Supernus Pharmaceuticals, Inc.
SUPERNUS PHARMACEUTICALS INC (Form: 10-Q, Received: 01/20/2017 17:34:10)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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

 

For the transition period from                  to                 

 

Commission File Number: 001-35518

 

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.

 

 

 



Table of Contents

 

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

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

1

 

Consolidated Statements of Operations for the three and nine month periods ended September 30, 2016 and 2015 (Unaudited)

2

 

Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2016 and 2015 (Unaudited)

3

 

Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2016 and 2015 (Unaudited)

4

 

Notes to Consolidated Financial Statements (Unaudited)

5

 

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

17

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

27

 

Item 4. Controls and Procedures

27

PART II — OTHER INFORMATION

 

 

Item 1. Legal Proceedings

28

 

Item 1A. Risk Factors

31

 

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

31

 

Item 3. Defaults Upon Senior Securities

32

 

Item 4. Mine Safety Disclosures

32

 

Item 5. Other Information

32

 

Item 6. Exhibits

32

SIGNATURES

33

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

54,305

 

$

33,498

 

Marketable securities

 

26,024

 

28,692

 

Accounts receivable, net

 

36,220

 

25,908

 

Inventories, net

 

17,453

 

12,587

 

Prepaid expenses and other current assets

 

4,201

 

5,261

 

Total current assets

 

138,203

 

105,946

 

Long term marketable securities

 

67,044

 

55,009

 

Property and equipment, net

 

4,318

 

3,874

 

Deferred legal fees

 

17,437

 

22,503

 

Intangible assets, net

 

15,526

 

976

 

Other non-current assets

 

332

 

318

 

Deferred tax asset

 

42,256

 

 

 

 

 

 

 

 

Total assets

 

$

285,116

 

$

188,626

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,685

 

$

4,314

 

Accrued sales deductions

 

39,694

 

26,794

 

Accrued expenses

 

26,719

 

25,153

 

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

 

2,342

 

497

 

Deferred licensing revenue

 

207

 

176

 

Total current liabilities

 

71,647

 

56,934

 

Deferred licensing revenue, net of current portion

 

1,554

 

1,390

 

Convertible notes, net

 

5,772

 

7,085

 

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

 

28,286

 

30,031

 

Other non-current liabilities

 

4,199

 

4,325

 

Derivative liabilities

 

287

 

854

 

 

 

 

 

 

 

Total liabilities

 

111,745

 

100,619

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized at September 30, 2016 and December 31, 2015; 49,539,301 and 49,004,674 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

50

 

49

 

Additional paid-in capital

 

271,801

 

263,955

 

Accumulated other comprehensive income (loss), net of tax benefit

 

127

 

(488

)

Accumulated deficit

 

(98,607

)

(175,509

)

Total stockholders’ equity

 

173,371

 

88,007

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

285,116

 

$

188,626

 

 

See accompanying notes.

 

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Table of Contents

 

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

Net product sales

 

$

55,618

 

$

38,551

 

$

148,978

 

$

100,914

 

Royalty revenue

 

1,140

 

776

 

3,464

 

2,007

 

Licensing revenue

 

52

 

35

 

187

 

857

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

56,810

 

39,362

 

152,629

 

103,778

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of product sales

 

3,428

 

2,248

 

8,214

 

5,628

 

Research and development

 

7,868

 

9,129

 

29,539

 

19,690

 

Selling, general and administrative

 

25,675

 

22,900

 

76,956

 

65,496

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

36,971

 

34,277

 

114,709

 

90,814

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

19,839

 

5,085

 

37,920

 

12,964

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

379

 

169

 

1,073

 

419

 

Interest expense

 

(202

)

(292

)

(577

)

(1,004

)

Interest expense-non-recourse royalty liability

 

(1,004

)

(998

)

(3,564

)

(2,530

)

Changes in fair value of derivative liabilities

 

125

 

114

 

349

 

66

 

Loss on extinguishment of debt

 

 

(25

)

(382

)

(2,400

)

Other (expense) income

 

(1

)

5

 

(2

)

30

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

(703

)

(1,027

)

(3,103

)

(5,419

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

19,136

 

4,058

 

34,817

 

7,545

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(42,690

)

142

 

(42,085

)

453

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61,826

 

$

3,916

 

$

76,902

 

$

7,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.25

 

$

0.08

 

$

1.56

 

$

0.15

 

Diluted

 

$

1.18

 

$

0.08

 

$

1.48

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

49,516,595

 

48,515,071

 

49,395,284

 

47,011,243

 

Diluted

 

51,974,435

 

51,590,797

 

51,615,334

 

51,059,466

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61,826

 

$

3,916

 

$

76,902

 

$

7,092

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized net (loss) gain on marketable securities, net of taxes

 

(422

)

44

 

615

 

47

 

Other comprehensive income:

 

(422

)

44

 

615

 

47

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

61,404

 

$

3,960

 

$

77,517

 

$

7,139

 

 

See accompanying notes.

 

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Table of Contents

 

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

76,902

 

$

7,092

 

 

 

 

 

 

 

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

 

 

 

 

 

Loss on extinguishment of debt

 

382

 

2,400

 

Change in fair value of derivative liability

 

(349

)

(66

)

Unrealized loss on marketable securities

 

 

47

 

Depreciation and amortization

 

1,728

 

651

 

Amortization of deferred financing costs and debt discount

 

512

 

646

 

Non-cash interest expense on liability related to sale of future royalties

 

3,564

 

2,530

 

Non-cash royalty revenue

 

(3,464

)

(2,007

)

Share-based compensation expense

 

4,454

 

3,011

 

Deferred income tax benefit

 

(42,377

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(10,312

)

(6,334

)

Inventories

 

(4,866

)

(1,301

)

Prepaid expenses and other assets

 

1,060

 

(2,793

)

Accounts payable

 

(1,629

)

949

 

Accrued sales deduction

 

12,900

 

10,359

 

Accrued expenses

 

3,314

 

(459

)

Deferred licensing revenue

 

195

 

(107

)

Other non-current liabilities

 

(140

)

(21

)

Net cash provided by operating activities

 

41,874

 

14,597

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(31,194

)

(51,942

)

Sales and maturities of marketable securities

 

22,398

 

33,671

 

Purchases of property and equipment

 

(1,302

)

(1,240

)

Deferred legal fees

 

(12,224

)

(6,908

)

Net cash used in investing activities

 

(22,322

)

(26,419

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock

 

1,255

 

1,067

 

Net cash provided by financing activities

 

1,255

 

1,067

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

20,807

 

(10,755

)

Cash and cash equivalents at beginning of period

 

33,498

 

36,396

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

54,305

 

$

25,641

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

247

 

$

504

 

 

 

 

 

 

 

Non-cash financial activity:

 

 

 

 

 

Conversion of convertible notes and interest make-whole

 

$

2,138

 

$

26,019

 

Exercise of warrants

 

$

 

652

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

7,920

 

$

6,866

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Three and Nine months ended September 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.  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 eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with t he requirements of the U.S. Securities and Exchange Commission (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. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K 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 nine months ended September 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 September 30, 2016 and December 31, 2015, the fair value of the SERP was $277,000, 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.

 

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Table of Contents

 

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 for bad debt of approximately $38,000 as of September 30, 2016. The Company recorded an allowance for expected sales deductions of approximately $5.2 million and $3.8 million as of September 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 8). 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”).

 

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.

 

Sales Deductions

 

Allowances for estimated sales deductions are provided for the following:

 

·                   Rebates.  Rebates include mandated discounts under the Medicaid Drug Rebate Program and 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.

 

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·                   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.

 

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 HealthCare Royalty Partners III, L.P. (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 $3.5 million and royalty revenue of $2.0 million for the nine months ended September 30, 2016 and 2015, respectively. We recognized interest expense of $3.6 million and $2.5 million for the nine months ended September 30, 2016 and 2015, respectively.

 

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) 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 nine months ended September 30, 2016, and zero and $750,000 of milestone revenue during the three and nine months ended September 30, 2015, respectively.

