III, L.P. and Deerfield Special Situations Fund, L.P. derivative liability at March 31, 2019 and December 31, 2018.

 

The fair value of the derivative liability was determined after taking into consideration valuations using the Monte Carlo method based on assumptions at March 31, 2019 and December 31, 2018. There were no significant changes in the pricing assumptions during the three months ended March 31, 2019. The methodologies and significant inputs used in the determination of the fair value of the debt derivative liability were as follows:

 

 

 

Derivative Liability

 

Date of Valuation

 

3/31/2019

 

12/31/2018

 

Valuation Method

 

Monte Carlo

 

Monte Carlo

 

Volatility (annual)

 

N/A

 

N/A

 

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

 

3.1

 

3.4

 

Cumulative probability of a change in control prepayment implied by model

 

25%

 

25%

 

Cumulative probability of other accelerated prepayments implied by model

 

13%

 

14%

 

Discount rate

 

24.75%

 

23.12%

 

Fair value of liability at valuation date (thousands)

 

$1,888

 

$2,017

 

 

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

 

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

 

17


Table of Contents

 

 

 

Level 3

 

 

 

Liabilities

 

 

 

(in thousands)

 

Balance at December 31, 2018

 

$

2,054

 

 

 

 

 

Change in fair value

 

(129

)

 

 

 

 

Balance at March 31, 2019

 

$

1,925

 

 

Note 5. Inventories

 

Inventories at the indicated dates consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Raw materials

 

$

4,055

 

$

3,845

 

Work in progress

 

2,813

 

2,704

 

Finished goods

 

4,722

 

4,259

 

 

 

 

 

 

 

Inventory at cost

 

11,590

 

10,808

 

Inventory reserve

 

(314

)

(441

)

 

 

 

 

 

 

 

 

$

11,276

 

$

10,367

 

 

Note 6. Sale-leaseback transaction

 

The Company accounts for the sale and leaseback transactions discussed below as capital leases. Accordingly, the leased assets are recorded in property and equipment and the capitalized lease obligations are included in long-term liabilities at the present value of the future lease payments in accordance with the terms of the lease (see Note 8). Lease payments are applied using the effective interest rate inherent in the leases. Depreciation of the property and equipment is included within cost of goods sold and operating expenses in the consolidated statements of operations and within depreciation and amortization of property and equipment in the consolidated statements of cash flows.

 

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

 

For the three months ended March 31, 2019 and 2018, approximately $1,000 and $1,000, respectively, of the net gain on sale-leasebacks was recognized in other income on the condensed consolidated statements of operations.

 

Note 7. Accrued expenses

 

Accrued expenses as of March 31, 2019 and December 31, 2018 consist of the following:

 

 

 

March 31,
2019

 

December 31,
2018

 

 

 

(in thousands)

 

Accrued savings offers

 

$

11,880

 

$

11,289

 

Accrued rebates

 

6,192

 

7,762

 

Accrued customer returns

 

5,656

 

5,157

 

Accrued wholesaler fees

 

4,089

 

4,249

 

Accrued payroll and benefits

 

3,353

 

4,555

 

Other accrued expenses

 

2,948

 

2,806

 

Total accrued expenses

 

$

34,118

 

$

35,818

 

 

18


Table of Contents

 

Note 8. Long-term debt

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Deerfield senior secured credit facility, net of discount of $2,978 and $3,334, respectively

 

$

50,273

 

$

49,916

 

Financing and capital leases, maturing through November 2020

 

1,608

 

1,858

 

 

 

 

 

 

 

 

 

51,881

 

51,774

 

Less current portion

 

(8,615

)

(8,557

)

 

 

 

 

 

 

Long-term debt

 

$

43,266

 

$

43,217

 

 

Senior secured credit facility: On May 11, 2016, the Company entered into a $60.0 million senior secured credit facility (the “Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of Facility) and Deerfield Special Situations Fund, L.P. (33 1/3% of Facility) (collectively, “Deerfield”), as lenders. In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share (see Note 10). Deerfield, the Company’s senior lender, participated in the purchase of the Company’s common shares as part of this public offering, and as a result, was classified as a related party at the time of the corresponding transactions.

 

Principal on the Facility was due in three equal annual installments beginning in May 2019 and continuing through May 2021, with a final payment of principal, interest and all other obligations under the Facility due May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of 12.95% per year. The Company had an option, which it exercised, to defer payment of each of the first four interest payments, adding such amounts to the outstanding loan principal. The aggregate $6.6 million in deferred interest payments (the “Accrued Interest”) was due and payable on June 1, 2017.  Borrowings under the Facility are collateralized by substantially all of the Company’s assets, except the assets under capital lease. The terms of the Facility require the Company to maintain cash on deposit of not less than $5.0 million.

 

On June 1, 2017 (the “Amendment Date”), the Company and Deerfield entered into a First Amendment (the “Amendment”) to the Facility which extended the date to repay the Accrued Interest under the Facility to June 1, 2018 (the “PIK Maturity Date”), which could have been extended to June 1, 2019 at the election of the Company if certain conditions had been met as specified in the Amendment. However, as described below, the accrued interest amount was converted into shares of common stock.

 

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

 

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

 

19


Table of Contents

 

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

 

In conjunction with the Amendment to the Facility and the related issuance of the Convertible Notes, the Company entered into a Registration Rights Agreement (the “Registration Agreement”) which required the Company to file a registration statement with the SEC to register the shares of common stock issued or issuable upon conversion of the Convertible Notes (the “Conversion Shares”) (subject to certain adjustment for stock split, dividend or other distribution, recapitalization or similar events, the “Registrable Securities”) within 30 days from June 1, 2017, which was to become effective per the SEC no later than 75 days thereafter. The Company filed a registration statement on Form S-3 to comply with the Registration Agreement on June 30, 2017, which became effective on July 11, 2017. This filing covered 940,924 shares, which is the number of shares that would be issued at the floor conversion rate of $7.00 per share. The Company was also required to, among other things, maintain the effectiveness of such registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with any Financial Industry Regulatory Authority (“FINRA”) requests. The Company’s obligations with respect to each registration end at the date which was the earlier of (a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its transferees or assignees under the Registration Agreement cease to hold any Registrable Securities. For each registration, the Company bore all reasonable expenses, other than underwriting discounts and commissions, and was to reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company had satisfied all of its obligations under this Registration Agreement and did not pay any damages pursuant to this agreement; therefore, no liability had been recorded (see Note 13), and as of September 30, 2018, Deerfield or any of its transferees or assignees under the Registration Agreement reported that it had ceased to hold any Registrable Securities.

 

The Company has accounted for the Amendment as a debt modification as the instruments were not substantially different; therefore, the remaining debt discount on the original Facility is being amortized using the effective interest method over the remaining term of the modified debt. The Company evaluated the Amendment together with the Convertible Notes to determine if those contracts or embedded components of those contracts qualified as derivatives requiring separate recognition. This evaluation identified a derivative liability of $2.1 million for the fair value of the change in control and other accelerated payment features as the prepayment fees resulted in premiums that were greater than 10%. As of December 31, 2018, the fair value of the derivative was $2.0 million (see Note 4). As the change in control and other accelerated payments terms, including the prepayment fees, were applied to the entire debt per the terms of the amended Facility, the corresponding debt discount will be amortized using the effective interest method over the remaining term of the Facility. The fees paid to or on behalf of the creditor for the debt modification totaled $40,000 and were recorded as additional debt discount on the amended Facility to be amortized to interest expense using the effective interest method over the term of the Facility. The Company’s evaluation also determined that the embedded conversion options should not be bifurcated as derivatives from the Convertible Notes host instruments. Therefore, the Company recorded a $0.6 million discount to the convertible notes for the intrinsic value of the embedded conversion option based upon the difference between the fair value of the underlying common stock on June 1, 2017 and the effective conversion price embedded in the Convertible Notes, which will be amortized using the effective interest method to interest expense over the one-year term of the Convertible Notes. The Company recorded a $0.6 million corresponding credit to a beneficial conversion feature classified as additional paid in capital on June 1, 2017 in stockholders’ equity (deficit) in the Company’s financial statements.

 

In connection with the Facility, the Company paid a $1,350,000 yield enhancement fee to Deerfield,  approximately $173,000 of legal costs to the Company’s attorneys and $58,000 of legal costs on behalf of Deerfield’s attorneys, all of which were recorded as debt discount and amortized over the six-year term of the Facility, using the effective interest method.

 

On November 5, 2018, the Company and Deerfield entered into an amendment (the “Second Amendment”) to the Facility pursuant to which the Company agreed to pay $7.5 million of principal under the Facility otherwise due in May 2019 upon completion of an underwritten public offering of the Company’s shares of its common stock for gross proceeds of at least $30.0 million, plus additional shares of the Company’s shares of its common stock for additional gross proceeds of at least $4.5 million (the “November Offering”). The remaining $52.5 million of principal under the Facility is due as follows: $7.5 million on May 11, 2019, $15.0 million on May 11, 2020 (the “2020 Principal Payment”), $15.0 million on

 

20


Table of Contents

 

May 11, 2021 and $15.0 million on May 11, 2022; provided, that the 2020 Principal Payment due date shall be extended to May 11, 2021 or May 11, 2022 subject to certain achievement of net sales. If all or any of the principal are prepaid or required to be prepaid under the Second Agreement prior to December 31, 2021, then the Company shall pay, in addition to such prepayment and accrued interest thereon, a prepayment premium equal to 6.25% of the amount of principal prepaid.  Additionally, the Company shall pay all interest which, absent such prepayment, would have accrued on the principal prepaid through May 11, 2020 in connection with a prepayment due to a Change of Control of the Company or through December 31, 2020 in connection with any other prepayment, whether voluntary or in an Event of Default. If such prepayment occurs after December 31, 2021 then no prepayment premium is due. In addition, upon the payment in full of the Obligations (whether voluntarily, in the connection with a Change of Control or an Event of Default and whether before, at the time of or after the Maturity Date, the Company shall pay to Deerfield a non-refundable exit fee in the amount of $750,239, which shall be due and payable in cash.

 

Pursuant to the Second Amendment, upon the effectiveness thereof, the Company amended and restated its outstanding notes under the Second Agreement in the form of senior secured convertible notes (the “A&R Notes”). Under the terms of the Second Amendment and the A&R Notes, beginning on or about May 11, 2019, the Company will have the right to pay principal and future interest in shares of Common Stock not to exceed 2,135,625 shares in the aggregate. The payment share price will be 93% of the lesser of (A) the Last Bid Price prior to the payment date and (B) the arithmetic average of the volume weighted average price on each of the ten consecutive trading days immediately preceding the payment date. Principal may not be satisfied at a price less than $3.00 per share, and the Company may not issue to Deerfield a number of shares upon any such payment to the extent that, upon such issuance, the number of shares beneficially owned by Deerfield and its affiliates would exceed 4.985% of the total number of shares of the Company’s common stock then issued and outstanding (the “4.985% Cap”). Additionally, Deerfield has the right to convert the remaining principal into shares of Common Stock not to exceed 3,796,668 shares in the aggregate (collectively, the “Conversion Shares”); provided, that the Lenders may only convert up to 50% of the remaining principal on or before November 5, 2019. Deerfield’s per share conversion price will be 95% reducing to a maximum 83% by one full percentage point for each full or partial calendar month between the date of the applicable conversion and the date on which such principal payment would otherwise be due, of the greater of (A) the average of the volume weighted average prices per share of the Common Stock on the NASDAQ Global Market for the three trading day period immediately preceding such conversion, and (B) $10.00 (subject to adjustment for Stock Events e.g. stock dividend, stock split etc.). Deerfield may not acquire a number of shares upon any such conversion to the extent that, upon such conversion, the number of shares beneficially owned by Deerfield and its affiliates would exceed the 4.985% Cap.

 

In conjunction with the Second Amendment to the Facility and the related issuance of the A&R Notes, the Company entered into a Registration Rights Agreement (the “Second Registration Agreement”) pursuant to which the Company was required to file a registration statement with the SEC to register the Conversion Shares within 30 days from November 5, 2018, which was to become effective per the SEC no later than 75 days thereafter. The filing deadline was subsequently extended to December 21, 2018. The Company filed a registration statement on Form S-3 to comply with the Second Registration Agreement on December 11, 2018, which became effective on December 20, 2018. This filing covered 3,796,668 shares, which is the maximum number of shares that may be converted. The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with any FINRA requests. The Company’s obligations with respect to each registration end at the date which is the earlier of (a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its transferees or assignees under the Second Registration Agreement cease to hold any Registrable Securities. For each registration, the Company shall bear all reasonable expenses, other than underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company had satisfied all of its obligations under the Second Registration Agreement and did not pay any damages pursuant to this agreement; therefore, no liability had been recorded (see Note 13).

 

Pursuant to the A&R Notes, if the Company fails to provide the number of Conversion Shares, then the Company would have to pay damages to Deerfield or subsequent holder or any designee for each day after the third business day after receipt of notice of conversion that such conversion is not timely effected. The Facility also contains certain customary nonfinancial covenants, including limitations on the Company’s ability to transfer assets, engage in a change of control, merge or acquire with or into another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the lenders may declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its security interests and other rights. As of March 31, 2019, the Company was in compliance with the covenants under the Facility.

 

21


Table of Contents

 

Debt discount amortization for the Facility, including the Amendment after June 1, 2017, was calculated using the effective interest rates of 15.03% on the original facility debt and 25.35% on the Convertible Notes and after the Second Amendment on November 5, 2018, using the effective interest rate of 16.69%, charged to interest expense and totaled $357,000 and $209,000 for the three months ended March 31, 2019 and March 31, 2018, respectively.

 

Financing and capital lease obligations:  Financing and capital lease obligations consist of sale-leaseback and equipment leases, both of which include options to purchase. As described in Note 6, during the years ended December 31, 2017, 2014 and 2013, the Company entered into agreements with Essex for the sale-leaseback of existing and newly acquired assets with a total capitalized cost of $3.2 million, $795,000 and $5.5 million, respectively, which are classified as financing leases as of March 31, 2019 and capital leases as of December 31, 2018. The approximate imputed interest rate on these leases is 14.9%, 14.5% and 14.5%, respectively. Interest expense on these leases was $64,000 and $98,000 for the three months ended March 31, 2019 and 2018, respectively.

 

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

 

Period ending:

 

March 31,

 

 

 

( in thousands)

 

2020

 

$

8,615

 

2021

 

15,459

 

2022

 

15,020

 

2023

 

15,765

 

Thereafter

 

 

 

 

 

 

Future principal payments

 

$

54,859

 

 

 

 

 

Less unamortized debt discount related to long-term debt

 

(2,978

)

Less current portion of long-term debt

 

(8,615

)

 

 

 

 

Total long-term debt, net of current portion

 

$

43,266

 

 

Note 9. Leases

 

The Company leases real estate, warehouses and certain equipment. The Company determines if an arrangement is a lease at inception.  Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the unaudited condensed consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s operating leases do not provide an implicit rate of return, the Company considered its other similar term collateralized financing arrangements, including the Essex sale-leaseback and equipment leases, certain vendor-direct equipment financing and the Deerfield debt facility, as amended, to determine its incremental borrowing rate. Operating lease ROU assets are comprised of the lease liability plus prepaid rents and are reduced by lease incentives and deferred rents. The Company has lease agreements with non-lease components which are not bifurcated.

 

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of the Company’s lease agreements include payments adjusted periodically for fair market value and certain other percentage increases. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The components of lease expense are as follows:

 

22


Table of Contents

 

 

 

Three Months Ended March 31, 2019

 

Statement of Operations Classification

 

 

 

(in thousands)

 

 

 

Lease cost:

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

264

 

Cost of goods sold and operating expenses

 

 

 

 

 

 

 

 

Short-term lease cost

 

12

 

Cost of goods sold and operating expenses

 

 

 

 

 

 

 

Variable lease cost

 

53

 

Cost of goods sold and operating expenses

 

Finance lease cost:

 

 

 

 

 

Amortization of leased assets

 

119

 

Cost of goods sold

 

Interest on lease liabilities

 

64

 

Interest expense

 

Total net lease cost

 

$

512

 

 

 

 

Supplemental unaudited consolidated balance sheet information related to leases is as follows:

 

 

 

As of March 31, 2019

 

Balance Sheet Classification

 

 

 

(in thousands)

 

 

 

Leases:

 

 

 

 

 

Assets:

 

 

 

 

 

Operating lease assets

 

$

3,381

 

Operating lease right-of-use assets

 

Finance lease assets

 

2,575

 

Property, plant and equipment, net

 

Total leased assets

 

$

5,956

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current:

 

 

 

 

 

Operating leases

 

$

571

 

Current portion of operating lease liabilities

 

 

 

 

 

 

 

 

Finance leases

 

1,115

 

Current portion of long-term debt

 

Noncurrent:

 

 

 

 

 

Operating leases

 

3,775

 

Operating lease liabilities

 

Finance leases

 

493

 

Long-term debt, net of current portion

 

Total lease liabilities

 

$

5,954

 

 

 

 

 

 

As of March 31, 2019

 

Weighted-Average Remaining Lease Term (years)

 

 

 

Operating lease assets

 

5.4

 

Finance lease assets

 

1.2

 

 

 

 

 

Weighted-Average Discount Rate

 

 

 

Operating lease assets

 

15.0

%

Finance lease assets

 

14.4

%

 

23


Table of Contents

 

Supplemental unaudited interim consolidated cash flow information related to leases is as follows:

 

 

 

Three Months Ended March 31, 2019

 

 

 

(in thousands)

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

Operating cash flows from operating leases

 

$

288

 

Operating cash flows from finance leases

 

64

 

Financing cash flows from finance leases

 

250

 

 

 

 

 

ROU assets obtained in exchange for new finance lease liabilities

 

 

ROU assets obtained in exchange for new operating lease liabilities

 

$

135

 

 

Maturities of lease liabilities are as follows:

 

 

 

As of March 31, 2019

 

 

 

Operating Leases

 

Finance Leases

 

 

 

(in thousands)

 

2019

 

$

880

 

