Supernus Pharmaceuticals, Inc.
SUPERNUS PHARMACEUTICALS INC (Form: 10-Q/A, Received: 01/23/2017 06:03:46)

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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 t he 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

 

 

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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

 

 

13



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: