Company Quick10K Filing
Neos Therapeutics
Price1.70 EPS-0
Shares50 P/E-6
MCap85 P/FCF-7
Net Debt-25 EBIT-7
TEV59 TEV/EBIT-8
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-16
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-15
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-18
10-Q 2015-09-30 Filed 2015-11-13
10-Q 2015-06-30 Filed 2015-09-04
8-K 2020-06-18
8-K 2020-06-10
8-K 2020-06-02
8-K 2020-05-11
8-K 2020-05-06
8-K 2020-04-18
8-K 2020-04-09
8-K 2020-03-30
8-K 2020-03-13
8-K 2019-11-08
8-K 2019-10-02
8-K 2019-08-08
8-K 2019-06-13
8-K 2019-05-09
8-K 2019-03-14
8-K 2019-01-29
8-K 2018-12-21
8-K 2018-12-11
8-K 2018-11-29
8-K 2018-11-09
8-K 2018-11-08
8-K 2018-11-06
8-K 2018-11-05
8-K 2018-10-23
8-K 2018-08-08
8-K 2018-06-27
8-K 2018-06-20
8-K 2018-05-09
8-K 2018-04-27
8-K 2018-03-15

NEOS 10Q Quarterly Report

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. Accrued Expenses
Note 7. Debt
Note 8. Leases
Note 9. Common Stock
Note 10. Share - Based Compensation
Note 11. Treasury Stock
Note 12. Commitments and Contingencies
Note 13. License Agreements
Note 14. Related Party Transactions
Note 15. Subsequent Events
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-10.2 neos-20200331ex102e99aaf.htm
EX-10.3 neos-20200331ex1037e87a0.htm
EX-31.1 neos-20200331ex3113f1f26.htm
EX-31.2 neos-20200331ex31292f50a.htm
EX-32.1 neos-20200331ex321d96573.htm

Neos Therapeutics Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1358943-3-49-952013201520172020
Assets, Equity
20100-10-20-302013201520172020
Rev, G Profit, Net Income
80573411-12-352013201520172020
Ops, Inv, Fin

10-Q 1 neos-20200331x10q.htm 10-Q neos_Current_Folio_10Q

3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended MARCH 31, 2020

 

OR

 

☐ 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)

 

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

 

 

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 ☒  No ☐

 

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 ☒   No ☐    

 

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  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☒

 

 

 

Emerging growth company  ☒

    

 

 

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. ☒

 

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

 

 

The number of shares outstanding of the registrant’s common stock as of May 4, 2020: 49,751,345 shares.

 

 

 

 

NEOS THERAPEUTICS, INC.

 

INDEX

 

 

 

 

 

 

Page No.

 

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1 

Financial Statements (Unaudited) 

5

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Comprehensive Loss

7

 

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

8

 

Condensed Consolidated Statements of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

Item 2 

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

36

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4 

Controls and Procedures

55

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

Item 1 

Legal Proceedings

56

Item 1A 

Risk Factors

56

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

97

Item 3 

Defaults Upon Senior Securities

97

Item 4 

Mine Safety Disclosures

97

Item 5 

Other Information

97

Item 6 

Exhibits

98

 

 

 

SIGNATURES 

100

 

 

2

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, 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;

 

·

our debt facility agreement, as amended, with Deerfield Private Design Fund III, L.P. and Deerfield Partners, L.P., and our revolving loan facility with Encina Business Credit, LLC, 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 successfully manufacture and distribute 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 its ANDA;

 

3

·

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 its 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;

 

·

the direct and indirect impact of COVID-19 on our business and operations, including product sales, expenses, supply chain, manufacturing, research and development costs, clinical trials and employees;

 

·

the impact of COVID-19 and related downturn of the U.S. and global economies;

 

·

our ability to achieve profitability;

 

·

our staffing needs; and

 

·

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

 

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

 

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

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, 

 

 

    

2020

    

2019

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,858

 

$

16,830

 

Short-term investments

 

 

3,992

 

 

8,064

 

Accounts receivable, net of allowances for chargebacks and cash discounts of $3,295 and $4,848 at March 31, 2020 and December 31, 2019, respectively

 

 

20,782

 

 

26,563

 

Inventories, net

 

 

10,218

 

 

11,010

 

Prepaid expenses and other current assets

 

 

2,904

 

 

4,092

 

Total current assets

 

 

65,754

 

