Supernus Pharmaceuticals, Inc.
SUPERNUS PHARMACEUTICALS INC (Form: 10-Q, Received: 08/03/2017 15:51:19)

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 June 30, 2017

 

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.    x  Yes   o  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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

Accelerated filer o

 

 

Non-accelerated filer    o

Smaller reporting company o

Emerging growth company o

(Do not check if a smaller reporting company)

 

 

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

 

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 July 27, 2017 was 50,699,110.

 

 

 



Table of Contents

 

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

TABLE OF CONTENTS

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016

1

Consolidated Statements of Operations for the three and six month periods ended June 30, 2017 and 2016 (Unaudited)

2

Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 2017 and 2016 (Unaudited)

3

Consolidated Statements of Cash Flows for the six month periods ended June 30, 2017 and 2016 (Unaudited)

4

Notes to Consolidated Financial Statements (Unaudited)

5

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

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

29

Item 4. Controls and Procedures

29

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

33

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

33

Item 3. Defaults Upon Senior Securities

33

Item 4. Mine Safety Disclosures

33

Item 5. Other Information

33

Item 6. Exhibits

33

SIGNATURES

35

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

61,737

 

$

66,398

 

Marketable securities

 

31,229

 

23,723

 

Accounts receivable, net

 

51,157

 

41,527

 

Inventories, net

 

16,623

 

16,801

 

Prepaid expenses and other current assets

 

4,746

 

2,955

 

Total current assets

 

165,492

 

151,404

 

Long term marketable securities

 

104,632

 

75,410

 

Property and equipment, net

 

4,572

 

4,344

 

Deferred legal fees

 

11,887

 

19,860

 

Intangible assets, net

 

28,989

 

16,490

 

Other non-current assets

 

349

 

331

 

Deferred income taxes

 

30,449

 

41,729

 

 

 

 

 

 

 

Total assets

 

$

346,370

 

$

309,568

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,577

 

$

8,055

 

Accrued sales deductions

 

47,621

 

41,943

 

Accrued expenses

 

23,434

 

27,427

 

Accrued income taxes payable

 

1,608

 

7

 

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

 

4,997

 

3,101

 

Deferred licensing revenue

 

287

 

209

 

Total current liabilities

 

85,524

 

80,742

 

Deferred licensing revenue, net of current portion

 

1,293

 

1,501

 

Convertible notes, net

 

1,472

 

4,165

 

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

 

24,184

 

27,289

 

Other non-current liabilities

 

4,500

 

4,002

 

Derivative liabilities

 

 

114

 

Total liabilities

 

116,973

 

117,813

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized at June 30, 2017 and December 31, 2016; 50,733,662 and 49,971,267 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

51

 

50

 

Additional paid-in capital

 

285,572

 

276,127

 

Accumulated other comprehensive income (loss), net of tax

 

216

 

(134

)

Accumulated deficit

 

(56,442

)

(84,288

)

Total stockholders’ equity

 

229,397

 

191,755

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

346,370

 

$

309,568

 

 

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 June 30,

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

Net product sales

 

$

73,328

 

$

50,335

 

$

129,697

 

$

93,360

 

Royalty revenue

 

1,179

 

1,205

 

2,328

 

2,324

 

Licensing revenue

 

1,322

 

86

 

1,380

 

135

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

75,829

 

51,626

 

133,405

 

95,819

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of product sales

 

3,861

 

2,751

 

6,809

 

4,786

 

Research and development

 

10,823

 

11,109

 

20,425

 

21,671

 

Selling, general and administrative

 

35,078

 

26,121

 

63,316

 

51,281

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

49,762

 

39,981

 

90,550

 

77,738

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

26,067

 

11,645

 

42,855

 

18,081

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

656

 

365

 

1,187

 

693

 

Interest expense

 

(58

)

(196

)

(147

)

(375

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(160

)

(1,281

)

(1,119

)

(2,560

)

Changes in fair value of derivative liabilities

 

23

 

123

 

76

 

224

 

Loss on extinguishment of debt

 

(103

)

 

(204

)

(382

)

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

358

 

(989

)

(207

)

(2,400

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

26,425

 

10,656

 

42,648

 

15,681

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

9,057

 

405

 

14,983

 

605

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

17,368

 

$

10,251

 

$

27,665

 

$

15,076

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.21

 

$

0.55

 

