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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from                  to                  

 

Commission File Number: 001-35518

 

SUPERNUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2590184

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

1550 East Gude Drive, Rockville, MD

 

20850

(Address of principal executive offices)

 

(Zip Code)

 

(301) 838-2500

(Registrant’s telephone number, including area code)

 

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.  o Yes x No

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on January 17, 2017 was 50,121,242.

 

 

 



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Explanatory Note

 

Unless the context requires otherwise, the words “Supernus,” “we,” “our,” and “the Company” refer to Supernus Pharmaceuticals, Inc. and its subsidiaries.

 

Supernus Pharmaceuticals, Inc. (the Company) is filing this Amendment No. 1 on Form 10-Q/A (the Amended Form 10-Q) to its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 (the Original Form 10-Q), which was originally filed with the U.S. Securities and Exchange Commission (SEC) on August 4, 2016 (the Original Filing Date), to reflect the restatement of consolidated financial statements (Restatement) as described below.

 

In this Amended Form 10-Q for the fiscal quarter ended June 30, 2016, we are restating our previously issued and unaudited consolidated financial statements and the related disclosures for the three and six month periods ended June 30, 2016 and 2015. As discussed in further detail below and in Note 2 to the accompanying consolidated financial statements, the Restatement is the result of a misapplication in the guidance on accounting for revenue recognition related to the sale of future revenues (as described below). We assessed the impact of this misapplication on our prior interim and annual consolidated financial statements and concluded that the impact was material to these consolidated financial statements. Consequently, we have restated the prior period consolidated financial statements identified above. All amounts in this Amended Form 10-Q affected by the Restatement reflect such amounts as restated. For a more detailed explanation of these matters and resulting restatements; please see Part I, Item 1: Financial Statements — Note 2 to the Consolidated Financial Statements, Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement of Previously Issued Consolidated Financial Statements; and Part I, Item 4: Controls and Procedures.

 

For the convenience of the reader, this Amended Form 10-Q sets forth the Original Form 10-Q for the three month and six month period ended June 30, 2016 in its entirety, as amended by and to reflect the Restatement and includes certain restated information for the three month and six month period ended June 30, 2015.

 

Background of Restatement

 

In July 2014, the Company entered into a royalty monetization transaction and recorded the transaction with Healthcare Royalty Partners III, L.P. (HC Royalty) as revenue referencing guidance under ASC 605, “Revenue Recognition.” In August 2016, the Company was informed by its former independent registered public accounting firm, Ernst and Young LLP (EY), that a royalty monetization transaction for another client had recently been reviewed by the SEC’s Office of the Chief Accountant (the OCA). The OCA had concluded that that transaction should have been recorded as a liability rather than as revenue. Accordingly, Supernus undertook to re-evaluate the accounting for the 2014 transaction.

 

Having conferred with the Company’s prior auditor, EY, and the Company’s current auditor KPMG LLP (KPMG), in October 2016, the Company submitted to the OCA a request to post clear the Company’s accounting for the royalty monetization transaction from 2014. In its submission, the Company concluded that the terms and conditions of the agreement met the criteria for revenue recognition under SAB 104 and ASC 605-10. On November 9, 2016, the OCA completed its review and informed the Company that the royalty monetization transaction should have been recorded as a debt obligation in 2014 in accordance with ASC 470-10-25. As a result, on November 10, 2016, the Company’s Audit Committee concluded that the Company’s consolidated financial statements for the years ended December 31, 2014 and December 31, 2015, and related reports of the Company’s independent registered public accounting firms thereon, and the interim quarterly reports in those years beginning with the third quarter of 2014, and the interim quarterly reports for the first and second quarters in 2016 should no longer be relied upon and should be restated.

 

The Company is restating in this Amended Form 10-Q its consolidated financial statements for the three and six month periods ended June 30, 2016 and 2015. The adjustments to our consolidated financial statements related to the 2014 royalty monetization transaction resulted in the following changes:

 

·                  The $30.0 million proceeds of the transaction have now been recorded in the third quarter of 2014 a non-recourse debt rather than revenue;

 

·                  Revenue and operating income in the third quarter of 2014 have been reduced by approximately $30.0 million; and

 

·                  Royalties received by the counterparty to the royalty monetization transaction are now recognized by the Company as non-cash royalty revenue. The $30.0 million of non-recourse liability is reduced by the same amount, and then increased by the non-cash implied interest expense to be recognized.

 



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The revisions referenced above result in noncash financial statement corrections, principally reducing net income and increasing liability, but will have no impact on the Company’s current or previously reported cash and marketable securities position and no impact on net product sales.

 

In connection with the Restatement, the Company also made the following corrections:

 

·                  Recording current tax expenses related to an increase in our reserve for an uncertain tax position related to alternative minimum taxes in the fourth quarter of 2014 that had been previously recognized in the second quarter of 2015;

 

·                  An adjustment to the Statement of Cash Flows for the quarter ended June 30, 2016 to adjust cash used in investing activities, with an offset to cash provided by operations for certain accrued legal fees that have been deferred;

 

·                  The correction of an immaterial error, to correctly recognize stock compensation expense associated with the January 2014 stock option awards to the Board. These options have a twelve month vesting period, though the Company originally began recognizing compensation expense over a four-year vesting term. This error was corrected during 2015. Correcting this immaterial error results in an increase in selling, general, and administrative expense (SG&A) in 2014, and a corresponding decrease in SG&A expense in 2015; and

 

·                  The reclassification of a Certificate of Deposit (CD), originally purchased during the first quarter of 2015 and continually renewed on a quarterly basis, as a current marketable security. This CD has 91 days to maturity and the Company incorrectly classified this amount as cash and cash equivalents on the balance sheets at March 31, 2015, June 30, 2015, September 30, 2015 and December 31, 2015. We have corrected the balance sheets in all periods to reflect the reclassification from cash and cash equivalents to current marketable securities.

 

An explanation of the impact of each of these revisions on our financial statements is contained in Note 2 to the consolidated financial statements contained in Part I, Item 1: Financial Statements.

 

Items Amended in this Quarterly Report on Form 10-Q/A

 

The following items of this Amended Form 10-Q include restated financial data: (i) Part I, Item 1: Financial Statements; and (ii) Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, Part I, Item 4: Controls and Procedures includes a statement of material weakness covering our controls over financial reporting.

 

Information not affected by the Restatement is unchanged and reflects the disclosures made as of the Original Filing Date and is not intended to speak as of any subsequent date. No statements made herein should be assumed to be accurate as of any subsequent date. Accordingly, this Amended Form 10-Q should be read in conjunction with our subsequent filings with the SEC, as information in such filings may update or supersede certain information contained in this Amended Form 10-Q.

 

Restatement of Other Financial Statements

 

In addition to the restated financial information for the three and six month periods ended June 30, 2016 and 2015, included in this Amended Form 10-Q, the Restatement requires the restatement of our audited consolidated financial statements and related disclosures for the years ended December 31, 2015 and December 31, 2014 and our unaudited condensed consolidated financial statements and related disclosures for the quarters ended September 30, 2014, March 31, 2015, September 30, 2015, and March 31, 2016. Concurrently with this filing, we are filing the following amended Forms 10-K and 10-Q with respect to these periods to address the corrections:

 

·                  Form 10-Q/A for the quarter ended September 30, 2015, which contains restated unaudited condensed consolidated financial statements and related disclosures for the three and nine month periods ended September 30, 2015 and 2014;

 

·                  Form 10-K/A for the year ended December 31, 2015, which contains restated audited consolidated financial statements and related disclosures for the years ended December 31, 2015 and 2014 and;

 

·                  Form 10-Q/A for the quarter ended March 31, 2016, which contains restated unaudited condensed consolidated financial statements and related disclosures for the three month periods ended March 31, 2016 and 2015.

 



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Internal Control Considerations

 

Management has assessed the effect of the restatement on the Company’s internal control over financial reporting and believes that this restatement represents a material weakness in its internal control over financial reporting for all periods under restatement. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. For a discussion of management’s consideration of the material weakness identified, see Part I, Item 4: Controls and Procedures included in this Quarterly Report. In addition, this Amended Form 10-Q includes currently-dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 



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SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q/A — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

TABLE OF CONTENTS

 

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

Consolidated Balance Sheets (as Restated) as of June 30, 2016 (Unaudited), December 31, 2015 and June 30, 2015 (Unaudited)

1

 

Consolidated Statements of Operations (as Restated) for the three and six month periods ended June 30, 2016 and 2015 (Unaudited)

2

 

Consolidated Statements of Comprehensive Income (as Restated) for the three and six month periods ended June 30, 2016 and 2015 (Unaudited)

3

 

Consolidated Statements of Cash Flows (as Restated) for the six month periods ended June 30, 2016 and 2015 (Unaudited)

4

 

Notes to Consolidated Financial Statements (as Restated) (Unaudited)

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)

18

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

33

 

Item 4. Controls and Procedures (Restated)

33

PART II — OTHER INFORMATION

 

 

Item 1. Legal Proceedings

35

 

Item 1A. Risk Factors

37

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

 

Item 3. Defaults Upon Senior Securities

38

 

Item 4. Mine Safety Disclosures

38

 

Item 5. Other Information

38

 

Item 6. Exhibits

38

SIGNATURES

39

 



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PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets (Restated)

(in thousands, except share amounts)

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2016

 

2015

 

2015

 

 

 

(unaudited)

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,156

 

$

33,498

 

$

32,457

 

Marketable securities

 

24,058

 

28,692

 

37,334

 

Accounts receivable, net

 

34,281

 

25,908

 

17,900

 

Inventories, net

 

16,373

 

12,587

 

13,592

 

Prepaid expenses and other current assets

 

3,272

 

5,261

 

4,417

 

Total current assets

 

114,140

 

105,946

 

105,700

 

Long term marketable securities

 

67,809

 

55,009

 

33,488

 

Property and equipment, net

 

4,193

 

3,874

 

2,908

 

Deferred legal fees

 

16,386

 

22,503

 

11,487

 

Intangible assets, net

 

15,785

 

976

 

110

 

Other non-current assets

 

320

 

318

 

321

 

 

 

 

 

 

 

 

 

Total assets

 

$

218,633

 

$

188,626

 

154,014

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,243

 

$

4,314

 

$

4,518

 

Accrued sales deductions

 

35,019

 

26,794

 

14,114

 

Accrued expenses

 

28,135

 

25,153

 

17,856

 

Non-recourse liability related to future royalties — short term

 

1,909

 

497

 

 

Deferred licensing revenue

 

208

 

176

 

143

 

Total current liabilities

 

67,514

 

56,934

 

36,631

 

Deferred licensing revenue, net of current portion

 

1,606

 

1,390

 

1,202

 

Convertible notes, net

 

5,699

 

7,085

 

8,608

 

Non-recourse liability related to future royalties — long term

 

28,855

 

30,031

 

30,326

 

Other non-current liabilities

 

4,322

 

4,325

 

3,355

 

Derivative liabilities

 

412

 

854

 

2,070

 

 

 

 

 

 

 

 

 

Total liabilities

 

108,408

 

100,619

 

82,192

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized at June 30, 2016, December 31, 2015 and June 30, 2015; 49,508,476, 49,004,674 and 48,444,821 shares issued and outstanding at June 30, 2016, December 31, 2015 and June 30, 2015, respectively

 

50

 

49

 

48

 

Additional paid-in capital

 

270,059

 

263,955

 

258,202

 

Accumulated other comprehensive income (loss)

 

549

 

(488

)

(151

)

Accumulated deficit

 

(160,433

)

(175,509

)

(186,277

)

Total stockholders’ equity

 

110,225

 

88,007

 

71,822

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

218,633

 

$

188,626

 

$

154,014

 

 

See accompanying notes.

 

1



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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations (Restated)

(in thousands, except share and per share data)

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

Net product sales

 

$

50,335

 

$

34,266

 

$

93,360

 

$

62,363

 

Royalty revenue

 

1,205

 

626

 

2,324

 

1,231

 

Licensing revenue

 

86

 

786

 

135

 

822

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

51,626

 

35,678

 

95,819

 

64,416

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of product sales

 

2,751

 

1,762

 

4,786

 

3,380

 

Research and development

 

11,109

 

6,878

 

21,671

 

10,561

 

Selling, general and administrative

 

26,121

 

23,194

 

51,281

 

42,596

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

39,981

 

31,834

 

77,738

 

56,537

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

11,645

 

3,844

 

18,081

 

7,879

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

363

 

137

 

694

 

250

 

Interest expense

 

(196

)

(331

)

(375

)

(712

)

Interest expense — Non-recourse liability related to sale of future royalties

 

(1,281

)

(773

)

(2,560

)

(1,532

)

Changes in fair value of derivative liabilities

 

123

 

1

 

224

 

(48

)

Loss on extinguishment of debt

 

 

(241

)

(382

)

(2,375

)

Other income (expense)

 

2

 

25

 

(1

)

25

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

(989

)

(1,182

)

(2,400

)

(4,392

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

10,656

 

2,662

 

15,681

 

3,487

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

405

 

225

 

605

 

311

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,251

 

$

2,437

 

$

15,076

 

$

3,176

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.05

 

$

0.31

 

$

0.07

 

Diluted

 

$

0.18

 

$

0.04

 

$

0.28

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

49,427,825

 

47,911,932

 

49,333,962

 

46,246,866

 

Diluted

 

51,745,342

 

52,273,549

 

51,484,686

 

47,687,992

 

 

See accompanying notes.

 

2



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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income (Loss)(Restated)

(in thousands)

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,251

 

$

2,437

 

$

15,076

 

$

3,176

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized net gain (loss) on marketable securities

 

381

 

(86

)

1,037

 

3

 

Other comprehensive income (loss):

 

381

 

(86

)

1,037

 

3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,632

 

$

2,351

 

$

16,113

 

$

3,179

 

 

See accompanying notes.

 

3



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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows (Restated)

(in thousands)

 

 

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

15,076

 

$

3,176

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on extinguishment of debt

 

382

 

2,375

 

Change in fair value of derivative liability

 

(224

)

48

 

Depreciation and amortization

 

1,117

 

431

 

Non-cash interest expense, net/ interest income, net

 

405

 

527

 

Non-cash interest expense/income on non-recourse liability related to sale of future royalties

 

2,560

 

1,532

 

Non-cash royalty revenue

 

(2,324

)

(1,231

)

Share-based compensation expense

 

2,971

 

1,879

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,373

)

(630

)

Inventories

 

(3,786

)

(151

)

Prepaid expenses and other assets

 

1,989

 

(738

)

Accounts payable

 

(2,071

)

1,862

 

Accrued sales deduction

 

8,225

 

7,527

 

Accrued expenses

 

(2,556

)

(3,341

)

Deferred licensing revenue

 

248

 

(72

)

Other non-current liabilities

 

(4

)

(482

)

Net cash provided by operating activities

 

13,635

 

12,712

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(23,039

)

(34,927

)

Sales and maturities of marketable securities

 

15,658

 

21,862

 

Purchases of property and equipment

 

(903

)

(777

)

Deferred legal fees

 

(3,688

)

(3,818

)

Net cash used in investing activities

 

(11,972

)

(17,660

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock

 

995

 

1,009

 

Net cash provided by financing activities

 

995

 

1,009

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

2,658

 

(3,939

)

Cash and cash equivalents at beginning of period

 

33,498

 

36,396

 

Cash and cash equivalents at end of period

 

$

36,156

 

$

32,457

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

247

 

$

504

 

 

 

 

 

 

 

Non-cash financial activity:

 

 

 

 

 

Conversion of convertible notes and interest make-whole

 

$

2,138

 

$

25,056

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

5,537

 

$

4,868

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Six Months ended June 30, 2016 and 2015

(unaudited)

 

1.  Organization and Business

 

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware on March 30, 2005, and commenced operations on December 22, 2005. The Company is a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases, including neurological and psychiatric disorders. The Company markets two epilepsy products, Oxtellar XR and Trokendi XR, and has several proprietary product candidates in clinical development that address the psychiatry market.

 

The Company commenced the commercialization of Oxtellar XR and Trokendi XR in 2013.

 

2.  Restatement of Financial Statements

 

In July 2014, the Company entered into a royalty monetization transaction and recorded the transactions as revenue. In October 2016, the Company submitted to the U.S. Securities and Exchange Commission’s (the SEC) Office of the Chief Accountant (the OCA) a request for post-accounting review of the royalty monetization transaction. On November 9, 2016, the OCA completed its review and informed the Company that the royalty monetization transaction should have been recorded as a debt obligation in 2014. As a result, on November 10, 2016, the Company’s Audit Committee concluded that the Company’s consolidated financial statements for the years ended December 31, 2014 and December 31, 2015 and the interim quarterly reports in those years beginning with the third quarter of 2014, and the interim quarterly reports for the first and second quarters in 2016, and related reports of the Company’s independent registered public accounting firms thereon, should no longer be relied upon and will be restated.

 

The Company is restating in this Quarterly Report its consolidated financial statements for the three and six month periods ended June 30, 2016 and June 30, 2015. This restatement results in noncash, financial statement corrections and will have no impact on the Company’s current or previously reported cash and marketable securities position or net product sales.

 

The Company has also made corrections to reflect (i) the recording during the fourth quarter of 2014 of a current tax expense related to an increase in our reserve for an uncertain tax position related to alternative minimum taxes that had been previously recognized in the second quarter of 2015 and (ii) an increase in Selling, General and Administrative Expense in 2014 which is fully offset by a corresponding decrease in Selling, General and Administrative Expense in 2015. This adjustment is the result of the recognition of stock compensation expense over a period of twelve months as opposed to four years related to certain option grants granted in January 2014. Additionally, during the first quarter of 2015, the Company purchased a Certificate of Deposit (CD) that has been continually renewed on a quarterly basis. This CD has 91 days to maturity and the Company incorrectly classified this amount as cash and cash equivalents on the balance sheets at March 31, 2015, June 30, 2015, September 30, 2015 and December 31, 2015. We have corrected the balance sheets in all periods to reflect the reclassification from cash and cash equivalents to current marketable securities. An adjustment was made to the Statement of Cash Flows for the quarter ended June 30, 2015 to change cash used in investing activities, with an offset to cash provided by operations for certain accrued legal fees that have been deferred;

 

The impact of the restatement and other corrections on the condensed Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statement of cash flows as of and for the for the three and six month periods ended June 30, 2016 and June 30, 2015 is presented below in thousands except share and per share data.

 

Three Months Ended June 30, 2016

 

Consolidated Statement of Operations 

 

As Previously

 

Restatement

 

Other

 

 

 

(unaudited)

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Royalty revenue

 

$

 

$

1,205

 

$

 

 

$

1,205

 

Total revenue

 

50,421

 

1,205

 

 

 

51,626

 

Operating income

 

10,440

 

1,205

 

 

 

11,645

 

Interest expense — non-recourse liability related to sale of future royalties

 

 

(1,281

)

 

 

(1,281

)

Total other income (expense)

 

292

 

(1,281

)

 

 

(989

)

Earnings before income taxes

 

10,732

 

(76

)

 

 

10,656

 

Income tax expense

 

714

 

 

 

(309

)

405

 

Net income

 

10,018

 

(76

)

309

 

10,251

 

Income per common share

 

0.20

 

 

 

0.01

 

0.21

 

 

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Table of Contents

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Operations 
(unaudited)

 

As Previously
Reported

 

Restatement
Adjustments

 

Other
Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Royalty revenue

 

$

 

$

2,324

 

$

 

 

$

2,324

 

Total revenue

 

93,495

 

2,324

 

 

 

95,819

 

Operating income

 

15,757

 

2,324

 

 

 

18,081

 

Interest expense — non-recourse liability related to sale of future royalties

 

 

(2,560

)

 

 

(2,560

)

Total other income (expense)

 

160

 

(2,560

)

 

 

(2,400

)

Earnings before income taxes

 

15,917

 

(236

)

 

 

15,681

 

Income tax expense

 

912

 

 

 

(307

)

605

 

Net income

 

15,005

 

(236

)

307

 

15,076

 

Income per common share: Basic

 

0.30

 

 

 

0.01

 

0.31

 

 

Six Months Ended June 30, 2016

 

 

 

As Previously

 

Restatement

 

Other

 

 

 

Consolidated Statements of Cash Flows (unaudited)

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(12,626

)

 

 

$

654

 

$

(11,972

)

Net change in cash and cash equivalents

 

2,004

 

 

 

654

 

2,658

 

 

As of June 30, 2016

 

 

 

As Previously

 

Restatement

 

Other

 

 

 

Consolidated Balance Sheet (unaudited)

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

28,102

 

 

 

$

33

 

$

28,135

 

Non-recourse liability related to sale of future royalties — short term

 

 

1,909

 

 

 

1,909

 

Total current liabilities

 

65,572

 

1,909

 

33

 

67,514

 

Non-recourse liability related to sale of future royalties — long term

 

 

28,855

 

 

 

28,855

 

Total liabilities

 

77,611

 

30,764

 

33

 

108,408

 

Accumulated deficit

 

(129,636

)

(30,764

)

(33

)

(160,433

)

Total stockholders’ equity

 

141,022

 

(30,764

)

(33

)

110,225

 

 

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Operations 
(unaudited)

 

As Previously
Reported

 

Restatement
Adjustments

 

Other
Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Royalty revenue

 

$

 

$

626

 

$

 

 

$

626

 

Total revenue

 

35,052

 

626

 

 

 

35,678

 

Selling, general and administrative

 

23,336

 

 

 

(142

)

23,194

 

Total costs and expenses

 

31,976

 

 

 

(142

)

31,834

 

Operating income

 

3,076

 

626

 

142

 

3,844

 

Interest expense — non-recourse liability related to sale of future royalties

 

 

(773

)

 

 

(773

)

Total other expense

 

(409

)

(773

)

 

 

(1,182

)

Earnings before income taxes

 

2,667

 

(147

)

142

 

2,662

 

Income tax expense

 

662

 

 

 

(437

)

225

 

Net Income

 

2,005

 

(147

)

579

 

2,437

 

Income per common share: Basic

 

0.04

 

 

 

0.01

 

0.05

 

Income per common share: Diluted

 

0.03

 

 

 

0.01

 

0.04

 

 

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Table of Contents

 

Six Months Ended June 30, 2015

 

Consolidated Statement of Operations 
(unaudited)

 

As Previously
Reported

 

Restatement
Adjustments

 

Other
Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Royalty revenue

 

$

 

$

1,231

 

$

 

 

$

1,231

 

Total revenue

 

63,185

 

1,231

 

 

 

64,416

 

Selling, general and administrative

 

42,737

 

 

 

(141

)

42,596

 

Total costs and expenses

 

56,678

 

 

 

(141

)

56,537

 

Operating Income

 

6,507

 

1,231

 

141

 

7,879

 

Interest expense — non-recourse liability related to sale of future royalties

 

 

(1,532

)

 

 

(1,532

)

Total other expense

 

(2,860

)

(1,532

)

 

 

(4,392

)

Earnings before income taxes

 

3,647

 

(301

)

141

)

3,487

 

Income tax expense

 

724

 

 

 

(413

)

311

 

Net income

 

2,923

 

(301

)

554

 

3,176

 

Income per common share: Basic

 

0.06

 

 

 

0.01

 

0.07

 

Income per common share: Diluted

 

0.06

 

 

 

0.01

 

0.07

 

 

Six Months Ended June 30, 2015

 

 

 

As Previously

 

Restatement

 

Other

 

 

 

Consolidated Statements of Cash Flows (unaudited)

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

15,172

 

 

 

$

(2,460

)

$

12,712

 

Net cash used in investing activities

 

(19,467

)

 

 

1,807

 

(17,660

)

Net change in cash and cash equivalents

 

(3,286

)

 

 

(653

)

(3,939

)

 

As of June 30, 2015

 

 

 

As Previously

 

Restatement

 

Other

 

 

 

Consolidated Balance Sheet (unaudited)

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,110

 

 

 

$

(653

)

$

32,457

 

Marketable securities

 

36,681

 

 

 

653

 

37,334

 

Accrued expenses

 

17,639

 

 

 

217

 

17,856

 

Total current liabilities

 

36,414

 

 

 

217

 

36,631

 

Non-recourse liability related to sale of future royalties — long term

 

 

30,326

 

 

 

30,326

 

Total liabilities

 

51,803

 

30,326

 

63

 

82,192

 

Accumulated deficit

 

(155,734

)

(30,326

)

(217

)

(186,277

)

Total stockholders’ equity

 

102,365

 

(30,326

)

(217

)

71,822

 

 

As of December 31, 2015

 

 

 

As Previously

 

Restatement

 

Other

 

 

 

Consolidated Balance Sheet

 

Reported

 

Adjustments

 

Corrections

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,152

 

 

 

$

(654

)

$

33,498

 

Marketable securities

 

28,038

 

 

 

654

 

28,692

 

Accrued expenses

 

24,813

 

 

 

340

 

25,153

 

Non-recourse liability related to sale of future royalties — current portion

 

 

497

 

 

 

497

 

Total current liabilities

 

56,097

 

497

 

340

 

56,934

 

Non-recourse liability related to sale of future royalties — long term

 

 

30,031

 

 

 

30,031

 

Total liabilities

 

69,751

 

30,528

 

340

 

100,619

 

Accumulated deficit

 

(144,641

)

(30,528

)

(340

)

(175,509

)

Total stockholders’ equity

 

118,875

 

(30,528

)

(340

)

88,007

 

 

3.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd., collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been

 

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eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with the requirements of the SEC for interim financial information.

 

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q/A. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2015 filed with the SEC.

 

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.  The Company currently operates in one business segment.

 

The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the Company’s future financial results.

 

Marketable Securities

 

Marketable securities consist of investments in U.S. Treasuries, various U.S. governmental agency debt securities, corporate bonds and other fixed income securities. The Company’s investments are classified as available for sale. Such securities are carried at estimated fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as accumulated other comprehensive income, which is a separate component of stockholders’ equity. Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in 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, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method. The Company places all investments with government, industrial, or financial 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 as non-current assets.

 

The Company established the Supernus Supplemental Executive Retirement Plan (SERP) for the sole purpose of receiving funds for executives from a previous SERP and providing a continuing deferral program under the Supernus SERP. As of June 30, 2016 and December 31, 2015, the fair value of the SERP was $266,000 and $263,000, respectively. The SERP assets were held in mutual fund investments. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding noncurrent liability is also included in the consolidated balance sheets to reflect the Company’s obligation for the SERP. The Company has not made, and has no plans to make, contributions to the SERP. The securities are restricted in nature and can only be used for purposes of paying benefits under the SERP.

 

Accounts Receivable, net

 

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience. The Company recorded an allowance of approximately $0.1 million as of June 30, 2016 and no accounts were written off as of December 31, 2015. The Company recorded an allowance of approximately $4.8 million and $3.8 million for expected sales discounts as of June 30, 2016 and December 31, 2015, respectively.

 

Deferred Financing Costs

 

Deferred financing costs consist of financing costs incurred by the Company in connection with the closing of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes) (see Note 9). The Company amortizes deferred financing costs over the term of the related debt using the effective interest method. When extinguishing debt, the related deferred financing costs are written off.

 

Revenue Recognition

 

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

 

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Table of Contents

 

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors will take title and ownership to the product upon physical receipt of the product and then distribute our products to pharmacies.

 

Royalty Revenue

 

In the third quarter of 2014, the Company received a $30.0 million payment pursuant to a royalty agreement related to the purchase by HC Royalty of certain of the Company’s rights under the agreement with United Therapeutics Corporation related to the commercialization of Orenitram. We have recorded a non-recourse liability related to this transaction and have begun to amortize this amount to recognize royalty revenue as royalties are received by HC Royalty from United Therapeutics. We also recognize non-cash interest expense related to this liability that accrues at an effective interest rate determined based on projections of HC Royalty’s rate of return. We recognized royalty revenue of $2.3 million and $1.2 million for the six months ended June 30, 2016 and 2015, respectively. We recognized interest expense of $2.6 million and $1.5 million for the six months ended June 30, 2016 and 2015, respectively.

 

Sales Deductions

 

Allowances for estimated sales deductions are provided for the following:

 

·                  Rebates.  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public sector (e.g. Medicaid) and with private sector benefit providers. The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates paid based on a plan provider’s utilization. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust balances of such rebates to reflect the actual expenditures of the Company with respect to these programs, which would affect revenue in the period of adjustment.

 

·                  Chargebacks.  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on known sales to contracted customers.

 

·                  Distributor/Wholesaler deductions and discounts.  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the purchase price paid by the distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

 

·                  Co-pay assistance.  Patients who pay in cash or have commercial insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation and estimates of program redemption using data provided by third-party administrators.

 

·                  Returns.  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse. The Company will accept expired product six months prior and up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

 

Milestone Payments

 

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort (i.e., effort consistent with amount of the milestone) that was necessary to achieve the milestone. Management may recognize revenue contingent upon the achievement of a milestone in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. The Company recorded no milestone revenue during the three months and six months ended June 30, 2016 and $750,000 of milestone revenue during the three and six months ended June 30, 2015.

 

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Table of Contents

 

Cost of Product Sales

 

The cost of product sales consists primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

 

Income Taxes

 

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

 

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes in income tax expense.

 

Recently Issued Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

In April 2015, FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU more closely aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related debt. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance has been applied on a retrospective basis and the impact is reflected in the as previously reported column in Note 2. The adoption of ASU 2015-03 resulted in a reclassification of deferred financing costs of $104,000 from asset to liability classification on the Company’s consolidated December 31, 2015 financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. The FASB has voted to approve a one-year deferral, changing the effective date to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. Presently, the Company is assessing what effect the adoption of ASU 2014-09 will have on our consolidated financial statements and accompanying notes and has not yet selected a method of adoption.

 

4.  Fair Value of Financial Instruments

 

The fair value of an asset or liability should represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

 

The Company reports assets and liabilities that are measured at fair value using a three tier or level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

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·                  Level 1—Inputs are unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date.

 

·                  Level 2—Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

·                  Level 3—Unobservable inputs that reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

 

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

 

 

 

Fair Value Measurements at

 

 

 

June 30, 2016

 

 

 

(unaudited) (restated)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

June 30,

 

Markets

 

Inputs

 

Inputs

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,156

 

$

36,156

 

$

 

$

 

Marketable securities

 

24,058

 

654

 

23,404

 

 

Long term marketable securities

 

67,809

 

 

67,809

 

 

Marketable securities - restricted (SERP)

 

266

 

 

266

 

 

Total assets at fair value

 

$

128,289

 

$

36,810

 

$

91,479

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

412

 

$

 

$

 

$

412

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2015
(restated)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

December 31,

 

Markets

 

Inputs

 

Inputs

 

 

 

2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,498

 

$

33,498

 

$

 

$

 

Marketable securities

 

28,692

 

654

 

28,038

 

 

Long term marketable securities

 

55,009

 

 

55,009

 

 

Marketable securities - restricted (SERP)

 

263

 

 

263

 

 

Total assets at fair value

 

$

117,462

 

$

34,152

 

$

83,310

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

854

 

$

 

$

 

$

854

 

 

 

 

Fair Value Measurements at

 

 

 

June 30, 2015

 

 

 

(unaudited) (restated)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

June 30,

 

Markets

 

Inputs

 

Inputs

 

 

 

2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,457

 

$

32,457

 

$

 

$

 

Marketable securities

 

37,334

 

653

 

36,681

 

 

Long term marketable securities

 

33,488

 

 

33,488

 

 

Marketable securities - restricted (SERP)

 

267

 

 

267

 

 

Total assets at fair value

 

$

103,546

 

$

33,110

 

$

70,436

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

2,070

 

$

 

$

 

$

2,070

 

 

11



Table of Contents

 

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

 

The Company’s Level 1 assets include cash held with banks, a CD and money market funds.

 

Level 2 assets include the SERP assets, commercial paper and investment grade corporate bonds and other fixed income securities.

 

Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

 

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Company’s Notes, which are recorded as derivative liabilities.

 

The fair value of the interest make-whole liability of the Notes was calculated using a binomial-lattice model with the following key assumptions as of June 30, 2016, unaudited:

 

Volatility

 

45 %

Stock Price as of June 30, 2016

 

$20.37 per share

Credit Spread

 

900 bps

Term

 

10 months

Dividend Yield

 

0.0 %

 

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

 

Changes in the fair value of the interest make-whole liability are recognized as a component of other income (expense) in the Consolidated Statements of Operations. The following table presents information about the Company’s Level 3 liabilities as of December 31, 2015 and June 30, 2016 that are included in the non-current liabilities section of the consolidated balance sheets, in thousands:

 

 

 

Six Months ended

 

 

 

June 30, 2016

 

 

 

(unaudited)

 

 

 

 

 

Balance at December 31, 2015

 

$

854

 

 

 

 

 

Changes in fair value of derivative liabilities included in earnings

 

(224

)

Reduction due to conversion of debt to equity

 

(218

)

 

 

 

 

Balance at June 30, 2016

 

$

412

 

 

The carrying value, face value and estimated fair value of the Notes was approximately $5.7 million, $6.6 million and $25.8 million, respectively, as of June 30, 2016. The fair value was estimated based on actual trade information as well as quoted prices provided by bond traders, which would be characterized within Level 2 of the fair value hierarchy. This fair value amount gives recognition to the value of the interest make-whole liability and the value of the conversion option. Upon issuance, these were accounted for as derivative liabilities and additional paid-in-capital, respectively.

 

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short-term maturities. Unrestricted marketable securities held by the Company were as follows, in thousands:

 

At June 30, 2016 (unaudited):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

91,318

 

597

 

(48

)

$

91,867

 

 

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Table of Contents

 

At December 31, 2015 (restated):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

84,189

 

5

 

(493

)

$

83,701

 

 

At June 30, 2015 (unaudited) (restated):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

70,973

 

$

10

 

$

(161

)

$

70,822

 

 

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

 

 

 

June 30, 2016

 

 

 

(unaudited)

 

Less Than 1 Year

 

$

24,058

 

1-5 years

 

67,809

 

Greater Than 5 Years

 

 

Total

 

$

91,867

 

 

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

 

5. Inventories

 

Inventories consist of the following, in thousands:

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2016

 

2015

 

2015

 

 

 

(unaudited)

 

 

 

(unaudited)

 

Raw materials

 

$

2,935

 

$

2,887

 

$

2,363

 

Work in process

 

6,238

 

3,946

 

4,040

 

Finished goods

 

7,200

 

5,754

 

7,189

 

 

 

$

16,373

 

$

12,587

 

$

13,592

 

 

6.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2016

 

2015

 

2015

 

 

 

(unaudited)

 

 

 

(unaudited)

 

Computer equipment

 

$

1,152

 

$

1,112

 

$

992

 

Software

 

1,611

 

307

 

333

 

Lab equipment and furniture

 

6,333

 

5,667

 

5,603

 

Leasehold improvements

 

2,642

 

2,642

 

2,587

 

Construction in progress

 

8

 

1,114

 

 

 

 

11,746

 

10,842

 

9,515

 

Less accumulated depreciation and amortization

 

(7,553

)

(6,968

)

(6,607

)

 

 

$

4,193

 

$

3,874

 

$

2,908

 

 

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Table of Contents

 

Depreciation and amortization expense on property and equipment was approximately $298,000 and $585,000 for the three and six months ended June 30, 2016, and $160,000 and $317,000 for the three and six months ended June 30, 2015, respectively.

 

7.  Deferred Legal Fees and Intangible Assets

 

Deferred legal fees have been incurred in connection with patent litigation for Oxtellar XR and Trokendi XR. As of June 30, 2016, December 31, 2015 and June 30, 2015, the Company had deferred legal fees of $16.4 million, $22.5 million and $11.5 million, respectively.

 

The following sets forth the gross carrying amount and related accumulated amortization of the intangible asset, in thousands:

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

(unaudited)

 

December 31, 2015

 

 

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

 

 

Average Life

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized patent defense costs

 

9.5 - 11 years

 

$

16,318

 

$

533

 

$

994

 

$

18

 

 

The Company prevailed in a lawsuit related to Oxtellar XR in February 2016, at which time the Company began amortizing the costs associated with that litigation.

 

The net book value of intangible assets was $15.8 million as of June 30, 2016 and was $1.0 million as of December 31, 2015. The increase in intangible assets reflects the successful outcome of the lawsuit related to Oxtellar XR in February 2016. There is an offsetting reduction in the amount carried as deferred legal fees, as described above. Amortization expense on intangible assets was approximately $0.4 million and $0.5 million for the three and six months ended June 30, 2016 and was approximately $57,000 and $115,000 for the three and six months ended June 30, 2015.

 

There were no indicators of impairment identified at June 30, 2016, December 31, 2015 or June 30, 2015.

 

8.  Accrued Expenses, restated:

 

Accrued expenses are comprised of the following, in thousands:

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2016

 

2015

 

2015

 

 

 

(unaudited)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued professional fees

 

$

12,051

 

$

10,057

 

$

4,461

 

Accrued compensation

 

6,507

 

7,519

 

6,493

 

Accrued clinical trial and clinical supply costs

 

3,225

 

3,677

 

715

 

Accrued product costs

 

923

 

113

 

2,813

 

Accrued sales and marketing expenses

 

1,454

 

1,313

 

650

 

Accrued interest expense

 

270

 

295

 

322

 

Other accrued expenses

 

3,705

 

2,179

 

2,402

 

 

 

$

28,135

 

$

25,153

 

$

17,856

 

 

9.  Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through June 30, 2016, in thousands:

 

Gross proceeds

 

$

90,000

 

Initial value of interest make-whole derivative reported as debt discount

 

(9,270

)

Conversion option reported as debt discount and APIC

 

(22,336

)

Conversion of debt to equity - principal

 

(81,463

)

Conversion of debt to equity - accretion of debt discount and deferred financing costs

 

25,003

 

Accretion of debt discount and deferred financing costs

 

5,151

 

December 31, 2015 carrying value

 

7,085

 

 

 

 

 

Conversion of debt to equity - principal

 

(1,962

)

Conversion of debt to equity - accretion of debt discount and deferred financing costs

 

424

 

Accretion of debt discount and deferred financing costs

 

152

 

June 30, 2016 carrying value, unaudited

 

$

5,699

 

 

14



Table of Contents

 

During the six month period ended June 30, 2016, approximately $2.0 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.4 million shares of common stock in conversion of the principal amount of the Notes. As a result of the conversions, the Company incurred a loss of approximately $0.4 million on extinguishment of debt during the six months ended June 30, 2016, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the six month period ended June 30, 2015, as a result of approximately $25.3 million in note conversions, the Company incurred a loss of approximately $2.4 million on extinguishment of debt.