 

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. These 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. (See Note 12)

 

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 was applied on a retrospective basis. 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, 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 beginning 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.

 

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3.  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:

 

·                   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

 

 

 

September 30, 2016

 

 

 

(unaudited)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

September 30,

 

Markets

 

Inputs

 

Inputs

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,305

 

$

54,305

 

$

 

$

 

Marketable securities

 

26,024

 

654

 

25,370

 

 

Long term marketable securities

 

67,044

 

 

67,044

 

 

Marketable securities - restricted (SERP)

 

278

 

 

278

 

 

Total assets at fair value

 

$

147,651

 

$

54,959

 

$

92,692

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

287

 

$

 

$

 

$

287

 

 

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Table of Contents

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2015

 

 

 

 

 

 

 

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

 

 

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 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 September 30, 2016, unaudited:

 

Volatility

 

45%

Stock Price as of September 30, 2016

 

$24.73 per share

Credit Spread

 

900 bps

Term

 

7 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 September 30, 2016 that are included in the non-current liabilities section of the consolidated balance sheets, in thousands:

 

 

 

Nine Months ended

 

 

 

September 30, 2016

 

 

 

(unaudited)

 

 

 

 

 

Balance at December 31, 2015

 

$

854

 

 

 

 

 

Changes in fair value of derivative liabilities included in earnings

 

(349

)

Reduction due to conversion of debt to equity

 

(218

)

 

 

 

 

Balance at September 30, 2016

 

$

287

 

 

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The carrying value, face value and estimated fair value of the Notes was approximately $5.8 million, $6.6 million and $31.2 million, respectively, as of September 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, which upon issuance 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 September 30, 2016 (unaudited):

 

Available for Sale

 

Amortized 
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

92,700

 

464

 

(96

)

$

93,068

 

 

At December 31, 2015:

 

Available for Sale

 

Amortized 
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized 
Losses

 

Fair Value

 

Corporate debt securities

 

$

84,189

 

5

 

(493

)

$

83,701

 

 

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

 

 

 

September 30, 2016

 

 

 

(unaudited)

 

Less Than 1 Year

 

$

26,024

 

1 year to 2 years

 

24,064

 

3 years to 4 years

 

42,980

 

Greater Than 4 Years

 

 

Total

 

$

93,068

 

 

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.

 

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4. Inventories

 

Inventories consist of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

2,781

 

$

2,887

 

Work in process

 

8,116

 

3,946

 

Finished goods

 

6,556

 

5,754

 

 

 

$

17,453

 

$

12,587

 

 

5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

Computer equipment

 

$

1,185

 

$

1,112

 

Software

 

1,744

 

307

 

Lab equipment and furniture

 

6,560

 

5,667

 

Leasehold improvements

 

2,642

 

2,642

 

Construction in progress

 

13

 

1,114

 

 

 

12,144

 

10,842

 

Less accumulated depreciation and amortization

 

(7,826

)

(6,968

)

 

 

$

4,318

 

$

3,874

 

 

Depreciation and amortization expense on property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2015, respectively.

 

6.  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 September 30, 2016 and December 31, 2015, the Company had deferred legal fees of $17.4 million and $22.5 million, respectively.

 

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

 

 

 

 

 

September 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

 

$

16,414

 

$

888

 

$

994

 

$

18

 

 

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

 

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The net book value of intangible assets was $15.5 million as of September 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 $0.3 million and $0.9 million for the three and nine months ended September 30, 2016 and was approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2015, respectively.

 

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

 

7.  Accrued Expenses

 

Accrued expenses are comprised of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued professional fees

 

$

8,480

 

$

10,057

 

Accrued compensation

 

8,404

 

7,519

 

Accrued clinical trial and clinical supply costs

 

3,538

 

3,677

 

Accrued interest expense

 

393

 

295

 

Accrued sales and marketing expenses

 

150

 

434

 

Other accrued expenses

 

5,754

 

3,171

 

 

 

$

26,719

 

$

25,153

 

 

8.   Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through September 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

 

225

 

September 30, 2016 carrying value, unaudited

 

$

5,772

 

 

During the nine month period ended September 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 nine months ended September 30, 2016, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the nine month period ended September 30, 2015, as a result of approximately $26.3 million in note conversions, the Company incurred a loss of approximately $2.4 million on extinguishment of debt.

 

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9. Summary Stockholders’ Equity

 

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

 

 

 

Common Stock

 

Additional Paid-in
Capital

 

 

 

(unaudited)

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

49

 

$

263,955

 

Share-based compensation

 

 

4,454

 

Issuance of ESPP shares

 

 

787

 

Exercise of stock options

 

1

 

467

 

Equity issued on note conversion

 

 

2,138

 

Balance, September 30, 2016

 

$

50

 

$

271,801

 

 

10. 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 September 30,

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

253

 

$

236

 

$

882

 

$

646

 

Selling, general and administrative

 

1,230

 

896

 

3,572

 

2,365

 

Total

 

$

1,483

 

$

1,132

 

$

4,454

 

$

3,011

 

 

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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)

 

1,036,600

 

13.12

 

 

 

Exercised (unaudited)

 

(74,882

)

6.24

 

 

 

Forfeited or expired (unaudited)

 

(26,575

)

12.41

 

 

 

Outstanding, September 30, 2016 (unaudited)

 

3,634,150

 

$

10.16

 

7.82

 

 

 

 

 

 

 

 

 

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 September 30, 2016:

 

 

 

 

 

 

 

Vested and expected to vest (unaudited)

 

3,571,887

 

$

10.13

 

7.80

 

Exercisable (unaudited)

 

1,494,199

 

$

8.59

 

6.74

 

 

11.  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 nine months ended September 30, 2016 and 2015:

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Shares underlying Convertible Senior Secured Notes

 

 

 

 

 

Warrants to purchase common stock

 

 

40,850

 

 

38,424

 

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

 

 

39,289

 

 

13,240

 

 

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Table of Contents

 

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

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Numerator, in thousands:

 

 

 

 

 

 

 

 

 

Net income used for calculation of basic EPS

 

$

61,826

 

$

3,916

 

$

76,902

 

$

7,092

 

 

 

 

 

 

 

 

 

 

 

Interest expense on convertible debt

 

202

 

292

 

577

 

1,004

 

Changes in fair value of derivative liabilities

 

(124

)

(174

)

(349

)

(462

)

Loss on extinguishment of debt

 

 

25

 

382

 

2,400

 

Loss on extinguishment of outstanding debt, as if converted

 

(705

)

7

 

(1,183

)

(2,494

)

Total adjustments

 

(627

)

150

 

(573

)

448

 

Net income used for calculation of diluted EPS

 

$

61,199

 

$

4,066

 

$

76,329

 

$

7,540

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

49,516,595

 

48,515,071

 

49,395,284

 

47,011,243

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

1,240,814

 

1,961,410

 

1,274,491

 

3,703,320

 

Shares issuable to settle interest make-whole derivatives

 

27,296

 

98,879

 

71,537

 

 

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

 

1,189,730

 

1,015,437

 

874,022

 

344,903

 

Total potential dilutive common shares

 

2,457,840

 

3,075,726

 

2,220,050

 

4,048,223

 

Weighted average shares outstanding, diluted

 

51,974,435

 

51,590,797

 

51,615,334

 

51,059,466

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic

 

$

1.25

 

$

0.08

 

$

1.56

 

$

0.15

 

Net income per share, diluted

 

$

1.18

 

$

0.08

 

$

1.48

 

$

0.15

 

 

12. Income Taxes

 

During the three and nine months ended September 30, 2016, the Company had pre-tax income of $19.1 million and $34.8 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).

 

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.  As of September 30, 2016, primarily because in the current year we achieved three years of cumulative pretax income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $42.3 million are realizable.  The Company therefore reduced the valuation allowance accordingly.

 

Our effective income tax rates were (120.9%) and 6.0% for the nine months ended September 30, 2016 and 2015, respectively.  During the third quarter, we recorded an income tax benefit of approximately $42.7 million as a result of the company releasing the valuation allowance on the deferred taxes that are realizable. This valuation allowance release causes the effective tax rate to be significantly different from our historical annual effective tax rate.