$

942

 

2020

 

1,225

 

798

 

2021

 

1,118

 

22

 

2022

 

1,060

 

19

 

2023

 

1,055

 

 

Later years

 

1,107

 

 

Total lease payments

 

$

6,445

 

$

1,781

 

Less amount representing interest

 

(2,099

)

(173

)

Total lease obligations

 

$

4,346

 

$

1,608

 

 

Disclosures related to periods prior to adoption of ASU 2016-02

 

Future minimum lease payments under non-cancelable rental and lease agreements which had initial or remaining term in excess of one year are as follows:

 

 

 

As of December 31, 2018

 

 

 

Operating Leases

 

Capital Leases

 

 

 

(in thousands)

 

2019

 

$

1,180

 

$

1,257

 

2020

 

1,195

 

798

 

2021

 

1,062

 

21

 

2022

 

1,055

 

20

 

2023

 

1,055

 

 

Later years

 

1,106

 

 

Minimum lease commitment

 

$

6,653

 

$

2,096

 

Less amount representing interest

 

 

 

(238

)

Present value of net minimum lease obligations

 

 

 

$

1,858

 

 

24


Table of Contents

 

Note 10. Common stock

 

On August 1, 2016, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on August 12, 2016. This shelf registration statement covered 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 “2016 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 2016 Shelf (the “Cowen Sales Agreement”).

 

In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock under the 2016 Shelf at a public offering price of $5.00 per share, which included 750,000 shares of its common stock resulting from the underwriters’ exercise of their over-allotment option. Deerfield participated in the purchase of the Company’s common shares as part of this public offering, and as a result, was classified as a related party at the time of the corresponding transactions. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were approximately $26.7 million.

 

On June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of its common stock under the 2016 Shelf at a public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of its common stock which was exercised in full on July 26, 2017. The net proceeds to the Company through July 26, 2017 from this offering, after deducting offering expenses payable by the Company, were approximately $34.3 million.

 

During the year ended December 31, 2017, the Company sold an aggregate 749,639 shares of common stock under the Cowen Sales Agreement, at an average sale price of approximately $5.01 per share for gross proceeds of $3.7 million and net proceeds of $3.6 million and paying total compensation to the sales agent of approximately $0.1 million.

 

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

 

During the year ended December 31, 2018, the Company sold an aggregate 651,525 shares of common stock under the Cowen Sales Agreement, at an average sale price of approximately $6.25 per share for gross proceeds of $4.1 million and net proceeds of $3.9 million and paying total compensation to the sales agent and other costs of approximately $0.2 million.

 

On November 5, 2018, the Company filed Supplement No. 1 to the prospectus dated August 12, 2016, which reduced the size of the continuous offering by the Company under such prospectus relating to the offering of Common Stock pursuant to the Sales Agreement. Following the reduction, the Company was authorized to issue up to $7,825,113 of its common stock pursuant to the Sales Agreement (inclusive of amounts previously sold thereunder prior to the date hereof). Aggregate gross proceeds of sales of the Company’s common stock under the Sales Agreement total $7,825,113, and sales of common stock under the Sales Agreement have been suspended.

 

On November 8, 2018, the Company closed an underwritten public offering of 19,999,999 shares of its common stock at a public offering price of $2.30 per share, which includes 2,608,695 shares of its common stock resulting from the underwriters’ exercise of their over-allotment option at the public offering price. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company were approximately $43.4 million. This offering met the criteria for the November Offering.

 

During the year ended December 31, 2018, the Company issued 26,991 shares of common stock pursuant to the conversion of vested RSUs and 832 shares of common stock pursuant to the exercise of vested stock options. During the three months ended March 31, 2019, the Company issued 11,006 shares of common stock pursuant to the conversion of vested RSUs and 35,207 shares of common stock pursuant to the exercise of vested stock options.

 

On March 18, 2019, the Company filed a shelf registration statement covering the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants and/or

 

25


Table of Contents

 

units (the “2019 Shelf”), which was declared effective by the SEC on May 1, 2019.  Following the effectiveness of the 2019 Shelf, the Company does not intend to make further offers or sales under the 2016 Shelf.  The Company simultaneously entered into a sales agreement with Cantor Fitzgerald & Co., as sales agent, to provide for the offering, issuance and sale by the Company of up to $30.0 million of its common stock from time to time in “at-the-market” offerings under the 2019 Shelf (the “Cantor Sales Agreement”).

 

Note 11. Share-based Compensation

 

Share-based Compensation Plans

 

In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan (“2015 Plan”) which became effective immediately prior to the closing of the IPO and initially had 767,330 shares of common stock reserved for issuance. On January 1, 2016 and each January 1 thereafter, the number of shares of common stock reserved and available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of shares of stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the administrator of the 2015 Plan. Accordingly, on January 1, 2019 and 2018, the Company added 2,483,815 shares and 1,449,847 shares, respectively, to the option pool. The 2015 Plan superseded the Neos Therapeutics, Inc. 2009 Equity Plan (“2009 Plan”), originally adopted in November 2009 and which had 1,375,037 shares reserved and available for issuance. Effective upon closing of the IPO, the Company’s Board of Directors determined not to grant any further awards under the 2009 Plan.

 

The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be added to the shares of common stock available under the 2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The 2015 Plan is administered by the Company’s Compensation Committee, which has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company’s Compensation Committee may delegate authority to grant certain awards to the Company’s chief executive officer. Through March 31, 2019, the Company has granted options, restricted stock and RSUs under the 2015 Plan. The exercise price per share for the stock covered by a stock award granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised stock awards under the 2015 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment.

 

The 2009 Plan allowed the Company to grant options to purchase shares of the Company’s common stock and to grant restricted stock awards to members of its management and selected members of the Company’s board of directors. Restricted stock awards are recorded as deferred compensation and amortized into compensation expense, on a straight-line basis over a defined vesting period ranging from 1 to 48 months. Options were granted to officers, employees, nonemployee directors and consultants, and independent contractors of the Company. The Company also granted performance based awards to selected management. The performance options vested over a three-year period based on achieving certain operational milestones and the remaining options vest in equal increments over periods ranging from two to four years. Unexercised options under the 2009 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment. All terminated options are available for reissuance under the 2015 Plan. Since the inception of the 2015 Plan through December 31, 2018, 82,635 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. During the three months ended March 31, 2019, 63,270 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. As of March 31, 2019, 2,895,507 shares of common stock remain available for grant under the 2015 Plan.