 

10. Summary Stockholders’ Equity

 

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the six month period ended June 30, 2016, in thousands:

 

 

 

Common Stock

 

Additional Paid-in
Capital

 

 

 

(unaudited)

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

49

 

$

263,955

 

Share-based compensation

 

 

2,971

 

Exercise of stock options

 

1

 

995

 

Equity issued on note conversion

 

 

2,138

 

Balance, June 30, 2016

 

$

50

 

$

270,059

 

 

11. Share-Based Payments

 

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights (SAR), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company’s common stock, to the Company’s key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company’s Board of Directors and provides for the issuance of up to 8,000,000 shares of the Company’s common stock upon the exercise of stock awards. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s common stock at the grant date. Those option awards generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten year contractual terms. Option awards granted to the directors generally vest over a one year term. Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, potential Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

(restated)

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

340

 

$

206

 

$

628

 

$

410

 

Selling, general and administrative

 

1,272

 

912

 

2,343

 

1,469

 

Total

 

$

1,612

 

$

1,118

 

$

2,971

 

$

1,879

 

 

The following table summarizes stock option and SAR activity:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term (in years)

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2015

 

2,699,007

 

$

8.94

 

7.92

 

Granted (unaudited)

 

1,024,150

 

13.01

 

 

 

Exercised (unaudited)

 

(44,057

)

4.69

 

 

 

Forfeited or expired (unaudited)

 

(6,750

)

11.47

 

 

 

Outstanding, June 30, 2016 (unaudited)

 

3,672,350

 

$

10.12

 

8.07

 

 

 

 

 

 

 

 

 

As of December 31, 2015:

 

 

 

 

 

 

 

Vested and expected to vest

 

2,654,381

 

$

8.93

 

7.90

 

Exercisable

 

901,672

 

$

7.95

 

6.86

 

 

 

 

 

 

 

 

 

As of June 30, 2016:

 

 

 

 

 

 

 

Vested and expected to vest (unaudited)

 

3,599,518

 

$

10.09

 

8.05

 

Exercisable (unaudited)

 

1,475,322

 

$

8.41

 

7.00

 

 

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Table of Contents

 

12.  Earnings per Share

 

Basic income per common share is determined by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income per share is computed by dividing the income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SARs, and potential ESPP awards, and the if-converted method is used to determine the dilutive effect of the Company’s Notes.

 

The following common stock equivalents were excluded in the calculation of diluted income per share because their effect would be anti-dilutive as applied to the income from continuing operations applicable to common stockholders for the three and six months ended June 30, 2016 and 2015:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

 

 

 

2,791,624

 

Warrants to purchase common stock

 

 

28,613

 

 

25,950

 

Stock options, stock appreciation rights, and non-vested stock options

 

1,124,100

 

 

1,159,100

 

 

 

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 30, 2016 and 2015, in thousands, except share and per share amounts, restated:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Numerator, in thousands:

 

 

 

 

 

 

 

 

 

Net income used for calculation of basic EPS

 

$

10,251

 

$

2,437

 

$

15,076

 

$

3,176

 

 

 

 

 

 

 

 

 

 

 

Interest expense on convertible debt

 

196

 

331

 

375

 

 

Changes in fair value of derivative liabilities

 

(123

)

(195

)

(224

)

 

Loss on extinguishment of debt

 

 

241

 

382

 

 

Loss on extinguishment of outstanding debt, as if converted

 

(849

)

(553

)

(1,183

)

 

Total adjustments

 

(776

)

(176

)

(650

)

 

Net income used for calculation of diluted EPS

 

$

9,475

 

$

2,261

 

$

14,426

 

$

3,176

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

49,427,825

 

47,911,932

 

49,333,962

 

46,246,866

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

1,240,814

 

2,417,586

 

1,301,885

 

 

Shares issuable to settle interest make-whole derivatives

 

52,563

 

246,105

 

71,537

 

 

Stock options, stock appreciation rights, and non-vested stock options

 

1,024,140

 

1,697,926

 

777,302

 

1,441,126

 

Total potential dilutive common shares

 

2,317,517

 

4,361,617

 

2,150,724

 

1,441,126

 

Weighted average shares outstanding, diluted

 

51,745,342

 

52,273,549

 

51,484,686

 

47,687,992

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.21

 

$

0.05

 

$

0.31

 

$

0.07

 

Net income per share, diluted

 

$

0.18

 

$

0.04

 

$

0.28

 

$

0.07

 

 

16



Table of Contents

 

13. Income Taxes

 

During the three and six months ended June 30, 2016, the Company had pre-tax income of $10.7 million and $15.7 million, respectively.  During the three and six months ended June 30, 2015, the Company had pre-tax income of $2.7 million and $3.5 million, respectively.  The provision for Federal and state income taxes related to the pre-tax income has been largely offset by the utilization of available net operating loss carryforwards (NOLs). Accordingly, the Company reduced its valuation allowance against its deferred tax assets and recognized an income tax expense for the jurisdictions that did not have sufficient NOLs to offset the expected tax expense.

 

During the three and six months ended June 30, 2016, the Company recorded $0.4 million and $0.6 million of current tax expense, respectively, primarily related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.  During the three and six months ended June 30, 2015, the Company recorded $0.2 million and $0.3 million of current tax expense related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.

 

14. Commitments and Contingencies

 

The Company has concurrent leases for office and lab space that extend through April 2020. The Company may elect to extend the term of the leases for an additional five-year term. The leases provide for a tenant improvement allowance of approximately $2.1 million in aggregate. During the three and six months ended June 30, 2016, none of the allowance was utilized. During the three and six months ended June 30, 2015, $0.2 million of the allowance was utilized and is included in fixed assets and deferred rent. As of June 30, 2016, $0.5 million remains available for tenant improvements. Rent expense for the leased facilities and leased vehicles for the Company’s sales representatives for the three and six months ended June 30, 2016 was approximately $0.7 million and $1.3 million, respectively. Rent expense for the leased facilities and leased vehicles for the three and six months ended June 30, 2015 was approximately $0.6 million and $1.2 million, respectively.

 

Future minimum lease payments under non-cancelable operating leases as of June 30, 2016 are as follows, in thousands, unaudited:

 

Year ending December 31:

 

 

 

2016 (remaining)

 

$

681

 

2017

 

1,312

 

2018

 

1,314

 

2019

 

1,341

 

Thereafter

 

454

 

 

 

$

5,102

 

 

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta), the Company has obtained exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810 (molindone hydrochloride). The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties in the low-single digits to Afecta based on worldwide net sales of each of these products.

 

The Company has also entered into a purchase and sale agreement with Rune Healthcare Limited (Rune), where the Company obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments due to Rune under this agreement. If the Company receives approval to market and sell any products based on the Rune product concept for SPN-809 (viloxazine hydrochloride), the Company is obligated to pay royalties to Rune based on net sales worldwide in the low-single digits.

 

17



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition of the Company. The interim financial statements included in this report and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on January 20, 2017.

 

In addition to historical information, this Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company’s belief or current expectations of management, such as statements including the words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential,” and similar statements or expressions, which are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in the Company’s business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K/A and elsewhere in this report as well as in other reports and documents we file with the Securities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q/A.

 

Solely for convenience, in this Quarterly Report on Form 10-Q/A the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto.

 

Restatement of Previously Issued Financial Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision and restatement adjustments made to the previously reported unaudited condensed consolidated financial statements for the three and six months ended June 30, 2016 and 2015.  For additional information and a detailed discussion of the revision and the restatement, see Note 2. “Restatement of Financial Statements” included in “Part I. Financial Information,” of this Form 10-Q/A.

 

Overview

 

We are a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases.

 

Oxtellar XR and Trokendi XR are the first once-daily extended release oxcarbazepine and topiramate products indicated for patients with epilepsy in the U.S. market. These products differ from immediate release products by offering once-daily dosing and unique pharmacokinetic characteristics which we believe can have very positive clinical effects for some patients. We believe a once-daily dosing regimen improves adherence, making it more probable that patients maintain sufficient levels of medication in their bloodstream to protect against seizures. In addition, the unique smooth and steady pharmacokinetic profiles of our once-daily formulations reduce the peak to trough fluctuation in blood level that are typically associated with immediate release products, which we believe may result in increased adverse events (AEs), more symptomatic side effects and decreased efficacy.

 

In addition, we are developing multiple product candidates in psychiatry to address large unmet medical needs and market opportunities. With SPN-810 (molindone hydrochloride), we are developing a product candidate to treat impulsive aggression (IA) in patients who have attention deficit hyperactivity disorder (ADHD). There are currently no approved products indicated for the treatment of IA. We subsequently plan to develop SPN-810 for treatment of IA in other CNS diseases, such as autism, bipolar disorder, schizophrenia, and some forms of dementia. With SPN-812 (viloxazine hydrochloride), we are developing this product candidate to treat patients who have ADHD.

 

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The table below summarizes our current pipeline of novel products and product candidates.

 

Product

 

Indication

 

Status

Oxtellar XR

 

Epilepsy

 

Launched

Trokendi XR

 

Epilepsy*

 

Launched

SPN-810

 

Impulsive Aggression**

 

Phase III

SPN-812

 

ADHD

 

Phase IIb

SPN-809

 

Depression

 

Phase II ready

 


*          Supplemental New Drug Application (sNDA) submitted in August 2015 for treatment in adults for prophylaxis of migraine headache.

 

**   Initial program is in patients with ADHD, with a plan to follow on in other indications, such as IA in patients with autism, bipolar disorder, schizophrenia, and some forms of dementia.

 

We are continuing to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. We currently have seven U.S. patents issued covering Oxtellar XR and six U.S. patents issued covering Trokendi XR, providing patent protection expiring no earlier than 2027 for each product.

 

Commercial Products

 

Trokendi XR

 

Trokendi XR, the first once-daily extended release topiramate product indicated for patients with epilepsy in the U.S. market, is designed to improve patient adherence over immediate release products, which must be taken multiple times per day.

 

We remain in discussions with the United States Food and Drug Administration (FDA) regarding the sNDA on migraine headache. The FDA requested that the Company resubmit the Trokendi XR product label with migraine as an indication in a different format prior to completing its review. No additional new data, studies or analyses for efficacy or safety were required by the FDA. We have submitted the revised label, and a targeted PDUFA date has been set for the third quarter of 2016.

 

Oxtellar XR

 

Oxtellar XR is the only once-daily extended release oxcarbazepine product indicated for the treatment of patients with epilepsy in the U.S. as adjunctive therapy.

 

In a retrospective medical chart review of 200 patients treated with immediate release oxcarbazepine or Oxtellar XR, Oxtellar XR was associated with a significantly lower rate of inpatient hospitalization stays, lower rate of emergency department visits, and a higher rate of compliance. The patient charts were obtained from 17 geographically and clinically diverse sites across the U.S. and included non-academic and academic affiliated practices, general neurology, pediatric neurology, and epilepsy centers.

 

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through the end of 2016 and in subsequent years. Data from Intercontinental Marketing Services (IMS) shows 238,531 prescriptions filled for both drugs during the six months ended June 30, 2016, representing a growth of 43.9% as compared to the 165,776 prescriptions reported for the six months ended June 30, 2015. For the three months ended June 30, 2016, data from IMS shows 123,758 prescriptions filled for both drugs, representing a growth of 38.9% as compared to the 89,086 prescriptions reported for the three months ended June 30, 2015.

 

We have received Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties. In response to these Paragraph IV notice letters, we have initiated litigation against these third parties alleging infringement of our intellectual property rights. We intend to vigorously defend our intellectual property rights in each of these cases. We anticipate continuing to incur increasing amounts of legal fees and related expenses for these cases as they progress. On February 8, 2016, the Company announced a court ruling that three patents covering Oxtellar XR were valid and that Actavis, plc infringed two of these three patents by submitting an abbreviated new drug application (ANDA) to the FDA. (See Part II, Item 1—Legal Proceedings in this Quarterly Report on Form 10-Q/A for additional information).

 

Product Candidates

 

SPN-810

 

We are developing SPN-810 as a novel treatment for IA in patients who have ADHD. Our Phase III clinical trial (P301) is being conducted under a Special Protocol Assessment (SPA).  SPN-810 has been granted fast-track designation by the FDA. We initiated two Phase III clinical trials in 2015 (P301 and P302) and began dosing patients during the first quarter of 2016. We expect patient enrollment to continue through the end of 2016 and into 2017. We continue to expect launching SPN-810, if approved by the FDA, according to the current timeline in 2019.

 

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SPN-812

 

SPN-812 is being developed as a novel non-stimulant treatment for ADHD. We initiated a Phase IIb dose ranging trial during 2015 and began dosing patients during the first quarter of 2016. Patient enrollment has been completed, and last visit for the last patient occurred during the third quarter. We continue to project that we will have data from this Phase IIb trial available by early 2017. In April 2016, we initiated an open-label trial in which 84% of the patients completing the Phase IIb trial have been enrolled.

 

We expect to incur significant research and development expenses related to the continued development of each of our product candidates, with a total cost of approximately $100 million for each of the two programs through FDA approval.

 

Collaboration Update

 

Recently, Shire announced positive results of SHP465 Safety and Efficacy Study in Children and Adolescents with ADHD. The study addresses a key FDA requirement, keeping SHP465 on track for resubmission in the fourth quarter of 2016 and potential launch in second half of 2017, if it is approved by the FDA. SHP465 was originally developed by Shire Laboratories, the former division of Shire that subsequently became Supernus Pharmaceuticals. Based on the agreement between Supernus and Shire, Shire will pay to Supernus a single digit percentage royalty on net sales of the product.

 

Critical Accounting Policies and the Use of Estimates

 

The significant accounting policies and bases of presentation for our consolidated financial statements are described in Note 2 “Summary of Significant Accounting Policies.” The preparation of our financial statements in accordance with Generally Accepted Accounting Principles (GAAP), requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

 

We believe the following accounting policies and estimates to be critical:

 

Revenue Recognition

 

Revenue from product sales is recognized when: persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

 

We derive our estimated sales deductions from an analysis of historical levels of deductions specific to each product. In addition, we also consider the impact of anticipated changes in product price, sales trends and changes in managed care coverage and co-pay assistance.

 

Accounting for Non-recourse Liability related to Sale of Future Royalties

 

In July 2014, we sold certain royalty rights for $30.0 million to HealthCare Royalty Partners (HC Royalty).  These royalty rights related to the approved product Orenitram, sold by United Therapeutics, Inc. Under the relevant accounting guidance, due to a limit on the amount of royalties that HC Royalty can earn under the arrangement, this transaction is accounted for as a debt and is amortized using the effective interest method over the life of the arrangement. We have no obligation to repay any amounts to HC Royalty. In order to record the amortization of the liability, we are required to estimate the total amount of future royalty payments to be received by HC Royalty under the License Agreement. The sum of these amounts less the net proceeds we received of $30.0 million will be recorded as non-cash interest expense over the life of the liability. Consequently, we impute interest on the unamortized portion of the liability and record non-cash interest expense using an imputed effective interest rate. We will periodically assess the expected royalty payments, and to the extent such payments are greater or less than our initial estimate, we will adjust the amortization of the liability and interest rate. As a result of this accounting, even though we do not retain HC Royalty’s share of the royalties, we will continue to record non-cash revenue related to those royalties until the amount of the associated liability and related interest is fully amortized.

 

Deferred Legal Fees

 

Deferred legal fees are comprised of costs incurred in connection with the defense of patents for Oxtellar XR and Trokendi XR. Amortization of the deferred legal fees will begin upon successful outcome of the on-going litigation. Deferred legal fees will be charged to expense in the event of an unsuccessful outcome of the on-going litigation.

 

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Research and Development Expenses

 

Research and development (R&D) expenditures are expensed as incurred. Research and development costs consist primarily of employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with clinical research organizations (CROs), investigative sites, consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

 

Accrued Clinical Expenses

 

Clinical trials are inherently complex, often involving multiple service providers, and can include payments made to investigator physicians at study sites. Because billing for services often lags by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. This process involves reviewing open contracts and communicating with our subject matter expert personnel and the appropriate service provider personnel to identify services that have been performed on our behalf. We accrue for the estimated but unbilled services performed and the associated costs incurred.

 

Payments to service providers can either be based on hourly rates for services or based on performance driven milestones. When accruing clinical expenses, we estimate the time period over which services will be performed during the life of the entire clinical program, the total cost of the program, and the level of effort to be expended in each intervening period. To the maximum extent possible, we work with each service provider to provide an estimate for unbilled services as of the end of the calendar quarter. This includes estimates for payments to site investigators. We work diligently to minimize estimates based solely on company generated calculations. If the service provider underestimates or overestimates the cost associated with a trial or service at any given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, our estimated accrued clinical expenses have closely approximated actual expenses incurred.

 

Results of Operations

 

Comparison of the three months ended June 30, 2016 and June 30, 2015

 

 

 

Three Months ended June 30,

 

 

 

 

 

2016

 

2015
(restated)

 

Increase/
(decrease)

 

 

 

(restated) (unaudited, in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

Net product sales

 

$

50,335

 

$

34,266

 

16,069

 

Royalty revenue

 

1,205

 

626

 

579

 

Licensing revenue

 

86

 

786

 

(700

)

Total revenues

 

51,626

 

35,678

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

2,751

 

1,762

 

989

 

Research and development

 

11,109

 

6,878

 

4,231

 

Selling, general and administrative

 

26,121

 

23,194

 

2,927

 

Total costs and expenses

 

39,981

 

31,834

 

 

 

Operating income

 

11,645

 

3,844

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

363

 

137

 

226

 

Interest expense

 

(196

)

(331

)

135

 

Interest expense — liability related to sale of future royalties

 

(1,281

)

(773

)

(508

)

Changes in fair value of derivative liabilities

 

123

 

1

 

122

 

Loss on extinguishment of debt

 

 

(241

)

241

 

Other income

 

2

 

25

 

(23

)

Total other expenses

 

(989

)

(1,182

)

 

 

Earnings before income taxes

 

10,656

 

2,662

 

 

 

Income tax

 

405

 

225

 

180

 

Net income

 

$

10,251

 

$

2,437

 

 

 

 

Net Product Sales.  The increase in net product sales for the three months ended June 30, 2015 as compared to the three months ended June 30, 2016 was primarily driven by increased prescriptions. Net product sales are based on gross revenue from shipments to

 

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distributors, less estimates for discounts, rebates, other sales deductions and returns. The table below lists our net product sales by product comparison, in thousands, unaudited:

 

 

 

Net Product Sales

 

 

 

 

 

Three Months ended June 30,

 

Change in Net Product

 

 

 

2016

 

2015

 

Sales (%)

 

 

 

(unaudited)

 

 

 

Trokendi XR

 

$

37,663

 

$

26,279

 

43.3

%

Oxtellar XR

 

12,672

 

7,987

 

58.7

%

Total

 

$

50,335

 

$

34,266

 

46.9

%

 

Royalty Revenue (restated).  Revenue of $1.2 million recognized during the three months ended June 30, 2016 as compared to $0.6 million in 2015 was non-cash revenue generated pursuant to an agreement with HealthCare Royalty Partners III, L.P. (HC Royalty).

 

Cost of Product Sales.  Cost of product sales during the three months ended June 30, 2016 was $2.8 million as compared to $1.8 million for the three months ended June 30, 2015, an increase of $1.0 million or 56.1%. This increase is primarily due to sales increases.

 

Research and Development Expenses.  R&D expenses during the three months ended June 30, 2016 were $11.1 million as compared to $6.9 million for the three months ended June 30, 2015, an increase of $4.2 million or 61.5%. This increase is primarily due to preclinical and late stage clinical trials for SPN-810 and SPN-812 as well as manufacture and scale-up of dosage form manufacturing. During the second half of 2015, we initiated two Phase III trials for SPN-810 and a Phase IIb trial for SPN-812. We expect R&D costs to increase significantly in 2016, as we continue to advance these trials and the related development activities for both of these programs.

 

Selling, General and Administrative Expenses (restated).  Our selling, general and administrative (SG&A) expenses were $26.1 million during the three months ended June 30, 2016 as compared to $23.2 million for the three months ended June 30, 2015, an increase of $2.9 million or 12.5%. The increase in SG&A expenses is primarily due to the development of promotional material and preparation for the launch of the migraine indication for Trokendi XR.

 

Interest Income. During the three months ended June 30, 2016 and June 30, 2015, we recognized $0.4 million and $0.1 million, respectively, of interest income earned on our cash and marketable securities.

 

Interest Expense.  Interest expense was $0.2 million during the three months ended June 30, 2016 as compared to $0.3 million incurred for the three months ended June 30, 2015. The decrease was due to a decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes due in 2019 (the Notes) from $10.7 million at June 30, 2015 to $6.6 million at June 30, 2016.

 

Interest Expense — Non-recourse Liability Related to Sale of Future Royalties (restated).  Interest expense related to our non-recourse royalty liability was $1.3 million during the three months ended June 30, 2016 as compared to $0.8 million for the three months ended June 30, 2015. The increase of $0.5 million for this non-cash expense item was primarily due to an increase in the expected royalties forecast related to Orenitram.

 

Changes in Fair Value of Derivative Liability.  During the three months ended June 30, 2016, we recognized a non-cash gain of $0.1 million related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. This gain is primarily due to the passage of time.

 

Loss on Extinguishment of Debt.  During the three months ended June 30, 2016, there was no loss on extinguishment of debt as no Notes were converted. During the three months ended June 30, 2015, we recognized a non-cash loss on extinguishment of debt of $0.2 million related to the conversion of $3.9 million of our Notes.

 

Income Tax.  During the three months ended June 30, 2016, we recorded $0.4 million of current tax expense related primarily to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax. During the three months ended June 30, 2015, we recorded $0.2 million of current tax expense related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.

 

Net Income.  We realized net income of $10.2 million during the three months ended June 30, 2016, compared to net income of $2.4 million during the three months ended June 30, 2015, an increase of $7.8 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased research expenses incurred for the late stage studies for our two product candidates and an increase in marketing expenditures.

 

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Comparison of the six months ended June 30, 2016 and June 30, 2015 (Restated)

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

Net product sales

 

$

93,360

 

$

62,363

 

30,997

 

Royalty revenue

 

2,324

 

1,231

 

1,093

 

Licensing revenue

 

135

 

822

 

(687

)

Total revenues

 

95,819

 

64,416

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

4,786

 

3,380

 

1,406

 

Research and development

 

21,671

 

10,561

 

11,110

 

Selling, general and administrative

 

51,281

 

42,596

 

8,685

 

Total costs and expenses

 

77,738

 

56,537

 

 

 

Operating income

 

18,081

 

7,879

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

694

 

250

 

444

 

Interest expense

 

(375

)

(712

)

337

 

Interest expense — liability related to sale of future royalties

 

(2,560

)

(1,532

)

(1,028

)

Changes in fair value of derivative liabilities

 

224

 

(48

)

272

 

Loss on extinguishment of debt

 

(382

)

(2,375

)

1,993

 

Other (expense) income

 

(1

)

25

 

(26

)

Total other expenses

 

(2,400

)

(4,392

)

 

 

Earnings before income taxes

 

15,681

 

3,487

 

 

 

Income tax

 

605

 

311

 

294

 

Net income

 

$

15,076

 

$

3,176

 

 

 

 

Net Product Sales.  The increase in net product sales for the six months ended June 30, 2015 as compared to the six months ended June 30, 2016 was primarily driven by increased prescriptions. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, other sales deductions and returns. The table below lists our net product sales by product comparison, in thousands, unaudited:

 

 

 

Net Product Sales

 

 

 

 

 

Six Months ended June 30,

 

Change in Net Product

 

 

 

2016

 

2015

 

Sales (%)

 

 

 

(unaudited)

 

 

 

Trokendi XR

 

$

69,983

 

$

47,205

 

48.3

%

Oxtellar XR

 

23,377

 

15,158

 

54.2

%

Total

 

$

93,360

 

$

62,363

 

49.7

%

 

Royalty Revenue (restated).  Revenue of $2.3 million recognized during the six months ended June 30, 2016 as compared to $1.2 million in 2015 was non-cash revenue generated pursuant to an agreement with HC Royalty.

 

Cost of Product Sales.  Cost of product sales during the six months ended June 30, 2016 was $4.8 million as compared to $3.4 million for the six months ended June 30, 2015, an increase of $1.4 million or 41.6%. This increase is primarily due to sales increases.

 

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Research and Development Expenses.  R&D expenses during the six months ended June 30, 2016 were $21.7 million as compared to $10.6 million for the six months ended June 30, 2015, an increase of $11.1 million or 105.2%. This increase is primarily due to preclinical and late stage clinical trials for SPN-810 and SPN-812 as well as manufacture of SPN-810 and SPN-812 clinical trial materials and manufacturing scale-up. During the second half of 2015, we initiated two Phase III trials for SPN-810 and a Phase IIb trial for SPN-812. We expect R&D costs to increase significantly in 2016, as we continue to advance these trials and the related development activities for both of these programs.

 

Selling, General and Administrative Expenses (restated).  Our SG&A expenses were $51.3 million during the six months ended June 30, 2016 as compared to $42.6 million for the six months ended June 30, 2015, an increase of $8.7 million or 20.4%. The increase in SG&A expenses is primarily due to the development of promotional material and preparation for the launch of the migraine indication for Trokendi XR in 2016, as well as supply chain and Medical Affairs programs to support our commercial products.

 

Interest Income. During the six months ended June 30, 2016 and June 30, 2015, we recognized $0.7 million and $0.3 million, respectively, of interest income earned on our cash and marketable securities.

 

Interest Expense.  Interest expense was $0.4 million during the six months ended June 30, 2016 as compared to $0.7 million incurred for the six months ended June 30, 2015. The decrease of $0.3 million was primarily due to an increase in the expected royalties forecast related to Orenitram.

 

Interest Expense — Non-recourse Liability Related to Sale of Future Royalties (restated).  Interest expense related to our non-recourse royalty liability was $2.6 million during the six months ended June 30, 2016 as compared to $1.5 million for the six months ended June 30, 2015. The increase of $1.1 million for this non-cash expense item was primarily due to increases in the projections for future Orenitram royalties.

 

Changes in Fair Value of Derivative Liability.  During the six months ended June 30, 2016, we recognized a non-cash gain of $0.2 million related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. This gain is primarily due to the passage of time. During the six months ended June 30, 2015, we recognized a non-cash loss of $48,000 related to a change in estimated fair value of the warrant liability of $336,000, offset by $288,000 of interest make-whole derivative liability related to our Notes. This loss was primarily due to the increase of our stock price.

 

Loss on Extinguishment of Debt.  During the six months ended June 30, 2016, we recognized a non-cash loss on extinguishment of debt of $0.4 million related to the conversion of $2.0 million of our Notes. During the six months ended June 30, 2015, we recognized a non-cash loss on extinguishment of debt of $2.4 million related to the conversion of $25.3 million of our Notes.

 

Income Tax.  During the six months ended June 30, 2016, we recorded $0.6 million of current tax expense related primarily to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax. During the six months ended June 30, 2015, we recorded $0.3 million of current tax expense related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.

 

Net Income.  We realized net income of $15.1 million during the six months ended June 30, 2016, compared to net income of $3.2 million during the six months ended June 30, 2015, an increase of $11.9 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased expenses incurred for the late stage studies for our two product candidates and an increase in marketing expenditures.

 

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Comparison of the three months ended June 30, 2015 and June 30, 2014

 

 

 

Three Months ended June 30,

 

 

 

 

 

2015
(restated)

 

2014

 

Increase/
(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

34,266

 

$

27,609

 

6,657

 

Royalty revenue

 

626

 

 

626

 

Licensing revenue

 

786

 

2,066

 

(1,280

)

Total revenues

 

35,678

 

29,675

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

1,762

 

1,661

 

101

 

Research and development

 

6,878

 

4,677

 

2,201

 

Selling, general and administrative

 

23,194

 

19,581

 

3,613

 

Total costs and expenses

 

31,834

 

25,919

 

 

 

Operating income

 

3,844

 

3,756

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

137

 

85

 

52

 

Interest expense

 

(331

)

(1,278

)

947

 

Interest expense — liability related to sale of future royalties

 

(773

)

 

(773

)

Changes in fair value of derivative liabilities

 

1

 

678

 

(677

)

Loss on extinguishment of debt

 

(241

)

(39

)

(202

)

Other income

 

25

 

 

25

 

Total other (expenses

 

(1,182

)

(554

)

 

 

Earnings before income taxes

 

2,662

 

3,202

 

 

 

Income tax

 

225

 

 

 

Net income

 

$

2,437

 

$

3,202

 

 

 

 

Net Product Sales.  Our net product sales of $34.3 million for the three months ended June 30, 2015 are based on $8.0 million of revenue of Oxtellar XR from shipments to distributors, less estimates for discounts, rebates, other sales deductions and returns, and $26.3 million of revenue for Trokendi XR, from shipments to distributors, less estimates for discounts, rebates, other sales deductions and returns.  The increase in net product sales is primarily driven by an increase in underlying prescription growth. The effect of the change to contemporaneous revenue recognition for Trokendi XR was to increase net product sales by $15.4 million for the three month period ended June 30, 2014.

 

Royalty Revenue (restated). The revenue for the three month period ended June 30, 2015 resulted from the Royalty Interest Acquisition Agreement that we entered into with HC Royalty in July 2014 for Orenitram, which is marketed by United Therapeutics Corporation.  We recognized $0.6 million of non-cash revenue pursuant to this agreement during 2015 and none in 2014.

 

Research and Development Expense.  Research and development expenses during the three months ended June 30, 2015 were $6.9 million as compared to $4.7 million for the three months ended June 30, 2014, an increase of $2.2 million or 47.1%.  During the second quarter of 2015, we were focused on preparing for the SPN-810 late stage studies including development of the outcome and assessment scale that we propose to use in the trials coupled with manufacturing of the clinical supplies. We expect research and development costs to increase significantly throughout 2015 as we initiate the Phase III program for SPN-810 and initiate the Phase IIb program for SPN-812.

 

Selling, General and Administrative Expenses (restated).  Our selling, general and administrative expenses were $23.2 million during the three months ended June 30, 2015 as compared to $19.6 million for the three months ended June 30, 2014, an increase of $3.6 million or 18.4%. This increase was mainly due to the increase in compensation and travel expenses associated with the expansion of our sales force throughout 2014, and an increase in promotional and marketing expenses including sample distribution to support the growth of Oxtellar XR and Trokendi XR.

 

Interest Expense.  Interest expense was $0.3 million during the three months ended June 30, 2015 as compared to $1.3 million for the three months ended June 30, 2014. The decrease of $1.0 million was primarily due to a decrease in the outstanding principal amount of our 7.5% Convertible Senior Secured Notes due in 2019 (the Notes) from $39.8 million at June 30, 2014 to $10.7 million at June 30, 2015.

 

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Interest Expense — Non-recourse Liability Related to Sale of Future Royalties (restated).  Interest expense related to our non-recourse royalty liability was $0.8 million during the three months ended June 30, 2015 as compared to zero for the three months ended June 30, 2014. The increase of $0.8 million for this non-cash expense item was primarily due to the fact that this liability existed for all three months of this period in 2015 and did not exist during this three month period in 2014.

 

Changes in Fair Value of Derivative Liability.  During the three months ended June 30, 2015, we recognized non-cash income of $1,000 related to a change in estimated fair value of the warrant liability of $194,000, offset by $195,000 of interest make-whole derivative liability related to our Notes. This loss is primarily due to the increase in our stock price. We recognized a non-cash credit of $0.7 million associated with the interest make-whole derivative liability during the three months ended June 30, 2014, due primarily to the passage of time.

 

Loss on Extinguishment of Debt.  During the three months ended June 30, 2015, we recognized a non-cash loss on extinguishment of debt of $0.2 million related to the conversion of $3.9 million of our Notes. During the three months ended June 30, 2014, we recognized a non-cash loss on extinguishment of debt of $39,000 related to the conversion of $0.2 million of our Notes.

 

Income Tax.  During the three months ended June 30, 2015, we recorded $0.2 million of current tax expense related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.

 

Net Income.  We realized net income of $2.4 million during the three months ended June 30, 2015, compared to a net income of $3.2 million during the three months ended June 30, 2014, a decrease of $0.8 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased expenses on preparing for the late stage studies for two product candidates and expenses associated costs with the expansion of our sales force as well as an increase in marketing expenditures associated with ongoing support of Oxtellar XR and Trokendi XR.

 

Comparison of the six months ended June 30, 2015 and June 30, 2014

 

 

 

Six Months ended June 30,

 

 

 

 

 

2015
(restated)

 

2014

 

Increase/
(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

62,363

 

$

36,604

 

25,759

 

Royalty revenue

 

1,231

 

 

1,231

 

Licensing revenue

 

822

 

2,152

 

(1,330

)

Total revenues

 

64,416

 

38,756

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

3,380

 

2,155

 

1,225

 

Research and development

 

10,561

 

9,159

 

1,402

 

Selling, general and administrative

 

42,596

 

37,109

 

5,487

 

Total costs and expenses

 

56,537

 

48,423

 

 

 

Operating income (loss)

 

7,879

 

(9,667

)

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

250

 

187

 

63

 

Interest expense

 

(712

)

(2,485

)

1,773

 

Interest expense — liability related to sale of future royalties

 

(1,532

)

 

(1,532

)

Changes in fair value of derivative liabilities

 

(48

)

1,355

 

(1,403

)

Loss on extinguishment of debt

 

(2,375

)

(1,732

)

(643

)

Other income

 

25

 

 

25

 

Total other expenses

 

(4,392

)

(2,675

)

 

 

Earnings (loss) before income taxes

 

3,487

 

(12,342

)

 

 

Income tax

 

311

 

 

311

 

Net income (loss)

 

$

3,176

 

$

(12,342

)

 

 

 

Net Product Sales.  Our net product sales of $62.4 million for the six months ended June 30, 2015 are based on $15.2 million of revenue of Oxtellar XR from shipments to distributors, less estimates for discounts, rebates, other sales deductions and returns, and $47.2 million of revenue for Trokendi XR, from shipments to distributors, less estimates for discounts, rebates, other sales deductions and returns. The increase in net product sales is primarily driven by an increase in underlying prescription growth. The effect of the

 

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change to contemporaneous revenue recognition for Trokendi XR was to increase net product sales by $15.4 million for the six month period ended June 30, 2014.

 

Royalty Revenue (restated). The revenue for the six month period ended June 30, 2015 resulted from the Royalty Interest Acquisition Agreement that we entered into with HC Royalty in July 2014 for Orenitram, which is marketed by United Therapeutics Corporation.  We recognized $1.2 million of non-cash revenue pursuant to this agreement during 2015 and none in 2014.

 

Research and Development Expense.  Research and development expenses during the six months ended June 30, 2015 were $10.6 million as compared to $9.2 million for the six months ended June 30, 2014, an increase of $1.4 million or 15.3%. This increase is due to the focus on preparing for the SPN-810 and late stage studies including development of the outcome and assessment scale that we propose to use in the trials coupled with manufacturing of the clinical supplies. We expect research and development costs to increase significantly throughout 2015 as we initiate the Phase III program for SPN-810 and initiate the Phase IIb program for SPN-812.

 

Selling, General and Administrative Expenses (restated).  Our selling, general and administrative expenses were $42.6 million during the six months ended June 30, 2015 as compared to $37.1 million for the six months ended June 30, 2014, an increase of $5.5 million or 14.8%. This increase was mainly due to the increase in compensation and travel expenses associated with the expansion of our sales force in the first half of 2014, and an increase in promotional and marketing expenses including sample distribution to support the growth of Oxtellar XR and Trokendi XR.

 

Interest Expense.  Interest expense was $0.7 million during the six months ended June 30, 2015 as compared to $2.5 million for the six months ended June 30, 2014. The decrease of $1.8 million was primarily due to a decrease in the outstanding principal amount of our Notes from $39.8 million at June 30, 2014 to $10.7 million at June 30, 2015.

 

Interest Expense — Non-recourse Liability Related to Sale of Future Royalties (restated).  Interest expense related to our non-recourse royalty liability was $1.5 million during the six months ended June 30, 2015 as compared to zero for the six months ended June 30, 2014. The increase of $1.5 million for this non-cash expense item was primarily due to the fact that this liability existed for all six months of this period in 2015 and did not exist during this six month period in 2014.

 

Changes in Fair Value of Derivative Liability.  During the six months ended June 30, 2015, we recognized non-cash loss of $48,000 related to a change in estimated fair value of the warrant liability of $336,000, offset by $288,000 of interest make-whole derivative liability related to our Notes. This loss is primarily due to the increase in our stock price. We recognized a non-cash credit of $1.4 million associated with the interest make-whole derivative liability during the six months ended June 30, 2014, due primarily to the passage of time.

 

Loss on Extinguishment of Debt.  During the six months ended June 30, 2015, we recognized a non-cash loss on extinguishment of debt of $2.4 million related to the conversion of $25.3 million of our Notes. During the six months ended June 30, 2014, we recognized a non-cash loss on extinguishment of debt of $1.7 million related to the conversion of $9.7 million of our Notes.

 

Income Tax.  During the six months ended June 30, 2015, we recorded $0.3 million of current tax expense related to an increase in our reserve for an uncertain tax position related to the Alternative Minimum Tax.

 

Net Income/ (Loss).  We realized net income of $3.2 million during the six months ended June 30, 2015, compared to a net loss of $12.3 million during the six months ended June 30, 2014, a change of $15.5 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased expenses on preparing for the late stage studies for two product candidates and expenses associated with costs of the expansion of our sales force as well as an increase in marketing expenditures associated with ongoing support of Oxtellar XR and Trokendi XR.

 

Liquidity and Capital Resources at June 30, 2016 (Restated)

 

We believe with continued increasing levels of net product sales, we will have sufficient resources to finance our operations, including the increased R&D expenses for our clinical programs. We expect to incur significantly increased R&D expenses to support the development of SPN-810 and SPN-812 including the late stage trials for SPN-810 and SPN-812.

 

Our working capital at June 30, 2016 was $46.6 million, a decrease of $2.4 million compared to our working capital of $49.0 million at December 31, 2015. Our long term marketable securities at June 30, 2016 were $67.8 million, an increase of $12.8 million compared to our long term marketable securities of $55.0 million at December 31, 2015.

 

Our stockholders’ equity increased by $22.2 million during the six months ended June 30, 2016 primarily as a result of the issuance of shares related to the conversion of our Notes, coupled with net income of $15.0 million.

 

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We expect to continue to incur significant sales and marketing expenses related to the commercial support of Oxtellar XR and Trokendi XR. In addition, we expect to incur substantial expenses related to our R&D efforts, primarily related to the development of SPN-810 and SPN-812 as we continue to advance these clinical programs.

 

In addition to income from operations, we have historically financed our business through the sale of our debt and equity securities. Our most recent financing occurred on May 3, 2013, when we issued $90.0 million aggregate principal amount of Notes to qualified institutional buyers, the initial purchasers of the Notes (Initial Purchasers). We issued the Notes under an Indenture, dated May 3, 2013. The Notes provide for 7.50% interest per annum on the principal amount of the Notes, payable semi-annually in arrears on May 1 and November 1 of each year. Interest will accrue on the Notes from and including May 3, 2013 and the Notes will mature on May 1, 2019, unless earlier converted, redeemed or repurchased by the Company. The Notes are secured by a first-priority lien, other than customary permitted liens, on substantially all of our assets, whether now owned or hereafter acquired. In July 2014, we raised $30.0 million non-recourse liability related to sale of future royalties to HC Royalty.

 

As of June 30, 2016, holders of the Notes have converted a total of approximately $83.4 million of the Notes. Cumulatively, through June 30, 2016, we issued a total of approximately 15.7 million shares of common stock in conversion of the principal amount of the Notes and issued an additional 2.2 million shares of common stock and paid approximately $1.7 million cash in settlement of the interest make-whole provision related to the converted Notes.

 

We believe our current working capital and long term marketable securities, along with increased revenues from increasing product sales, will be sufficient to finance the Company. Our operations were profitable in each quarter of 2015 and each of the first two quarters of 2016.

 

We expect continued profitability in 2016 as we continue to increase sales while also increasing activities and spending to advance our clinical product candidates. We expect significant variability from quarter to quarter in our level of profitability primarily due to variability in R&D expenditures for clinical trials and SG&A expenditures for marketing activities.

 

On December 17, 2014, the SEC declared effective our registration statement on Form S-3.  We have not sold any securities under the registration statement and as of the filing date of this Amended From 10-Q, we are no longer eligible to use the Form S-3 registration statement to sell any securities.