 

13. 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 nine months ended September 30, 2016, none of the allowance was utilized. During the three and nine months ended September 30, 2015, $107,000 and $215,000, respectively, of the allowance was utilized and is included in fixed assets and deferred rent. As of September 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 nine months ended September 30, 2016 were approximately $0.7 million and $2.0 million, respectively. Rent expense for the leased facilities and leased vehicles for the three and nine months ended September 30, 2015 were approximately $0.7 million and $2.0 million, respectively.

 

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

 

Year ending December 31:

 

2016 (remaining)

 

$

337

 

2017

 

1,312

 

2018

 

1,314

 

2019

 

1,341

 

Thereafter

 

454

 

 

 

$

4,758

 

 

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 SPN-810.

 

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.

 

14. Subsequent Event

 

Subsequent to September 30, 2016, holders of the Notes converted approximately $3.0 million of the Notes. We issued a total of approximately 0.6 million shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon resulting in a remaining Note balance of $3.6 million.

 

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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 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 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.

 

Solely for convenience, in this Quarterly Report on Form 10-Q 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.

 

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 result in very positive clinical outcomes 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.

 

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

 

Product

 

Indication

 

Status

 

Oxtellar XR

 

Epilepsy

 

Launched

 

Trokendi XR

 

Epilepsy

 

Launched

 

Trokendi XR

 

  Migraine Prophylaxis

 

Tentative Approval

 

SPN-810

 

Impulsive Aggression*

 

Phase III

 

SPN-812

 

ADHD

 

Phase IIb completed

 

SPN-809

 

Depression

 

Phase II ready

 

 


 

*   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.

 

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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, as these must be taken multiple times per day.

 

In August 2016, we received tentative approval to expand the label for Trokendi XR to include the indication of prophylaxis of migraine headache in adults. We continue to prepare and will be ready to launch the migraine indication soon after receiving full FDA approval.

 

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 370,397 prescriptions filled for both drugs during the nine months ended September 30, 2016, representing a growth of 39% as compared to the 266,546 prescriptions reported for the nine months ended September 30, 2015. For the three months ended September 30, 2016, data from IMS shows 131,308 prescriptions filled for both drugs, representing a growth of 30.3% as compared to the 100,770 prescriptions reported for the three months ended September 30, 2015.

 

We have received Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties, asserting that our patents are invalid, or that our patents are not infringed by their formulations, or both. 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 substantial 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 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. In addition, we began enrolling patients in the open-label extension study during 2016. We expect patient enrollment to continue into 2017.

 

SPN-812

 

SPN-812 is being developed as a novel non-stimulant treatment for ADHD. We completed a Phase IIb dose ranging trial and recently announced topline results.  The trial met the primary endpoint, demonstrating that SPN-812 at daily doses of 400 mg, 300 mg, and 200 mg achieved a statistically significant improvement in the symptoms of ADHD when compared to placebo.  All SPN-812 doses tested in the trial were well tolerated. Of the patients treated with SPN-812, only 6.7% discontinued due to an AE. In addition, 87% of patients who completed the trial elected to enroll in the ongoing open-label extension.

 

At the end of the SPN-812 study, 400 mg, 300 mg and 200 mg doses were statistically significant compared to placebo in the primary endpoint. Patients receiving SPN-812 400 mg, 300 mg and 200 mg had a -19.0 point change (p=0.021), -18.6 point change (p=0.027) and a -18.4 point change (p=0.031) from baseline, respectively, in the primary endpoint vs. -10.5 for placebo.

 

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With respect to the effect size, patients receiving SPN-812 400 mg, 300 mg and 200 mg had a median effect size of 0.63, 0.60 and 0.55, respectively. Patients receiving SPN-812 100 mg had a -16.7 point change from baseline in the primary endpoint and a median effect size of 0.46, which did not quite reach statistical significance (p=0.089) in this relatively low number of patients.