$

0.31

 

Diluted

 

$

0.32

 

$

0.18

 

$

0.52

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

50,530,968

 

49,427,825

 

50,345,830

 

49,333,962

 

Diluted

 

53,223,714

 

51,745,342

 

53,026,323

 

51,484,686

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

17,368

 

$

10,251

 

$

27,665

 

$

15,076

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized net gain on marketable securities, net of tax

 

184

 

381

 

350

 

1,037

 

Other comprehensive income:

 

184

 

381

 

350

 

1,037

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

17,552

 

$

10,632

 

$

28,015

 

$

16,113

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

27,665

 

$

15,076

 

 

 

 

 

 

 

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

 

 

 

 

 

Loss on extinguishment of debt

 

204

 

382

 

Change in fair value of derivative liability

 

(76

)

(224

)

Depreciation and amortization

 

2,084

 

1,117

 

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

 

(277

)

405

 

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

 

1,119

 

2,560

 

Non-cash royalty revenue

 

(2,328

)

(2,324

)

Share-based compensation expense

 

4,087

 

2,971

 

Deferred income tax provision

 

11,672

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(9,630

)

(8,373

)

Inventories

 

178

 

(3,786

)

Prepaid expenses and other current assets

 

(1,791

)

1,989

 

Accounts payable

 

50

 

(2,071

)

Accrued sales deductions

 

5,678

 

8,225

 

Accrued expenses

 

(1,283

)

(2,585

)

Accrued income taxes payable

 

1,601

 

29

 

Deferred licensing revenue

 

(130

)

248

 

Other non-current liabilities

 

477

 

(4

)

Net cash provided by operating activities

 

39,300

 

13,635

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(48,468

)

(23,039

)

Sales and maturities of marketable securities

 

12,419

 

15,658

 

Purchases of property, plant and equipment

 

(852

)

(903

)

Deferred legal fees

 

(9,224

)

(3,688

)

Net cash used in investing activities

 

(46,125

)

(11,972

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock

 

2,164

 

995

 

Net cash provided by financing activities

 

2,164

 

995

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(4,661

)

2,658

 

Cash and cash equivalents at beginning of period

 

66,398

 

33,498

 

Cash and cash equivalents at end of period

 

$

61,737

 

$

36,156

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

134

 

$

247

 

 

 

 

 

 

 

Noncash financial activity:

 

 

 

 

 

Conversion of convertible notes and interest make-whole

 

$

2,984

 

$

2,138

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

1,884

 

$

5,537

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Six Months ended June 30, 2017 and 2016

(unaudited)

 

1.  Organization and Business

 

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

 

The Company launched Oxtellar XR and Trokendi XR in 2013 for the treatment of epilepsy and launched Trokendi XR for the prophylaxsis of migraine in adolescents and adults April 2017.

 

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, 2016 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, 2017 are not necessarily indicative of the Company’s future financial results.

 

Marketable Securities

 

Marketable securities consist of investments in U.S. Treasuries, certificates of deposit, various U.S. governmental agency debt securities, corporate and municipal bonds and other fixed income securities. 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’s investments are classified as available-for-sale and are carried at estimated fair value. Any unrealized holding gains or losses are reported, net of any tax effects reported, as accumulated other comprehensive income (loss), 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 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, 2017 and December 31, 2016, the fair value of the SERP was $294,000 and $275,000, respectively. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding non-current 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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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 expected sales discounts of approximately $8.3 million and $5.6 million as of June 30, 2017 and December 31, 2016, respectively.

 

Inventories

 

Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when it becomes probable that the related product candidates will receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product.

 

Property and Equipment

 

Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following useful lives:

 

Computer equipment

 

3 years

Software

 

3 years

Lab equipment and furniture

 

5 - 10 years

Leasehold improvements

 

Shorter of lease term or useful life

 

Deferred Legal Fees

 

Legal fees have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR (see Note 6). Amortization of the deferred legal fees will begin upon successful outcome of the ongoing litigation. Deferred legal fees will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation.

 

Intangible Assets

 

Intangible assets consist of deferred legal fees related to patents. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. The carrying value of the patents and deferred legal fees are assessed for impairment annually during the fourth quarter of each year, or more frequently if impairment indicators exist. There were no indicators of impairment identified as of June 30, 2017.

 

Impairment of Long-Lived Assets

 

Long-lived assets consist primarily of patent defense costs, deferred legal fees, and property and equipment. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. Evaluation of impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and could require the recognition of an impairment charge equal to the excess of the carrying value of the long-lived assets over its estimated fair value.

 

There were no indicators of impairment identified for the Company’s long-lived assets as of June 30, 2017.

 

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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). 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.

 

Preclinical Study and Clinical Trial Accruals

 

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, investigators, and clinical research organizations (CROs) that conduct these activities on our behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services. As appropriate, we accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.

 

Revenue from Product Sales

 

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, allowances, 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 takes title and ownership to the product upon physical receipt of the product and then distributes 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, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of product to a benefit plan participant has occurred and are based upon contractual agreements or legal requirements with the public sector (e.g., Medicaid) and with private sector benefit providers (e.g., commercial managed care). 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 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.

 

·                   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 when filling a prescription. Liabilities for co-pay assistance are based on actual program participation as well as estimates of program activity using data provided by third-party administrators.

 

·                   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 as consideration 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.

 

·                   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 to 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.

 

·                   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

 

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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 sales to contracted customers.

 

Revenue Recognition of License Revenue

 

License and Collaboration Agreements

 

We have entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe that when milestones meet all of the necessary criteria to be considered substantive, these should be recognized as revenue when achieved. For up-front license fees, we have estimated the service period of the contract and are recognizing revenue on a straight-line basis over the respective service period.

 

Milestone Payments

 

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize milestone revenue in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Substantive milestone payments are recognized upon achievement only if all of the following conditions are met:

 

·                   the milestone payments are non-refundable;

 

·                   achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

 

·                   substantive effort on the partner’s part is involved in achieving the milestone; and

 

·                   the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.

 

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone. Therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period.

 

The Company recorded $1.3 million of milestone revenue during both the three and six month periods ended June 30, 2017. No milestone revenue was recorded during the three and six months ended June 30, 2016.

 

Royalty Revenue

 

We recognize non-cash royalty revenue for royalty amounts earned pursuant to a royalty agreement with United Therapeutics. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 14). Accordingly, the Company records non-cash royalty revenue when payments are made from United Therapeutics to HC Royalty in connection with these agreements.

 

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.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development costs primarily consist of employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs; payments to investigators and consultants 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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Advertising Expense

 

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $9.8 million and $16.5 million in advertising costs for the three and six months ended June 30, 2017 and approximately $5.0 million and $11.4 million in advertising costs for the three and six months ended June 30, 2016, respectively. These expenses are recorded in the selling, general and administrative expense line of the Statement of Operations.

 

Share-Based Compensation

 

Employee share-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The Company recognizes expense using the straight-line method.

 

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company’s common stock.

 

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. When appropriate, 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 as income tax expense.

 

Recently Issued Accounting Pronouncements

 

Accounting Pronouncements Adopted in 2017

 

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. The Company adopted ASU 2016-09 on January 1, 2017 using the modified retrospective approach . As a result, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balance, with an offset to accumulated deficit for historical forfeiture assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase its deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

 

New Accounting Pronouncements Not Yet Adopted

 

In July 2017, the FASB issued ASU 2017-11, “ Earnings per share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ” The amendments in Part I change the classification analysis of certain equity-linked financial instruments (embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments in Part II of this Update do not require any transition guidance because those

 

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amendments do not have an accounting effect. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, “ Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, ” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does not expect it to have a material impact.

 

In March 2017, the FASB issued ASU 2017-08, “ Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.   The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, as the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “ Classification of Certain Cash Receipts and Cash Payments .” The standard eliminates diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In February 2016, the 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 expect the ASU to have a material impact on our assets and liabilities due to the addition of previously classified operating leases, but we do not expect it to have a material impact on our cash flows or results of operations.

 

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, 2017, with early adoption being permitted for periods ending after December 15, 2016. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures).

 

As the ASU supersedes substantially all existing revenue recognition guidance affecting us under the current standard, it could impact revenue and cost recognition across our business processes. We commenced our evaluation of the impact of the ASU by selecting and reviewing contracts to develop a baseline understanding. Based on our preliminary assessment, the most likely impact from the adoption of the new ASU is to our revenue recognition practices on our product sales with regards to the accounting for variable considerations such as incentives and sales deductions. In addition, the new ASU may also impact the timing of revenue recognition for our licensing and collaboration agreements with regards to variable considerations that have significant uncertainties; for example, milestone achievement. Currently, the Company is in process of assessing the impact that this standard will have on its consolidated financial statements, and has not selected an adoption methodology.