 

66,559

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

7,014

 

 

7,345

 

Operating lease right-of-use assets

 

 

2,920

 

 

3,044

 

Intangible assets, net

 

 

12,139

 

 

12,543

 

Other assets

 

 

1,266

 

 

1,382

 

Total assets

 

$

89,093

 

$

90,873

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

13,033

 

$

6,650

 

Accrued expenses

 

 

30,556

 

 

40,188

 

Current portion of operating lease liabilities

 

 

707

 

 

681

 

Short-term line of credit

 

 

8,569

 

 

 —

 

Current portion of long-term debt

 

 

15,534

 

 

15,836

 

Total current liabilities

 

 

68,399

 

 

63,355

 

 

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

29,422

 

 

29,099

 

Operating lease liabilities

 

 

3,067

 

 

3,254

 

Derivative liability

 

 

1,231

 

 

1,135

 

Other long-term liabilities

 

 

154

 

 

160

 

Total long-term liabilities

 

 

33,874

 

 

33,648

 

 

 

 

 

 

 

 

 

Stockholders' (Deficit) Equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at March 31, 2020 and December 31, 2019

 

 

 —

 

 

 —

 

Common stock, $0.001 par value, 100,000,000 shares authorized at March 31, 2020 and December 31, 2019; 49,777,756 and 49,743,955 shares issued and outstanding, respectively, at March 31, 2020; 49,766,472 and 49,732,671 shares issued and outstanding, respectively, at December 31, 2019

 

 

50

 

 

50

 

Treasury stock, at cost, 33,801 shares at March 31, 2020 and December 31, 2019

 

 

(352)

 

 

(352)

 

Additional paid-in capital

 

 

328,956

 

 

328,056

 

Accumulated deficit

 

 

(341,835)

 

 

(333,885)

 

Accumulated other comprehensive income

 

 

 1

 

 

 1

 

Total stockholders' deficit

 

 

(13,180)

 

 

(6,130)

 

Total liabilities and stockholders' deficit

 

$

89,093

 

$

90,873

 

 

See notes to condensed consolidated financial statements.

5

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

    

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

14,493

 

$

14,634

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

6,389

 

 

6,396

 

Gross profit

 

 

8,104

 

 

8,238

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

2,035

 

 

3,197

 

Selling and marketing expenses

 

 

7,592

 

 

7,069

 

General and administrative expenses

 

 

4,365

 

 

3,793

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(5,888)

 

 

(5,821)

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,037)

 

 

(2,115)

 

Other (expense) income, net

 

 

(25)

 

 

336

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,950)

 

$

(7,600)

 

 

 

 

 

 

 

 

 

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

 

 

49,736,125

 

 

49,703,563

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.16)

 

$

(0.15)

 

 

See notes to condensed consolidated financial statements.

 

6

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

 

2019

    

 

 

 

 

 

 

 

 

Net loss

 

$

(7,950)

 

$

(7,600)

 

Other comprehensive loss:

 

 

 

 

 

 

 

Net unrealized loss on short-term investments

 

 

 —

 

 

(1)

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

$

 —

 

$

(1)

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(7,950)

 

$

(7,601)

 

 

See notes to condensed consolidated financial statements.

7

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2020

 

2019

 

 

    

Shares

    

Amount

    

Shares

    

Amount

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

Balance as of the end of the period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

49,766,472

 

 

50

 

 

49,710,104

 

 

50

 

Issuance of common stock upon RSU conversion

 

 

10,451

 

 

 —

 

 

11,006

 

 

 —

 

Shares issued for exercise of stock options

 

 

833

 

 

 —

 

 

35,207

 

 

 —

 

Balance as of the end of the period

 

 

49,777,756

 

 

50

 

 

49,756,317

 

 

50

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

(33,801)

 

 

(352)

 

 

(33,801)

 

 

(352)

 

Balance as of the end of the period

 

 

(33,801)

 

 

(352)

 

 

(33,801)

 

 

(352)

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

 

 

 

328,056

 

 

 

 

 

325,130

 

Shares issued for exercise of stock options

 

 

 

 

 

 —

 

 

 

 

 

11

 

Payroll tax withheld for RSU releases

 

 

 

 

 

(2)

 

 

 

 

 

(1)

 

Share-based compensation expense

 

 

 

 

 

902

 

 

 

 

 

874

 

Balance as of the end of the period

 