 

In June 2018, the Company adopted the Neos Therapeutics, Inc. 2018 Inducement Plan (the “Inducement Plan”) which had 800,000 shares of common stock reserved and available for issuance. The Inducement Plan allows the Company to grant equity awards to induce highly-qualified prospective officers and employees who are not currently employed by the Company to accept employment and provide them with a proprietary interest in the Company. The Inducement Plan is administered by the Company’s compensation committee. The exercise price per share for the stock covered by a stock award granted pursuant to the Inducement Plan shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised stock awards under the Inducement Plan expire after 10 years following the grant date. Under the Company’s employment agreement dated June 27, 2018 with Gerald McLaughlin, the Company’s Chief Executive Officer, the Company granted Mr. McLaughlin, under the Inducement Plan, an option to purchase 600,000 shares of the Company’s common stock, which vests in equal annual installments over

 

26


Table of Contents

 

four years from Mr. McLaughlin’s start date. In addition, on July 30, 2018, the Company granted Mr. McLaughlin, under the Inducement Plan, an option to purchase 200,000 shares of the Company’s common stock. The shares underlying this option shall vest subject to certain performance metrics to be evaluated for the fiscal year ending December 31, 2019. As of December 31, 2018, no shares of common stock remain available for grant under the Inducement Plan.

 

Share-based Compensation Expense

 

The Company has reported share-based compensation expense for the three months ended March 31, 2019 and 2018, respectively, in its condensed consolidated statements of operations as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Cost of goods sold

 

$

144

 

$

119

 

Research and development

 

90

 

78

 

Selling and marketing

 

120

 

257

 

General and administrative

 

520

 

513

 

 

 

$

874

 

$

967

 

 

The total share based compensation expense included in the table above is attributable to stock options and RSUs of $823,000 and $51,000 for the three months ended March 31, 2019, respectively. The total share based compensation expense included in the table above is attributable to stock options and restricted stock of $931,000 and $36,000 for the three months ended March 31, 2018, respectively.

 

As of March 31, 2019, there was $6.1 million of compensation costs, adjusted for any estimated forfeitures, related to non-vested stock options and RSUs granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.8 years for stock options and 2.7 years for RSUs. There is no unrecognized compensation cost associated with grants of restricted stock.

 

Stock Options

 

During the year ended December 31, 2018, the Company’s board of directors granted 953,539 options under the 2015 Plan. In June and July 2018, the Company granted 600,000 and 200,000 options, respectively, under the Inducement Plan to Gerald McLaughlin, the Company’s Chief Executive Officer, at an exercise price of $6.20 and $5.55 per share, respectively. During the three months ended March 31, 2019, the Company granted 1,626,859 options under the 2015 Plan.

 

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

 

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

 

 

 

Three Months

 

 

 

Ended March 31, 2019

 

Estimated dividend yield

 

0.00

%

Expected stock price volatility

 

60.00

%

Weighted-average risk-free interest rate

 

2.58

%

Expected life of option in years

 

6.10

 

Weighted-average option fair value at grant

 

$

1.36

 

 

27


Table of Contents

 

A summary of outstanding and exercisable options as of March 31, 2019 and December 31, 2018 and the activity from December 31, 2018 through March 31, 2019, is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Number of

 

Average

 

Intrinsic

 

 

 

Options

 

Exercise Price

 

Value

 

 

 

 

 

 

 

(in thousands)

 

Outstanding at December 31, 2018

 

3,446,885

 

$

8.935

 

$

70

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2018

 

1,643,011

 

$

10.627

 

$

70

 

 

 

 

 

 

 

 

 

Granted

 

1,626,859

 

$

2.37

 

 

 

Exercised

 

(35,207

)

0.32

 

 

 

Expired, forfeited or cancelled

 

(244,646

)

13.25

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

4,793,891

 

$

6.55

 

$

525

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2019

 

1,537,642

 

$

10.16

 

$

50

 

 

The weighted-average remaining contractual life of options outstanding and exercisable on March 31, 2019 was 8.5 and 6.6 years, respectively. The option exercise prices for all options granted January 1, 2019 through March 31, 2019 ranged from $1.91 per share to $3.14 per share. The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2018 was 7.9 and 6.6 years, respectively. The option exercise price for all options granted in the year ended December 31, 2018 ranged from $4.76 to $10.40 per share.

 

Restricted Stock Units

 

On May 1, 2017, the Company granted 78,750 RSUs to members of its management which vest in four equal annual installments, beginning May 1, 2018. On October 2, 2017, the Company granted 6,250 RSUs to a member of its management which vest in four equal annual installments, beginning October 2, 2018. On March 1, 2018, the Company granted 93,750 RSUs to members of its management which vest in four equal annual installments, beginning March 1, 2019.

 

The Company satisfies its RSUs by issuing shares of the Company’s common stock when RSUs vest and are issued. In addition, when RSUs vest and are issued, RSU recipients may elect to have the Company withhold units as consideration for the tax withholding obligation for their vested RSUs. During the year ended December 31, 2018, 33,748 vested RSUs were converted into an equivalent 26,991 shares of common stock. The Company withheld 6,757 shares of its common stock to partially satisfy tax withholding obligations upon vesting of the RSUs for the year ended December 31, 2018. During the three months ended March 31, 2019, 11,562 vested RSUs were converted into an equivalent 11,006 shares of common stock. The Company withheld 556 shares of its common stock to partially satisfy tax withholding obligations upon vesting of the RSUs for the year ended March 31, 2019.