 

Cash Flows (restated)

 

The following table sets forth the major sources and uses of cash and equivalents for the periods set forth below, in thousands:

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

13,635

 

$

12,712

 

923

 

Investing activities

 

(11,972

)

(17,660

)

5,688

 

Financing activities

 

995

 

1,009

 

(14

)

Net increase (decrease) in cash and cash equivalents

 

$

2,658

 

$

(3,939

)

 

 

 

Operating Activities (restated)

 

Net cash provided by operating activities is comprised of two components; cash provided by (used in) operating income and cash used in changes in working capital. Results for the six months ended June 30, 2016 and June 30, 2015 are summarized below, in thousands:

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited)

 

 

 

Cash provided by operating income

 

$

19,963

 

$

8,737

 

11,226

 

Cash (used in) provided by changes in working capital

 

(6,328

)

3,975

 

(10,303

)

Net cash provided by operating activities

 

$

13,635

 

$

12,712

 

 

 

 

The increase in cash used in changes in working capital is primarily driven by increases in accounts receivable and inventory from increased revenue and decreases in accounts payable due to timing of payments.

 

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The changes in certain operating assets and liabilities are, in thousands:

 

 

 

Six Months ended June 30,

 

 

 

 

 

2016

 

2015

 

Explanation of Change

 

 

 

(unaudited)

 

 

 

Increase in accounts receivable

 

$

(8,373

)

$

(630

)

Increased sales.

 

Increase in inventory

 

(3,786

)

(151

)

Increased inventory to support sales growth.

 

Decrease (increase) in prepaid expenses and other assets

 

1,989

 

(738

)

Progress of clinical trials.

 

Increase in accounts payable and accrued expenses

 

3,598

 

6,048

 

Increased expenses, primarily for clinical trial accruals and accrued net sales deductions.

 

Other

 

244

 

(554

)

 

 

 

 

$

(6,328

)

$

3,975

 

 

 

 

Investing Activities (restated)

 

We invest excess cash in accordance with our investment policy. Marketable securities consist of investments which mature in four years or less, including United States Treasury and various government agency debt securities, as well as investment grade securities in industrial and financial institutions. Fluctuations in investing activities between periods relate exclusively to the timing of marketable security purchases and the related maturities of these securities.

 

Net cash used in investing activities for the six months ended June 30, 2016 of $12.0 million related to net purchase of marketable securities of $7.4 million, deferred legal fees of $3.7 million, and property and equipment purchases of $0.9 million. Net cash used in investing activities for the six months ended June 30, 2015 consisted of $17.7 million related to net purchase of marketable securities of $13.1 million, an increase in deferred legal fees of $3.8 million, and property and equipment purchases of $0.8 million.

 

Financing Activities

 

Net cash provided by financing activities was $1.0 million for the six months ended June 30, 2016, $1.0 million for the six months ended June 30, 2015 and resulted from proceeds received from stock option exercises.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments as of June 30, 2016 (except as noted below), in thousands, unaudited:

 

 

 

Less than

 

1 - 3

 

3 - 5

 

Greater than

 

 

 

 

 

1 Year

 

Years

 

Years

 

5 Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Senior Secured Notes

 

$

 

$

 

$

6,575

 

$

 

$

6,575

 

Interest on Convertible Notes

 

493

 

986

 

 

 

 

1,479

 

Operating leases (1)

 

1,346

 

2,629

 

1,127

 

 

5,102

 

Purchase obligations (2)

 

4,056

 

 

 

 

4,056

 

Total (3)

 

$

5,895

 

$

3,615

 

$

7,702

 

$

 

$

17,212

 

 


(1)                                 Our commitments for operating leases relate to our lease of fleet vehicles and office and laboratory space as of June 30, 2016.

 

(2)                                 Relates primarily to agreements and purchase orders with contractors for the conduct of clinical trials, other research and development activities and sales and marketing activities.

 

(3)                                 This table does not include (a) any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials as the timing and likelihood of such payments are not known, (b) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known and (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

 

In addition to the above table, we are contractually obligated to allow all royalty payments earned under a licensing agreement with United Therapeutics Corporation to be paid to HC Royalty. Although we have recorded a liability of $30.8 million at June 30, 2016 related to this obligation, it is a non-recourse liability for which we have no obligation to make any payments to HC Royalty.

 

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Table of Contents

 

Accordingly, this obligation will have no impact on our liquidity at any time. As a result, these contingent payments to HC Royalty have not been recorded in the table above.

 

We have obtained exclusive licenses from third parties for proprietary rights to support the product candidates in our psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta), we have an exclusive option to evaluate Afecta’s CNS pipeline and to obtain exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. We do not owe any future milestone payments for SPN-810. We will be obligated to pay royalties to Afecta based on net sales worldwide of our product candidates in the low-single digits.

 

We have also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where we obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments owing to Rune under this agreement. If we receive approval to market and sell any products based on the Rune product concept for SPN-809 (viloxazine hydrochloride), we will be obligated to pay royalties to Rune based on net sales worldwide in the low-single digits.

 

Liquidity and Capital Resources at June 30, 2015 (Restated)

 

Our working capital at June 30, 2015 was $69.1 million, a decrease of $11.5 million compared to our working capital of $80.6 million at December 31, 2014. This decrease was primarily attributable to the purchase of long term marketable securities and an additional $6.3 million of deferred legal fees incurred in connection with litigation related to patents for Oxtellar XR and Trokendi XR (see Part II, Item I—Legal Proceedings in this Quarterly Report on Form 10-Q/A).

 

Our stockholders’ equity increased by $31.1 million during the six month period ended June 30, 2015 primarily as a result of the issuance of shares related to the conversion of our Notes.

 

We expect to continue to incur significant sales and marketing expenses related to the commercial support of Oxtellar XR and Trokendi XR. In addition, we expect to incur substantial expenses related to our research and development efforts, primarily related to development of SPN-810 and SPN-812 as we continue to advance these clinical programs.

 

In addition to income through operations, we have historically financed our business through the sale of our debt and equity securities. On May 3, 2013, we issued $90.0 million aggregate principal amount of Notes to qualified institutional buyers, the initial purchasers of the Notes (the Initial Purchasers). We issued the Notes under an Indenture, dated May 3, 2013. The Notes provide for 7.50% interest per annum on the principal amount of the Notes, payable semi-annually in arrears on May 1 and November 1 of each year.  In July 2014, we raised $30.0 million non-recourse liability related to sale of future royalties to HC Royalty.

 

Interest will accrue on the Notes from and including May 3, 2013 and the Notes will mature on May 1, 2019, unless earlier converted, redeemed or repurchased by the Company. The Notes are secured by a first-priority lien, other than customary permitted liens, on substantially all of our assets, whether now owned or hereafter acquired.

 

As of June 30, 2015, holders of the Notes have converted a total of approximately $79.3 million of the Notes. Cumulatively, through June 30, 2015, we issued a total of approximately 15.0 million shares of common stock in conversion of the principal amount of the Notes and issued an additional 2.2 million shares of common stock and paid approximately $1.7 million cash in settlement of the interest make-whole provision related to the converted Notes.

 

We believe our current working capital and long term marketable securities, along with increased revenues from increasing product sales, will be sufficient to finance the Company. We achieved positive cash flow and profitability from operations during the fourth quarter of 2014 and expect continued profitability for calendar year 2015 and beyond as we continue to increase sales while also increasing activities and spending to advance our clinical product candidates.

 

On December 17, 2014, the SEC declared effective our registration statement on Form S-3.  We have not sold any securities under the registration statement and as of the filing date of this Amended From 10-Q, we are no longer eligible to use the Form S-3 registration statement to sell any securities.

 

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Table of Contents

 

Cash Flows (restated)

 

The following table sets forth the major sources and uses of cash for the periods set forth below, in thousands:

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2015

 

2014

 

(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

12,712

 

$

(26,044

)

38,756

 

Investing activities

 

$

(17,660

)

$

4,770

 

(22,430

)

Financing activities

 

$

1,009

 

$

250

 

759

 

Net decrease in cash and cash equivalents

 

$

(3,939

)

$

(21,024

)

 

 

 

Operating Activities (restated)

 

Net cash provided by/used in operating activities is comprised of two components; cash provided by/used in operating income/loss and cash provided by/used in changes in working capital. Results for the six months ended June 30, 2015 and June 30, 2014 are summarized below, in thousands:

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2015

 

2014

 

(decrease)

 

 

 

(unaudited)

 

 

 

Cash provided by (used in) operating income (loss)

 

$

8,737

 

$

(9,098

)

17,835

 

 

 

 

 

 

 

 

 

Cash provided by (used by) changes in working capital

 

3,975

 

(16,946

)

20,921

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

12,712

 

$

(26,044

)

 

 

 

The increase in net cash provided by operating activities is primarily driven by increased revenue generated from the sale of Trokendi XR and Oxtellar XR.

 

The changes in certain operating assets and liabilities are, in thousands:

 

 

 

Six Months ended June 30,

 

 

 

 

 

2015

 

2014

 

Explanation of Change

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

$

(630

)

$

(5,800

)

Shipment of additional product to wholesalers.

 

Increase in inventory

 

(151

)

(2,949

)

Build up of inventory for product sales.

 

Increase in prepaid expenses and other assets

 

(738

)

(1,019

)

Increase in activity to support both products.

 

Increase in accounts payable and accrued expenses

 

6,048

 

730

 

Increase in sales deductions.

 

Decrease in deferred product and licensing revenue

 

 

(8,015

)

Transition of Trokendi XR revenue recognition to be based on shipments to wholesalers.

 

Other

 

(554

)

107

 

 

 

 

 

$

3,975

 

$

(16,946

)

 

 

 

Investing Activities (restated)

 

Our investing activities are principally driven by cash provided by our financing activities. We invest excess cash in accordance with our investment policy. Marketable securities consist of investments which generally mature in three years or less, including U.S. Treasury and various government agency debt securities, as well as investment grade securities in industrial and financial institutions. Fluctuations in investing activities between periods relate exclusively to the timing of marketable security purchases and the related maturities of these securities.

 

Net cash used in investing activities for the six months ended June 30, 2015 of $17.7 million related to an increase in deferred legal fees of $3.8 million, property and equipment purchases of $0.8 million, and net purchases of marketable securities of $13.1 million. Net cash provided by investing activities for the six months ended June, 2014 consisted of $4.8 million related to: marketable

 

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securities holdings decreased by $7.2 million offset by the increase in deferred legal fees of $2.0 million and property and equipment purchases of $0.4 million.

 

Financing Activities

 

Net cash provided by financing activities of $1.0 million for the six months ended June 30, 2015 resulted from proceeds received from stock option exercises. Net cash provided by financing activities for the six months ended June 30, 2014 was $250,000, primarily the result of the issuance of common stock related to the proceeds received from employee stock purchase plan shares and exercise of stock options.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments as of June 30, 2015 (except as noted below), in thousands:

 

 

 

Less than

 

1 - 3

 

3 - 5

 

Greater than

 

 

 

Contractual Obligations

 

1 Year

 

Years

 

Years

 

5 Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Senior Secured Notes

 

$

 

 

$

 

$

10,724

 

$

 

$

10,724

 

Interest on Convertible Notes

 

804

 

1,609

 

670

 

 

3,083

 

Operating leases (1)

 

1,663

 

2,581

 

2,454

 

 

6,698

 

Purchase obligations (2)

 

1,365

 

 

 

 

1,365

 

Total (3)

 

$

3,832

 

$

4,190

 

$

13,848

 

$

 

$

21,870

 

 


(1)                                 Our commitments for operating leases relate to our lease of office equipment, fleet vehicles and office and laboratory space as of June 30, 2015.

 

(2)                                 Relates primarily to agreements and purchase orders with contractors for the conduct of clinical trials and other research and development and sales and marketing activities.

 

(3)                                 This table does not include (a) any milestone payments which may become payable to third parties under license agreements as the timing and likelihood of such payments are not known, (b) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known and (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

 

In addition to the above table, we are contractually obligated to allow all royalty payments earned under a licensing agreement with United Therapeutics Corporation to be paid to HC Royalty. Although we have recorded a liability of $30.3 million at June 30, 2015 related to this obligation, it is a non-recourse liability for which we have no obligation to make any payments to HC Royalty.  Accordingly, this obligation will have no impact on our liquidity at any time. As a result, these non-recourse liability has not been included in the table above.

 

We have obtained exclusive licenses from third parties for proprietary rights to support the product candidates in our psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta) we have an exclusive option to evaluate Afecta’s CNS pipeline and to obtain exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. We do not owe any future milestone payments for SPN-810. We will be obligated to pay royalties to Afecta based on net sales worldwide of our product candidates in the low-single digits. We have also entered into a purchase and sale agreement with Rune, where we obtained the exclusive worldwide rights to a product concept from Rune Healthcare Limited (Rune). There are no future milestone payments owing to Rune under this agreement. If we receive approval to market and sell any products based on the Rune product concept for SPN-809, we will be obligated to pay royalties to Rune based on net sales worldwide in the low single digits.

 

Off-Balance Sheet Arrangements

 

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

 

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Recently Issued Accounting Pronouncements

 

For a discussion of new accounting pronouncements, see Note 3 in the notes to the consolidated financial statements in Part I, Item 1 of this report.