 

 

 

 

328,956

 

 

 

 

 

326,014

 

Retained Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

 

 

 

(333,885)

 

 

 

 

 

(316,983)

 

Net loss

 

 

 

 

 

(7,950)

 

 

 

 

 

(7,600)

 

Balance as of the end of the period

 

 

 

 

 

(341,835)

 

 

 

 

 

(324,583)

 

Accumulated Other Comprehensive Income (Loss), Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the period

 

 

 

 

 

 1

 

 

 

 

 

 —

 

Net unrealized loss on investments

 

 

 

 

 

 —

 

 

 

 

 

(1)

 

Balance as of the end of the period

 

 

 

 

 

 1

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' deficit

 

 

 

 

$

(13,180)

 

 

 

 

$

1,128

 

 

 

See notes to condensed consolidated financial statements.

8

Neos Therapeutics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

    

2019

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(7,950)

 

$

(7,600)

 

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

 

 

 

 

 

 

 

Share-based compensation expense

 

 

902

 

 

874

 

Depreciation and amortization of property and equipment

 

 

491

 

 

549

 

Amortization of patents and other intangible assets

 

 

434

 

 

618

 

Changes in fair value of earnout, derivative and warrant liabilities

 

 

96

 

 

(129)

 

Amortization of senior debt issuance costs and discounts

 

 

465

 

 

357

 

Amortization of short-term investment purchase discounts

 

 

(23)

 

 

(16)

 

Gain on sale of equipment

 

 

 —

 

 

(1)

 

Other adjustments

 

 

(6)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

5,781

 

 

4,579

 

Inventories

 

 

792

 

 

(909)

 

Other assets

 

 

1,186

 

 

1,477

 

Accounts payable

 

 

6,500

 

 

(4,178)

 

Accrued expenses

 

 

(9,630)

 

 

(1,700)

 

Operating lease liabilities

 

 

(37)

 

 

(24)

 

Net cash used in operating activities

 

 

(999)

 

 

(6,103)

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(2,992)

 

 

(7,190)

 

Sales and maturities of short-term investments

 

 

7,087

 

 

 —

 

Capital expenditures

 

 

(160)

 

 

(167)

 

Intangible asset expenditures

 

 

(30)

 

 

(18)

 

Net cash provided by (used in) investing activities

 

 

3,905

 

 

(7,375)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

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

 

 

 —

 

 

11

 

Payments made on borrowings

 

 

(326)

 

 

(250)

 

Proceeds from short-term line of credit

 

 

22,500

 

 

 —

 

Payments made on short-term line of credit

 

 

(13,931)

 

 

 —

 

Payment of debt financing costs

 

 

(119)

 

 

 —

 

Payment of payroll taxes withheld for releases of restricted stock units

 

 

(2)

 

 

(1)

 

Net cash provided by (used in) financing activities

 

 

8,122

 

 

(240)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

11,028

 

 

(13,718)

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

Beginning

 

 

16,830

 

 

46,478

 

Ending

 

$

27,858

 

$

32,760

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid

 

$

1,503

 

$

1,764

 

 

See notes to condensed consolidated financial statements.

 

 

9

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 oral suspension dosage forms. The Company has a pipeline of extended-release pharmaceuticals including three products approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of attention deficit hyperactivity disorder (“ADHD”). Adzenys XR-ODT was approved by 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, in June 2017, and commercially launched in September 2017. Also, the Company received approval from the FDA for Adzenys ER oral suspension (“Adzenys ER”) in September 2017 and commercially launched this product in February 2018. In addition, the Company manufactures and markets a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release oral suspension for the treatment of cough and upper respiratory symptoms of a cold. In addition to its marketed products, the Company is developing NT0502, its product candidate for the treatment of sialorrhea.

 

The ongoing global COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus and, while the Company cannot predict their scope and severity, these developments and measures have adversely affected its business, results of operations and financial condition and will likely continue to do so. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and is taking steps to minimize its impact on its business. However, the full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 pandemic or the effectiveness of actions taken to contain the pandemic or treat its impact, among others. Furthermore, if the Company or any of the third parties with whom it engages, were to experience additional or prolonged shutdowns or other business disruptions, the Company’s ability to conduct its business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on its business, results of operation and financial condition.