 

A summary of outstanding RSUs as of March 31, 2019 and December 31, 2018 and the activity from December 31, 2018 through March 31, 2019, is presented below:

 

 

 

 

 

Weighted-

 

 

 

Number of

 

Average

 

 

 

RSUs

 

Fair Value

 

Outstanding at December 31, 2018

 

75,314

 

$

7.93

 

 

 

 

 

 

 

Granted

 

 

 

Converted

 

(11,006

)

8.30

 

Withheld for tax obligation

 

(556

)

8.30

 

Expired, forfeited or cancelled

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

63,752

 

$

7.86

 

 

28


Table of Contents

 

Restricted stock

 

The Company did not issue any shares of restricted stock for the three months ended March 31, 2019, or for the year ended December 31, 2018. No vested restricted stock awards were settled during the three months ended March 31, 2019.

 

The Company had no unvested restricted stock as of March 31, 2019 and December 31, 2018.  For the three months ended March 31, 2019, there were no shares of restricted stock granted 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 October 16, 2017, October 17, 2016 and October 16, 2015, 14,895 shares, 9,709 shares and 9,197 shares, respectively, of restricted stock were surrendered by the holder to the Company to cover taxes associated with vesting of restricted stock and such shares were added back into the treasury stock of the Company, increasing total treasury stock to 33,801 shares as of December 31, 2018 and March 31, 2019.

 

Note 13. Commitments and contingencies

 

Registration Payment Arrangement:  On November 5, 2018, in conjunction with the Second Amendment to the Facility and the related issuance of the Convertible Notes, the Company entered into the Second Registration Agreement which required the Company to file a registration statement with the SEC to register the Registrable Securities (see Note 8) within 30 days from November 5, 2018, which was to become effective per the SEC no later than 75 days thereafter. The filing deadline was subsequently extended to December 21, 2018. The Company filed a registration statement on Form S-3 to comply with the Registration Agreement on December 11, 2018, which became effective on December 20, 2018. This filing covered 3,796,668 shares, which is the number of shares that would be issued up to the Exchange Cap as (defined in the agreement). The Company is also required to, among other things, maintain the effectiveness of such registration statement, continue to file the required SEC filings on a timely basis, use its best efforts to ensure that the registered securities are listed on each securities exchange on which securities of the same class or series as issued by the Company are then listed and comply with any FINRA requests. Upon any Registration Failure, the Company shall pay additional damages to the Holder for each 30-day period (prorated for any partial period) after the date of such Registration Failure in an amount in cash equal to two percent of the original principal amount of the Convertible Notes. The Company’s obligations with respect to each registration end at the date which is the earlier of (a) when all of the Registrable Securities covered by such registration have been sold or (b) when Deerfield or any of its transferees or assignees under the Registration Agreement cease to hold any of the Registrable Securities. For each registration filing, the Company shall bear all reasonable expenses, other than underwriting discounts and commissions, and shall reimburse Deerfield or any assignee or transferee for up to $25,000 in legal fees. The Company currently expects to satisfy all of its obligations under the Registration Agreement and does not expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded.

 

Patent Infringement Litigation: On October 31, 2017, the Company received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. (“Teva”) advising the Company that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT, in connection with seeking to market its product prior to the expiration of patents covering Cotempla XR-ODT. On December 13, 2017, the Company filed a patent infringement lawsuit in federal district court in the District of Delaware against Teva alleging that Teva infringed the Company’s Cotempla XR-ODT patents. This lawsuit automatically stayed, or barred, the FDA from approving Teva’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents is rendered, whichever is earlier. On December 21, 2018, the Company entered into a Settlement Agreement (the “Teva Settlement Agreement”) and a Licensing Agreement (the “Teva Licensing Agreement” and collectively with the Teva Settlement Agreement, the “Teva Agreement”) with Teva that resolved all ongoing litigation involving the Company’s Cotempla XR-ODT patents and Teva’s ANDA. Under the Teva Agreement, the Company granted Teva the right to manufacture and market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Teva Agreement has been submitted to the applicable governmental agencies.

 

On July 25, 2016, the Company received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising the Company that Actavis had filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, the Company filed a patent infringement lawsuit in federal district court against Actavis alleging that Actavis infringed the Company’s Adzenys XR-ODT patents. On October 17, 2017, the Company entered into a Settlement Agreement (the “Actavis Settlement Agreement”) and a Licensing

 

29


Table of Contents

 

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

 

Other Litigation: On March 7, 2018 and April 18, 2019, the Company received citations advising the Company that the County of Harris Texas (“Harris County”) and the County of Walker Texas (“Walker County”) filed lawsuits on December 13, 2017 and January 11, 2019, respectively, against the Company and various other alleged manufacturers, promoters, sellers and distributors of opioid pharmaceutical products. Through these lawsuits, each of Harris County and Walker County seek to recoup as damages some of the expenses they allegedly have incurred to combat opioid use and addiction. Each of Harris County and Walker County also seeks punitive damages, disgorgement of profits and attorneys’ fees.

 

While the Company believes that these lawsuits are without merit and intends to vigorously defend against them, the Company is not able to predict at this time whether these proceedings will have a material impact on its results of operations.

 

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. Prior to the adoption of the New Lease Standard on January 1, 2019, 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 $989,000 at December 31, 2018. The Company adopted ASU No. 2016-02 at January 1, 2019 and recognized an operating lease liability of $4.3 million at March 31, 2019 under the New Lease Standard (See Note 2 and 9). 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 $52,000 and $54,000 for the three months ended March 31, 2019 and 2018, respectively. Rent expense for these leases, excluding the share of operating expenses, was $253,000 and $253,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Cash incentive bonus plan:  In July 2015, the Company adopted the Senior Executive Cash Incentive Bonus Plan (“Bonus Plan”). The Bonus Plan provides for cash payments based upon the attainment of performance targets established by the Company’s compensation committee. The payment targets will be related to financial and operational measures or objectives with respect to the Company, or corporate performance goals, as well as individual targets. The Company has recorded $467,000 and $344,000 of compensation expense for the three months ended March 31, 2019 and 2018, respectively, under the Bonus Plan.

 

Note 14. License agreements

 

Under the Teva Licensing Agreement, the Company granted Teva a non-exclusive license to certain patents owned by the Company by which Teva has the right to manufacture and market its generic version of Cotempla XR-ODT under its ANDA beginning on July 1, 2026, or earlier under certain circumstances. The Teva Licensing Agreement has been submitted to the applicable governmental agencies (see Note 13).

 

On October 23, 2018, the Company entered into an Exclusive License Agreement (“NeuRx License”) with NeuRx Pharmaceuticals LLC (“NeuRx”), pursuant to which NeuRx granted the Company an exclusive, worldwide, royalty-bearing license to research, develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx’s proprietary compound designated as NRX-101, referred to by the Company as NT0502.  NT0502 is a new chemical entity that is being developed by the Company for the treatment of sialorrhea, which is excessive salivation or drooling.  Under the NeuRx License, the Company made an upfront payment of $175,000 to NeuRx upon the execution of the agreement and may in the future be required to make certain development and milestone payments and royalties based on annual net sales, as defined in the NeuRx License. Royalties are to be paid on a country-by-country and licensed product-by-licensed product basis, during the period of time beginning on the first commercial sale of such licensed product in such country and continuing until the later of: (i) the expiration of the last-to-expire valid claim in any licensed patent in such country that covers such licensed product in such country; and/or (ii) expiration of regulatory exclusivity of such licensed product in such country.

 

30


Table of Contents

 

Under the Actavis Licensing Agreement, the Company granted Actavis a non-exclusive license to certain patents owned by the Company by which Actavis has the right to manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on September 1, 2025, or earlier under certain circumstances. The Licensing Agreement has been submitted to the applicable governmental agencies (see Note 13).

 

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

 

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

 

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

 

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

 

Note 15. Related party transactions

 

In February 2017, the Company closed an underwritten public offering of 5,750,000 shares of its common stock at a public offering price of $5.00 per share, which includes 750,000 shares of the Company’s common stock resulting from the underwriters’ exercise of their over-allotment option at the public offering price on February 17, 2017. On June 30, 2017, the Company closed an underwritten public offering of 4,800,000 shares of its common stock at a public offering price of $6.25 per share for total proceeds of $30.0 million before estimated offering costs of $0.2 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 720,000 shares of its common stock. Deerfield, the Company’s senior lender, participated in the purchase of the Company’s common shares as part of both public offerings, and as a result, is classified as a related party. The Company is obligated under a $60.0 million senior secured credit Facility that was issued by the Company to Deerfield. On June 1, 2017, the Company and Deerfield entered into an Amendment to the Company’s existing Facility with Deerfield which extended the date to repay the Accrued Interest under the Facility to June 1, 2018, which may have been extended to June 1, 2019 at the election of the Company if certain conditions have been met as specified in the Amendment. The right to payment of the Accrued Interest was memorialized in the form of Convertible Notes issued to Deerfield on the Amendment Date. On October 26, 2017, Deerfield provided a conversion notice electing to convert the entire $6.6 million of Convertible Notes into shares of the Company’s common stock at a conversion price of $7.08 per share. The conversion price was based on 95% of the average of the volume weighted average prices per share of the Company’s common stock on the NASDAQ Global Market for the three trading day period immediately preceding such conversion. This resulted in issuing 929,967 shares of the Company’s common stock to Deerfield on this date and the Convertible Notes were cancelled (see Note 8).

 

On November 5, 2018, the Company and Deerfield entered into the Second Amendment to the Facility pursuant to which the Company agreed to pay $7.5 million of principal under the Facility otherwise due in May 2019 upon completion of the November Offering. The Second Amendment provides an option for the $15.0 million principal on the Facility due in May 2020 to be paid in either May 2021 or May 2022 upon the achievement of certain revenue milestones as described in the Second Amendment. Also, pursuant to the Second Amendment, the Company amended and restated its outstanding notes under the Facility in the form of senior secured convertible notes. The Company has the right to pay principal and

 

31


Table of Contents

 

future interest in shares of Common Stock not to exceed 2,135,625 shares in the aggregate. Additionally, subject to the terms of the amended and restated convertible notes, Deerfield has the right to convert the remaining principal under the Facility into shares of Common Stock not to exceed 3,796,668 shares in the aggregate at a conversion price of 95% of the greater of the average of the volume weighted average price per share of the Common Stock for the three trading day period immediately preceding such conversion and $10.00. On November 8, 2018, the Company closed an underwritten public offering of 19,999,999 shares of its common stock at a public offering price of $2.30 per share, which includes 2,608,695 shares of its common stock resulting from the underwriters’ exercise of their over-allotment option at the public offering price. The net proceeds to the Company from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company were approximately $43.4 million. Deerfield also participated in the purchase of the Company’s common shares as part of this offering (see Note 8).

 

32


Table of Contents

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements for the years ended December 31, 2018 and 2017 and notes thereto included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2019. 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 microparticle modified-release drug delivery technology platform, which we have already used to develop Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER oral suspension (“Adzenys ER”), for the treatment of attention deficit hyperactivity disorder (“ADHD”). Our products and product candidates are extended-release (“XR”), medications in patient-friendly, orally disintegrating tablets (“ODT”) or liquid suspension dosage forms. Our microparticle technology 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 in May 2016. We received approval from the FDA for Cotempla XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, on June 19, 2017 and launched commercially in September 2017. Also, we received approval from the FDA for Adzenys ER, our amphetamine extended-release liquid suspension, on September 15, 2017, and launched the commercialization of this product in February 2018. We believe Adzenys XR-ODT and Cotempla XR-ODT are the first amphetamine XR-ODT and the first methylphenidate XR-ODT, respectively, for the treatment of ADHD on the market. In addition to our marketed products, we are developing NT-0400, our preclinical XR-ODT product candidate, for nausea and vomiting, and NT0502, our preclinical product candidate for the treatment of sialorrhea.

 

We are commercializing Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in the United States using our own commercial infrastructure. We manufacture Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in our current Good Manufacturing Practice (“cGMP”) and U.S. Drug Enforcement Administration (“DEA”)-registered manufacturing facilities, thereby 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 (“generic Tussionex”).