 

In addition, SPN-812 400 mg, 300 mg and 200 mg met the Clinical Global Impression Severity (CGI-S) secondary endpoint with p- values of 0.014, 0.015 and 0.031, respectively, compared to placebo.

 

Based on these positive results in children with ADHD and the positive Phase IIa results in adults with ADHD, Supernus plans to have an end-of-Phase II meeting with the U.S. Food and Drug Administration (FDA) after which it will initiate Phase III clinical testing.

 

We expect to incur increasing amount of 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, from 2016 through FDA approval.

 

Collaboration Update

 

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 which 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 consolidated 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, marketed by United Therapeutics, Inc. Under the relevant accounting guidance, due to a limit on the rate of return that HC Royalty can earn under the arrangement, this transaction is accounted for as debt in accordance with ASC 470-10-25 and is amortized using the effective interest method over the expected 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.

 

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.

 

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Accrued Clinical Expenses

 

Clinical trials are inherently complex, often involve 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, if not eliminate, 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 September 30, 2016 and September 30, 2015

 

 

 

Three Months ended September 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

Net product sales

 

$

55,618

 

$

38,551

 

17,067

 

Royalty revenue

 

1,140

 

776

 

364

 

Licensing revenue

 

52

 

35

 

17

 

Total revenues

 

56,810

 

39,362

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

3,428

 

2,248

 

1,180

 

Research and development

 

7,868

 

9,129

 

(1,261

)

Selling, general and administrative

 

25,675

 

22,900

 

2,775

 

Total costs and expenses

 

36,971

 

34,277

 

 

 

Operating income

 

19,839

 

5,085

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

379

 

169

 

210

 

Interest expense

 

(202

)

(292

)

90

 

Interest expense-non-recourse royalty liability

 

(1,004

)

(998

)

(6

)

Changes in fair value of derivative liabilities

 

125

 

114

 

11

 

Loss on extinguishment of debt

 

 

(25

)

25

 

Other (expense) income

 

(1

)

5

 

(6

)

Total other income (expenses)

 

(703

)

(1,027

)

 

 

Earnings before income taxes

 

19,136

 

4,058

 

 

 

Income tax (benefit) expense

 

(42,690

)

142

 

(42,832

)

Net income

 

$

61,826

 

$

3,916

 

 

 

 

Net Product Sales.   The increase in net product sales for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 was primarily driven by increased prescriptions. Price increases also contributed to the period over period increases in net product sales. 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:

 

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Table of Contents

 

 

 

Net Product Sales

 

 

 

 

 

Three Months ended September 30,

 

Change in Net Product

 

 

 

2016

 

2015

 

Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

41,690

 

$

29,841

 

39.7

%

Oxtellar XR

 

13,928

 

8,710

 

59.9

%

Total

 

$

55,618

 

$

38,551

 

44.3

%

 

Royalty Revenue.   Revenue of $1.1 million and $0.8 million generated during the three months ended September 30, 2016 and September 30, 2015, respectively, 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 September 30, 2016 was $3.4 million as compared to $2.2 million for the three months ended September 30, 2015, an increase of $1.2 million or 52.5%. This increase is primarily due to sales increases.

 

Research and Development Expenses.   R&D expenses during the three months ended September 30, 2016 were $7.9 million as compared to $9.1 million for the three months ended September 30, 2015, a decrease of $1.2 million or 13.8%. This decrease was primarily due to the completion of the Phase IIb trial for SPN-812.  We expect R&D costs to increase going forward into 2017, as we continue to advance these trials and the related development activities for both of these programs.

 

Selling, General and Administrative Expenses.   Our selling, general and administrative (SG&A) expenses were $25.7 million during the three months ended September 30, 2016 as compared to $22.9 million for the three months ended September 30, 2015, an increase of $2.8 million or 12.1%. The increase in SG&A expenses is primarily due to support of our commercial products, and development of promotional material in preparation for the launch of the migraine indication for Trokendi XR soon after receiving FDA approval.

 

Interest Income. During the three months ended September 30, 2016 and 2015, we recognized $0.4 million and $0.2 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 September 30, 2016 as compared to $0.3 million incurred for the three months ended September 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 $9.7 million at September 30, 2015 to $6.6 million at September 30, 2016.