 

 

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, 2020 are not necessarily indicative of the results for the year ending December 31, 2020 or any period thereafter. The audited consolidated financial statements as of and for the year ended December 31, 2019 included information and footnotes necessary for such presentation and were included in the Neos Therapeutics, Inc. Annual Report on Form 10-K filed with the SEC on March 13, 2020. 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, 2019.

 

10

Principles of consolidation: At March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019, 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 2019 and the three months ended March 31, 2020, the Company incurred 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. On October 2, 2019, the Company entered into a senior secured credit agreement with Encina Business Credit, LLC (“Encina”) as agent for the lenders (the “Loan Agreement”), in which Encina will extend up to $25.0 million in secured Revolving Loans to the Company, of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivables. 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 Quarterly 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.

 

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’ 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.

 

Leases: At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on the unique facts and circumstances present in such arrangement. Lease classification, recognition, and measurement are then determined at the lease commencement date. For arrangements that contain a lease, the Company will (i) identify lease and non-lease components, (ii) determine the consideration in the contract, (iii) determine whether

11

the lease is an operating or financing lease, and (iv) recognize lease right-of-use (“ROU”) assets and liabilities. Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses the implicit interest rate when readily determinable and uses the Company’s incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the lease commencement date in determining the present value of the lease payments.

 

Fixed lease payments are recognized over the expected term of the lease using the effective interest method. Variable lease expenses that are not considered fixed, or in substance fixed, are expensed as incurred. Fixed and variable lease expense on operating leases are recognized within cost of goods sold and operating expenses in the Company’s consolidated statements of operations. ROU asset amortization and interest costs on financing leases are recorded within cost of goods sold and interest expense, respectively, in the Company’s consolidated statements of operations. The Company has elected the short-term lease exemption and recognizes a short-term lease expense over lease term of 12 months or less.

 

Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities and operating lease liabilities in the Company’s consolidated balance sheets. Financing leases are included in property and equipment, net, current portion of long-term debt and long-term debt, net of current portion in the Company’s condensed consolidated balance sheets.

 

Debt issuance costs and discounts: Debt issuance costs reflect fees paid to lenders, as compensation for services beyond their role as a creditor, and third parties whose costs are directly related to issuing debt and that otherwise would not be incurred. Amounts paid to the lender as a reduction in the proceeds received are considered a component of the discount on the issuance and not an issuance cost. Debt issuance costs and discounts related to term loans are reported as a direct deduction from the outstanding debt and amortized over the term of the debt using the effective interest method as additional interest expense. Debt issuance costs related to a line of credit facility are accounted for in accordance with ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, in which the Company elects to defer and present debt issuance costs as an asset and are recorded at cost and subsequently amortized over the term of the line of credit as additional interest expense. The unamortized debt issuance costs related to a line of credit facility is included in other assets in the condensed consolidated balance sheets.

 

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 (expense) income, net 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

12

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 with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires 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.

 

Contract Balances

 

Contract assets primarily relate to our right to consideration in exchange for products transferred to a customer in which our right to consideration is dependent upon the customer selling these products. As of March 31, 2020 and December 31, 2019, contract assets of $35,000 and $27,000, respectively, were included in other current assets in the consolidated balance sheets. As of March 31, 2020 and December 31, 2019, the Company had no contract liability.

 

Disaggregation of revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2020

    

2019

    

 

 

    (in thousands)

 

Adzenys XR-ODT

 

$

4,234

 

$

6,657

 

Cotempla XR-ODT

 

 

8,115

 

 

5,773

 

Adzenys ER

 

 

190

 

 

185

 

Generic Tussionex

 

 

1,954

 

 

2,019

 

 

 

$

14,493

 

$

14,634

 

 

 

13

Net 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 wholesaler chargebacks and 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.

 

Due to estimates and assumptions inherent in determining the amount of 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.

 

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 amount of redeemed savings offers is recorded 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.

 

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.

 

14

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 data 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

 

The Company’s products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to the Company. 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.

 

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, milestone payments earned in the performance of research and development for licensed products and other related costs.

 

Share-based compensation: Share-based compensation awards, including grants of stock options, restricted stock, restricted stock units (“RSUs”) and modifications to existing stock options, are recognized in the statement of operations based on their fair values. Compensation expense related to stock-based awards 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.

 

Since the Company’s initial public offering (“IPO”) in July 2015, 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.

 

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.