 

Jumpstart Our Business Startups Act of 2012

 

The JOBS Act permits an “emerging growth company” such as ours to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have chosen to “opt out” of this provision. As a result, we will continue to comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The primary objective of our investment activities is to preserve our capital and to fund operations. We also seek to maximize income from our investments without assuming significant interest rate or default risk. Our exposure to market risk is confined to our cash, cash equivalents, marketable securities and long term marketable securities. As of June 30, 2016, we had unrestricted cash, cash equivalents, marketable securities and long term marketable securities of $128.0 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash, cash equivalents, marketable securities and because we hold these securities and our long term marketable securities to maturity, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments. We do not have any currency or other derivative financial instruments other than the interest make-whole payment associated with our Notes.

 

We engage with a limited number of vendors where we pay for services recorded in currencies other than the U.S. dollar and may be subject to fluctuations in foreign currency rates. We do not hedge our foreign currency exchange rate risk. A hypothetical 10% appreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have decreased our net income by approximately $6,000 for the three months ended June 30, 2016. Conversely, a hypothetical 10% depreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have increased our net income by approximately $6,000 for the three months ended June 30, 2016. We do not believe that inflation and changing prices over the three and six months ended June 30, 2016 and June 30, 2015 had a significant impact on our consolidated results of operations.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow timely decisions regarding required disclosures.

 

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

We conducted an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed on August 5, 2016, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2016.

 

Subsequent to the evaluation made in connection with the Quarterly Report on Form 10-Q in August 2016, and in connection with the preparation and filing of the restatement and this Form 10-Q/A, our management, including the CEO and CFO re-evaluated the effectives of the design and operation of our disclosure controls and procedures. Based on this evaluation our CEO and CFO concluded that our disclosure controls and procedures were not effective as of June 30, 2015 and June 30, 2016 at the reasonable assurance level due to the material weakness described below.

 

Subsequent to August 5, 2016, management identified a material weakness in internal control over financial reporting. Management’s review revealed that our risk assessment process and our review controls over the accounting for significant, complex, and unusual accounting transactions was deficient, in that these controls were not designed to ensure that sufficient technical accounting expertise was applied to assess and document the appropriate accounting over such transactions.  These control deficiencies resulted in a material misstatement within the Company’s consolidated financial statements, as described in Part I, Item 1; Financial Information — Note 2 to the Consolidated Financial Statements. The presence of these control deficiencies created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represented a material weakness in the Company’s internal control over financial reporting and that our internal control over financial reporting was not effective as of June 30, 2016.

 

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Management’s Remediation Initiatives

 

During 2016, we took action to strengthen our control procedures and risk assessment process regarding the review of the accounting for significant, complex, and unusual transactions. We have engaged, and going forward will continue to engage, expert third party accounting service providers and relevant subject matter experts to supplement the Company’s existing expertise and resources. This will include, amongst other actions, thorough considerations of potential alternative accounting treatment regarding significant, complex, and unusual transactions.

 

We will continue to devote time and attention to these remediation efforts. As we continue to evaluate and work to improve our controls, management may implement additional measures to enhance the remediation plans described above, and will continue to review and make necessary changes to improve the overall design of our controls.

 

Changes in Internal Control over Financial Reporting

 

In the first quarter of 2016, we implemented a new financial accounting system. The software package which was selected has been implemented in numerous publicly held manufacturing and service companies within the U.S. It is supported by a major software provider in the U.S.

 

The primary impetus for this change was to retire a platform that the Company had outgrown and which lacked much of the additional functionality required to support the Company’s expanded operations. We believe incorporating this additional functionality into an upgraded system will provide a stronger base and enhance our overall control environment. The implementation was not made in response to any significant deficiency or material weakness in our internal control over financial reporting.

 

Management believes the new system has been successfully implemented and is functioning as required.

 

Other than the changes described above under “Management’s Remediation Initiatives” and the new financial accounting system implementation, during the three months June 30, 2016, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. We may be required to file infringement claims against third parties for the infringement of our patents. We have filed such claims for infringement of the Orange Book patents listed for our products Oxtellar XR and Trokendi XR.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. Nos. 13-4740; 14-1981 (RMB)(JS) (D.N.J.)
Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., Appeal No. 2016-1619 (Fed. Cir.)

 

We received a Paragraph IV Notice Letter against two of our Oxtellar XR Orange Book patents (United States Patent Nos. 7,722,898 and 7,910,131) from generic drug maker Watson Laboratories, Inc.—Florida (WLF) n/k/a Actavis Laboratories FL, Inc. (Actavis Labs FL) on June 26, 2013. On August 7, 2013, we filed a lawsuit against Actavis, Inc., Actavis Labs FL, Actavis Pharma, Inc., Watson Laboratories, Inc., and ANDA, Inc. (collectively Actavis) alleging infringement of United States Patent Nos. 7,722,898 and 7,910,131. We received a second Paragraph IV Notice Letter against a later-issued Oxtellar XR Orange Book Patent (United States Patent No. 8,617,600) on February 20, 2014. On March 28, 2014, we filed a second lawsuit against Actavis alleging infringement of United States Patent No. 8,617,600. We have since listed four additional Orange Book patents: United States Patent Nos. 8,821,930, 9,119,791, 9,351,975, and 9,370,525. Our United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525 generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all seven of our Oxtellar XR patents as expiring on April 13, 2027.

 

Both Complaints—filed in the U.S. District Court for the District of New Jersey—allege, inter alia, that Actavis infringed our Oxtellar XR patents by submitting to the FDA an Abbreviated New Drug Application (ANDA) seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. The two cases were consolidated for all purposes on October 8, 2015.

 

A seven-day bench trial for the consolidated action involving United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 was held between November 18 and December 4, 2015. On February 5, 2016, the Court issued an opinion and order finding that: (i) Actavis’s ANDA products infringe United States Patent Nos. 7,722,898 and 7,910,131; (ii) Actavis’s ANDA products do not infringe U.S. Patent No. 8,617,600; and (iii) United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 are valid.  The Court entered a final judgment on February 18, 2016: (i) enjoining the FDA from approving Actavis’s ANDA before the expiration date of United States Patent Nos. 7,722,898 and 7,910,131; and (ii) enjoining Actavis from commercially manufacturing, using, offering to sell, or selling within the United States, or importing into the United States, Actavis’s ANDA products until the expiration of United States Patent Nos. 7,722,898 and 7,910,131.  On February 19, 2016, Actavis filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit.  The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of all appeals, cross-appeals, claims, and counterclaims concerning U.S. Patent Nos. 8,617,600, 8,821,930, and 9,119,791. The appeal with respect to United States Patent Nos. 7,722,898 and 7,910,131 (docketed on February 24, 2016) is pending.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. Nos. 15-2499 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent No. 8,821,930 from Actavis Labs FL on February 21, 2015. On April 7, 2015, we filed a third lawsuit against Actavis alleging infringement of United States Patent No. 8,821,930.

 

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleges, inter alia, that Actavis infringed United States Patent No. 8,821,930 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 8,821,930.

 

The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of both parties’ claims and counterclaims concerning U.S. Patent No. 8,821,930.

 

Supernus Pharmaceuticals, Inc. v. TWi Pharmaceuticals, Inc., et al., C.A. Nos. 15-369 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930 from generic drug maker TWi Pharmaceuticals, Inc. on December 9, 2014. On January 16, 2015, we filed a lawsuit against TWi Pharmaceuticals, Inc. and TWi International LLC (d/b/a TWi Pharmaceuticals USA) (collectively TWi) alleging infringement of United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930.

 

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The Complaint—filed in the U.S. District Court for the District of New Jersey—alleges, inter alia, that TWi infringed our Oxtellar XR patents by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. Filing the Complaint within 45 days of receiving TWi’s Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving TWi’s ANDA for 30 months from the date of our receipt of the first Paragraph IV certification notice. On February 13, 2015, TWi answered the Complaint and denied the substantive allegations of the complaint.  TWi also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent Nos. 7,722,898 and 7,910,131. On March 20, 2015, we filed our Reply, denying the substantive allegations of those Counterclaims.

 

Following an October 7, 2015 Markman hearing, the Court issued a claim construction order for this case on October 9, 2015.  The case is proceeding through fact and expert discovery.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. Nos. 15-8342 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent No. 9,119,791 from Actavis Labs FL on October 15, 2015. On November 25, 2015, we filed a fourth lawsuit against Actavis alleging infringement of United States Patent No. 9,119,791.

 

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleges, inter alia, that Actavis infringed United States Patent No. 9,119,791 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 9,119,791. On January 29, 2016, Actavis answered the Complaint, denying the substantive allegations of that Complaint. Actavis Labs FL also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent No. 9,119,791.  On March 4, 2016, we filed our Reply, denying the substantive allegations of those Counterclaims.  The court has not yet issued a scheduling order.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., C.A. No. 14-6102 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Actavis Laboratories FL, Inc.

 

These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On October 1, 2014, we initiated a lawsuit against Actavis; the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

 

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Actavis infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Actavis answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its October 1, 2014 Complaint within 45 days of receiving the first of three Actavis Laboratories FL, Inc. Paragraph IV Notice Letters entitles Supernus to an automatic stay preventing the FDA from approving Actavis’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

This case has been consolidated for pretrial purposes with two other actions pending in the District of New Jersey concerning infringement of the Trokendi XR Orange Book patents, those actions being C.A. No. 14-7272 (against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Limited) and C.A. No. 15-326 (against Par Pharmaceutical Companies, Inc. and Par Pharmaceutical, Inc.). The Company has since entered into a settlement agreement with Par (see below). A Rule 16 scheduling conference was held on April 14, 2015. The Court issued a Scheduling Order on May 22, 2015, which was amended several times, most recently on July 15, 2016. The Court issued its Markman Opinion and Order on March 9, 2016. The Court adopted Supernus’s definitions of five of the seven disputed terms, and did not adopt any of Actavis’s definitions. Fact discovery ended on May 4, 2016. The case is proceeding through expert discovery, which closes on September 23, 2016. The Court’s Amended Scheduling Order states that no summary judgment motions shall be filed. No date has been set for trial.

 

Supernus Pharmaceuticals, Inc. v. Zydus Pharmaceuticals (USA) Inc., C.A. No. 14-7272 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Zydus Pharmaceuticals (USA) Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On November 21, 2014, we initiated a lawsuit against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Limited (collectively Zydus); the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191 and 8,992,989 as expiring on November 16, 2027.

 

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This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Zydus infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Zydus answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its November 21, 2014 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Zydus Pharmaceuticals (USA) Inc. entitles Supernus to an automatic stay preventing the FDA from approving Zydus’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

This case has been consolidated for pretrial purposes with two other actions pending in the District of New Jersey concerning infringement of the Trokendi XR Orange Book patents, those actions being C.A. No. 14-6102 (against Actavis, Inc., Actavis Laboratories FL, Inc., Actavis plc, Actavis Pharma, Inc., Watson Laboratories, Inc., and ANDA, Inc.) and C.A. No. 15-326 (against Par Pharmaceutical Companies, Inc. and Par Pharmaceutical, Inc.). The Company has since entered into a settlement agreement with Par (see below). A Rule 16 scheduling conference was held on April 14, 2015. The Court issued a Scheduling Order on May 22, 2015, which was amended several times, most recently on July 15, 2016. The Court issued its Markman Opinion and Order on March 9, 2016. The Court adopted Supernus’s definitions of five of the seven disputed terms, and did not adopt any of Zydus’s definitions. Fact discovery ended on May 4, 2016. The case is proceeding through expert discovery, which closes on September 23, 2016. The Court’s Amended Scheduling Order states that no summary judgment motions shall be filed. No date has been set for trial.

 

Supernus Pharmaceuticals, Inc. v. Par Pharmaceutical Companies, Inc., C.A. No. 15-326 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Par Pharmaceutical, Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On January 16, 2015, we initiated a lawsuit against Par; the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

 

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Par infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Par answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its January 16, 2015 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Par Pharmaceutical, Inc. entitles Supernus to an automatic stay preventing the FDA from approving Par’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

The Company announced on October 15, 2015 that it has entered into a settlement agreement with Par regarding this case. The settlement permits Par to begin selling a generic version of Trokendi XR on April 1, 2025, or earlier under certain circumstances. The agreement is subject to a consent judgment that was entered by the U.S. District Court for the District of New Jersey. In the consent judgment, Par acknowledges that the Orange Book-listed patents for Trokendi XR owned by Supernus, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989, are valid and enforceable with respect to Par’s ANDA product, and would be infringed by Par’s ANDA product. The agreement has been submitted to the applicable governmental agencies.

 

Item 1A. Risk Factors

 

Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q/A, including our condensed consolidated financial statements and related notes, and the additional information in the other reports we file with the Securities and Exchange Commission along with the risks described in our Annual Report on Form 10-K/A for the year ended December 31, 2015. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our common stock may decline and you could lose part or all of your investment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)           Sales of Unregistered Securities.

 

During the three months ended June 30, 2016, the Company granted options to employees to purchase an aggregate of 7,400 shares of common stock at an exercise price of $17.16 per share. The options are exercisable for a period of ten years from the grant date. These issuances were exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions not involving any public offering.

 

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Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q/A:

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

 

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

 

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SUPERNUS PHARMACEUTICALS, INC.

 

 

 

 

DATED: January 20, 2017

 

By:

/s/ Jack A. Khattar

 

 

Jack A. Khattar

 

 

President, Secretary and Chief Executive Officer

 

 

 

 

 

 

DATED: January 20, 2017

 

By:

/s/ Gregory S. Patrick

 

 

Gregory S. Patrick

 

 

Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Number

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

40