 

Interest Expense-non-recourse royalty liability - Interest expense related to our non-recourse royalty liability was $1.0 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively. 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 September 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 September 30, 2016, there was no loss on extinguishment of debt as no Notes were converted. During the three months ended September 30, 2015, we recognized a non-cash loss on extinguishment of debt of $25,000 related to the conversion of $1.0 million of our Notes.

 

Income Tax.   During the three months ended September 30, 2016, we recorded $42.7 million of current tax benefit related to releasing all of our valuation allowance on deferred tax assets. During the three months ended September 30, 2015, we recorded $0.1 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 $61.8 million during the three months ended September 30, 2016, compared to net income of $3.9 million during the three months ended September 30, 2015, an increase of $57.9 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, and the release of valuation allowance on deferred tax assets of $42.3 million.

 

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Comparison of the nine months ended September 30, 2016 and September 30, 2015

 

 

 

Nine Months ended September 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

Net product sales

 

$

148,978

 

$

100,914

 

48,064

 

Royalty revenue

 

3,464

 

2,007

 

1,457

 

Licensing revenue

 

187

 

857

 

(670

)

Total revenues

 

152,629

 

103,778

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

8,214

 

5,628

 

2,586

 

Research and development

 

29,539

 

19,690

 

9,849

 

Selling, general and administrative

 

76,956

 

65,496

 

11,460

 

Total costs and expenses

 

114,709

 

90,814

 

 

 

Operating income

 

37,920

 

12,964

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

1,073

 

419

 

654

 

Interest expense

 

(577

)

(1,004

)

427

 

Interest expense-non-recourse royalty liability

 

(3,564

)

(2,530

)

(1,034

)

Changes in fair value of derivative liabilities

 

349

 

66

 

283

 

Loss on extinguishment of debt

 

(382

)

(2,400

)

2,018

 

Other (expense) income

 

(2

)

30

 

(32

)

Total other income (expenses)

 

(3,103

)

(5,419

)

 

 

Earnings before income taxes

 

34,817

 

7,545

 

 

 

Income tax (benefit) expense

 

(42,085

)

453

 

(42,538

)

Net income

 

$

76,902

 

$

7,092

 

 

 

 

Net Product Sales.   The increase in net product sales for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 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

 

 

 

 

 

Nine Months ended September 30,

 

Change in Net Product

 

 

 

2016

 

2015

 

Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

111,673

 

$

77,046

 

44.9

%

Oxtellar XR

 

37,305

 

23,868

 

56.3

%

Total

 

$

148,978

 

$

100,914

 

47.6

%

 

Royalty Revenue.  Revenue of $3.5 million and $2.0 million generated during the nine months ended September 30, 2016 and 2015, respectively, was non-cash revenue generated pursuant to an agreement with HC Royalty.

 

Cost of Product Sales.   Cost of product sales during the nine months ended September 30, 2016 was $8.2 million as compared to $5.6 million for the nine months ended September 30, 2015, an increase of $2.6 million or 45.9%. This increase was primarily due to sales increases.

 

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Research and Development Expenses.   R&D expenses during the nine months ended September 30, 2016 were $29.5 million as compared to $19.7 million for the nine months ended September 30, 2015, an increase of $9.8 million or 50.0%. This increase was due to the continuation of two Phase III trials for SPN-810; a Phase IIb trial for SPN-812; manufacture of SPN-810 and SPN-812 clinical trial materials, and manufacturing scale-up activities. We expect R&D costs to continue to increase into 2017, as we continue to advance these trials and the related development activities for both of these programs.

 

Selling, General and Administrative Expenses.   Our SG&A expenses were $77.0 million during the nine months ended September 30, 2016 as compared to $65.5 million for the nine months ended September 30, 2015, an increase of $11.5 million or 17.2%. The increase in SG&A expenses was primarily due to support of our commercial products, the development of promotional material in preparation for the launch of the migraine indication for Trokendi XR soon after receiving full FDA approval, as well as supply chain and medical affairs programs to support our commercial products.

 

Interest Income. During the nine months ended September 30, 2016 and September 30, 2015, we recognized $1.1 million and $0.4 million, respectively, of interest income earned on our cash and marketable securities.

 

Interest Expense.  Interest expense was $0.6 million during the nine months ended September 30, 2016 as compared to $1.0 million incurred for the nine months ended September 30, 2015. The decrease of $0.4 million was primarily due to a decrease in the principal amount of our outstanding Notes from $9.7 million at September 30, 2015 to $6.6 million at September 30, 2016.

 

Interest Expense-non-recourse royalty liability - Interest expense related to our non-recourse royalty liability was $3.6 million and $2.5 million for the nine months ended September 30, 2016 and 2015, respectively. 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 nine months ended September 30, 2016, we recognized a non-cash gain of $0.3 million related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. This gain was primarily due to the passage of time. During the nine months ended September 30, 2015, we recognized a non-cash credit of $0.1 million related to a change in estimated fair value of the warrant liability of $0.4 million, offset by $0.5 million 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 nine months ended September 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 nine months ended September 30, 2015, we recognized a non-cash loss on extinguishment of debt of $2.4 million related to the conversion of $26.3 million of our Notes.

 

Income Tax.   During the nine months ended September 30, 2016, we recorded $42.1 million of current tax benefit related to releasing all of our valuation allowance on deferred tax assets. During the nine months ended September 30, 2015, we recorded $0.5 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 $76.9 million during the nine months ended September 30, 2016, compared to net income of $7.1 million during the nine months ended September 30, 2015, an increase of $69.8 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, and the release of the valuation allowance on deferred tax assets.

 

Liquidity and Capital Resources

 

We believe with continued increased 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 higher R&D expenses to support the development of SPN-810 and SPN-812 including the late stage trials for each.

 

Our working capital at September 30, 2016 was $66.6 million, an increase of $17.6 million compared to our working capital of $49.0 million at December 31, 2015. Our long term marketable securities at September 30, 2016 were $67.0 million, an increase of $12.0 million compared to our long term marketable securities of $55.0 million at December 31, 2015.

 

Our stockholders’ equity increased by $85.4 million during the nine months ended September 30, 2016 primarily as a result of the issuance of shares related to the conversion of our Notes, coupled with net income of $76.9 million.

 

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. 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 liablity related to the sale of future royalties.

 

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Through September 30, 2016, holders of the Notes have converted a total of approximately $83.4 million of the Notes. Cumulatively, through September 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 cash resources coupled with increasing revenues from increasing product sales, will be sufficient to finance the Company.

 

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 variability in 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

 

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

 

 

 

Nine Months ended September 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

41,874

 

$

14,597

 

27,277

 

 

 

 

 

 

 

 

 

Investing activities

 

(22,322

)

(26,419

)

4,097

 

 

 

 

 

 

 

 

 

Financing activities

 

1,255

 

1,067

 

188

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

$

20,807

 

$

(10,755

)

 

 

 

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Operating Activities

 

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

 

 

 

Nine Months ended September 30,

 

Increase/

 

 

 

2016

 

2015

 

(decrease)

 

 

 

(unaudited)

 

 

 

Cash provided by operating income

 

$

41,352

 

$

14,304

 

27,048

 

 

 

 

 

 

 

 

 

Cash provided by working capital

 

522

 

293

 

229

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

41,874

 

$

14,597

 

 

 

 

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

 

 

 

Nine Months ended September 30,

 

 

 

 

 

2016

 

2015

 

Explanation of Change

 

 

 

(unaudited)

 

 

 

Increase in accounts receivable

 

$

(10,312

)

$

(6,334

)

Increased sales.

 

Increase in inventory

 

(4,866

)

(1,301

)

Increased inventory to support sales growth.

 

Decrease (increase) in prepaid expenses and other assets

 

1,060

 

(2,793

)

Progress of clinical trials.

 

Increase in accounts payable accrued sales deductions and accrued expenses

 

14,585

 

10,849

 

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

 

Other

 

55

 

(128

)