 

15

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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, 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 March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform if contract modifications are made on or before December 31, 2022. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the adoption of ASU 2020-04 and does not expect it to have a material impact to the consolidated financial statements.

 

In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, enhances and simplifies various aspects of the income tax accounting guidance including the elimination of certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for foreign basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company elected to early adopt ASU 2019-12 on its consolidated financial statements for the period ended December 31, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial position.

 

In August 2018, the 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a write-down. The standard is effective for public entities that are smaller reporting companies, as defined by the SEC, for the fiscal years beginning after December 15, 2022, with early adoption permitted through a modified retrospective approach. The Company has evaluated the impact of adopting ASU 2016-13 and determined that the adoption will be immaterial to the consolidated financial

16

statements. The Company will adopt ASU 2016-13 on January 1, 2023, unless the Company’s filing status as a small reporting company changes, in which case adoption will be immediate.

 

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, 2020 and 2019 were excluded from consideration in the computation of diluted net loss per share of common stock for the three months ended March 31, 2020 and 2019, respectively, because including them would have been anti-dilutive:

 

 

 

 

 

 

 

 

March 31, 

 

    

2020

 

2019

Series C Redeemable Convertible Preferred Stock Warrants (as converted)

 

70,833

 

70,833

Stock options outstanding

 

6,105,870

 

4,793,891

RSUs outstanding

 

784,250

 

63,752

 

 

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.

 

17

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, 2020

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,357

 

$

2,501

 

$

 —

 

$

27,858

Short-term investments

 

 

 —

 

 

3,992

 

 

 —

 

 

3,992

Total financial assets

 

$

25,357

 

$

6,493

 

$

 —

 

$

31,850

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnout liability

 

$

 —

 

$

 —

 

$

30

 

$

30

Derivative liabilities (see Note 7)

 

 

 —

 

 

 —

 

 

1,231

 

 

1,231

Total financial liabilities

 

$

 —

 

$

 —

 

$

1,261

 

$

1,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of December 31, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,338

 

$

4,492

 

$

 —

 

$

16,830

Short-term investments

 

 

1,261

 

 

6,803

 

 

 —

 

 

8,064

Total financial assets

 

$

13,599

 

$

11,295

 

$

 —

 

$

24,894

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnout liability

 

$

 —

 

$

 —

 

$

30

 

$

30

Derivative liabilities (see Note 7)

 

 

 —

 

 

 —

 

 

1,135

 

 

1,135

Total financial liabilities

 

$

 —

 

$

 —

 

$

1,165

 

$

1,165

 

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, 2020 and December 31, 2019. 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 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, 2020 and December 31, 2019 as shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Amortized

 

Unrealized

 

Market

 

    

Cost

    

Gain / (Loss)

    

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Bank deposits and money market funds

 

$

25,357

 

$

 —

 

$

25,357

Financial and corporate debt securities

 

 

6,492

 

 

 1

 

 

6,493

 

 

$

31,849

 

$

 1

 

$

31,850

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Amortized

 

Unrealized

 

Market

 

    

Cost

    

Gain / (Loss)

    

Value

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Bank deposits and money market funds

 

$

13,599

 

$

 —

 

$

13,599

Financial and corporate debt securities

 

 

11,294

 

 

 1

 

 

11,295

 

 

$

24,893

 

$

 1

 

$

24,894

 

The Company’s Level 3 liability included the fair value of the earnout liability and the fair values of the Encina and Deerfield derivative liabilities at March 31, 2020 and December 31, 2019.

 

The fair value of the Encina derivative liability was determined after taking into consideration valuations using the Probability Weighted Discounted Cash Flow method based on assumptions at March 31, 2020 and December 31, 2019. The fair value of the Deerfield derivative liability was determined after taking into consideration valuations using the Monte Carlo method based on assumptions at March 31, 2020 and December 31, 2019. The methodologies and significant inputs used in the determination of the fair value of the debt derivative liability were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Encina Derivative Liability

 

Deerfield Derivative Liability

Date of Valuation

    

 

3/31/2020

    

 

12/31/2019

 

    

 

3/31/2020

    

 

12/31/2019

 

Valuation Method

 

 

Discounted Cash Flow

 

 

Discounted Cash Flow

 

 

 

Monte Carlo

 

 

Monte Carlo

 

Volatility (annual)

 

 

N/A

 

 

N/A

 

 

 

N/A

 

 

N/A

 

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

 

 

2.1