 

On October 23, 2018, we entered into an Exclusive License Agreement (the “License Agreement”) with NeuRx Pharmaceuticals LLC (“NeuRx”), pursuant to which NeuRx granted us an exclusive, world-wide, royalty-bearing license to us to research, develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx’s proprietary compound designated as NRX 101, referred to by us as NT0502. NT0502 is a new chemical entity that is being developed by us for the treatment of sialorrhea, which is excessive salivation or drooling. We are utilizing our microparticle technology platform to develop NT0502 to address the significant unmet medical needs for the treatment of chronic sialorrhea in adult and pediatric patients with neurological conditions including cerebral palsy, Parkinson’s disease, mental retardation, and amyotrophic lateral sclerosis or ALS.

 

On July 25, 2016, we received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising us that Actavis has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, we filed a patent infringement lawsuit in federal district court in the District of Delaware against Actavis alleging that it infringed our Adzenys XR-ODT patents. On October 17, 2017, we entered into a Settlement Agreement and a Licensing Agreement (collectively, the “Actavis Agreement”) with Actavis that resolved all ongoing litigation involving our Adzenys XR-ODT patents and Actavis’s ANDA. Under the Actavis Agreement, we have granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning on September 1, 2025, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Actavis Agreement has been submitted to the applicable governmental agencies.

 

On October 31, 2017, we received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. (“Teva”) advising us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT. On December 13,

 

33


Table of Contents

 

2017, we filed a patent infringement lawsuit in federal district court in the District of Delaware against Teva alleging that Teva infringed our Cotempla XR-ODT patents. On December 21, 2018, we entered into a Settlement Agreement with Teva (the “Teva Settlement Agreement”) and a Licensing Agreement (the “Teva Licensing Agreement” and collectively with the Teva Settlement Agreement, the “Teva Agreement”) that resolved all ongoing litigation involving our Cotempla XR-ODT patents and Teva’s ANDA. Under the Teva Agreement, we granted Teva the right to manufacture and market its generic version of Cotempla XR-ODT under the ANDA beginning on July 1, 2026, or earlier under certain circumstances. A stipulation and order of dismissal was entered by the U.S. District Court for the District of Delaware. The Teva Agreement has been submitted to the applicable governmental agencies.

 

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, the development of our product candidates, and the commercialization of our approved products; these activities include the implementation of our commercialization strategies, conducting research and development activities and clinical trials for our product candidates, providing general and administrative support of these operations, and seeking and maintaining intellectual property protection. Prior to our initial public offering of our common stock in July 2015, we funded our operations principally through private placements of our common stock, redeemable convertible preferred stock, bank and other lender financings and through payments received under collaborative arrangements.

 

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

 

We have incurred significant losses in each year since our reorganization in 2009. Our net losses were $7.6 million and $51.8 million for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively. As of March 31, 2019 and December 31, 2018, we had accumulated deficits of approximately $324.6 million and $317.0 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including, among other things:

 

·                  sales and marketing efforts for Adzenys XR-ODT, Cotempla XR-ODT, and Adzenys ER;

 

·                  research and development activities for new product candidates;

 

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

 

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

 

·                  protection and enforcement of our intellectual property rights; and

 

·                  general operations as a public company.

 

FINANCIAL OPERATIONS OVERVIEW

 

Revenue

 

Prior to 2017, our revenue was generated primarily from product sales of our generic Tussionex recorded on a net sales basis. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season. We launched commercialization of Adzenys XR-ODT on May 16, 2016, initiated an early experience program with Cotempla XR-ODT with limited product availability on September 5, 2017 before launching this product nationwide on October 2, 2017 and

 

34


Table of Contents

 

launched commercialization of Adzenys ER on February 26, 2018. We sell our products to drug wholesalers in the United States. We have also established indirect contracts with drug, food and mass retailers that order and receive our generic Tussionex product through wholesalers. As a result of our acquisition of all of the rights to commercialize and derive future profits from the Tussionex ANDA, and the continuing commercialization of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, we expect our future revenue to increase from historical levels.

 

We expect the number of prescriptions filled for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to continue to increase compared to the same quarter in the prior year. In addition, we expect product shipments to our wholesalers to correspondingly increase. Unit shipments of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER were 60,813, 56,442 and 614, respectively, for the three months ended March 31, 2019 as compared to 58,139, 52,221 and 1,422, respectively, for the three months ended March 31, 2018.

 

In the future, we will seek to generate additional revenue from product sales of Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and generic Tussionex. If we fail to successfully market Adzenys XR-ODT, Cotempla XR-ODT, Adzenys ER and generic Tussionex, 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, benefits, and share-based compensation expense, of employees engaged in research and development activities;

 

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

 

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

 

·                  cost of facilities, depreciation and other allocated expenses;

 

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

 

·                  expenses associated with obtaining and maintaining patents.

 

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

 

The following table summarizes our research and development expenses for the periods indicated:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Cotempla XR-ODT

 

$

403

 

$

20

 

Adzenys ER

 

4

 

4

 

Adzenys XR- ODT

 

1,343

 

400

 

NT0502

 

59

 

 

Other Research and Development Activities (1)

 

1,388

 

1,267

 

 

 

$

3,197

 

$

1,691

 

 


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

 

We expect that our research and development expenses will fluctuate over time as we explore new product candidates, but will decrease as a percentage of revenue if Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are commercially successful. We expect to fund our research and development expenses from our current cash and cash

 

35


Table of Contents

 

equivalents, sales of our commercial products and, if approved, our product candidates, and the net proceeds from any future equity or debt financings.

 

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

 

Selling and marketing

 

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

 

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

 

General and administrative

 

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

 

We anticipate that our general and administrative expenses may increase as we incur additional costs and professional fees associated with future business development activities, if any. In addition, although we have settled our recent Paragraph IV litigation cases, we may be subject to future Paragraph IV litigation costs, and could incur material 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, the Note and the capitalized leases from Essex resulting from the sale-leaseback transactions of our existing and newly-acquired property and equipment. We amortize debt issuance costs over the life of the notes which are reported as interest expense in our consolidated statements of operations.

 

Other income (expense), net

 

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

 

36


Table of Contents

 

RESULTS OF OPERATIONS

 

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

 

Revenues

 

The following table summarizes our revenues for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

Increase

 

%Increase

 

 

 

2019

 

2018

 

(Decrease)

 

(Decrease)

 

 

 

(in thousands)

 

 

 

 

 

Net product sales

 

$

14,634

 

$