 

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.

 

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The Company reports assets and liabilities that are measured at fair value using a three 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

 

 

 

June 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

June 30,

 

Markets

 

Inputs

 

Inputs

 

 

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,737

 

$

61,737

 

$

 

$

 

Marketable securities

 

31,229

 

656

 

30,573

 

 

Long term marketable securities

 

104,632

 

 

104,632

 

 

Marketable securities - restricted (SERP)

 

294

 

 

294

 

 

Total assets at fair value

 

$

197,892

 

$

62,393

 

$

135,499

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

 

$

 

$

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2016

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

December 31,

 

Markets

 

Inputs

 

Inputs

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,398

 

$

66,398

 

$

 

$

 

Marketable securities

 

23,723

 

656

 

23,067

 

 

Long term marketable securities

 

75,410

 

 

75,410

 

 

Marketable securities - restricted (SERP)

 

275

 

 

275

 

 

Total assets at fair value

 

$

165,806

 

$

67,054

 

$

98,752

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

114

 

$

 

$

 

$

114

 

 

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, certificate of deposits, 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 Notes, which are recorded as derivative liabilities. The “make-whole fundamental change” provision (as defined in the Notes Indenture Agreement) expired on May 1, 2017.

 

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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 June 30, 2017 and December 31, 2016 that are included in the non-current liabilities section of the Consolidated Balance Sheets, in thousands:

 

 

 

Six Months ended June 30,

 

 

 

June 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

Balance at December 31, 2016

 

114

 

Changes in fair value of derivative liabilities included in earnings

 

(76

)

Reduction due to conversion of debt to equity

 

(38

)

 

 

 

 

Balance at June 30, 2017

 

$

 

 

The carrying value, face value and estimated fair value of the Notes was approximately $1.5 million, $1.6 million and $12.8 million, respectively, as of June 30, 2017. 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.

 

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, 2017 (unaudited):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

135,864

 

229

 

(232

)

$

135,861

 

 

At December 31, 2016:

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

99,487

 

86

 

(440

)

$

99,133

 

 

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

 

 

 

June 30,

 

 

 

2017

 

 

 

(unaudited)

 

Less Than 1 Year

 

$

31,229

 

1 year to 2 years

 

33,124

 

3 years to 4 years

 

71,508

 

Greater Than 4 Years

 

 

Total

 

$

135,861

 

 

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:

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

2,972

 

$

2,091

 

Work in process

 

8,646

 

8,874

 

Finished goods

 

5,005

 

5,836

 

 

 

$

16,623

 

$

16,801

 

 

5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Computer equipment

 

$

1,214

 

$

1,206

 

Software

 

1,939

 

1,807

 

Lab equipment and furniture

 

7,411

 

6,758

 

Leasehold improvements

 

2,729

 

2,642

 

Construction in progress

 

 

28

 

 

 

13,293

 

12,441

 

Less accumulated depreciation and amortization

 

(8,721

)

(8,097

)

 

 

$

4,572

 

$

4,344

 

 

Depreciation and amortization expense on property and equipment was approximately $0.3 million and $0.6 million for the three and six months ended June 30, 2017, and $0.3 million and $0.6 million for the three and six months ended June 30, 2016, respectively.

 

6.  Deferred Legal Fees and Intangible Assets

 

Deferred legal fees have been incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR. As of June 30, 2017 and December 31, 2016, the Company had deferred legal fees of $11.9 million and $19.9 million, respectively.

 

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

 

 

 

Weighted-

 

June 30,

 

December 31,

 

 

 

Average Life

 

2017

 

2016

 

 

 

(unaudited)

 

Capitalized patent defense costs

 

5.9 - 11 years

 

$

31,732

 

$

17,773

 

 

 

 

 

 

 

 

 

Less accumulated amortization

 

 

 

(2,743

)

(1,283

)

 

 

 

 

$

28,989

 

$

16,490

 

 

In March 2017, the Company entered into two settlements with various companies related to Trokendi XR patent litigation, at which time the Company reduced deferred legal fees by $12.6 million and transferred these amounts to intangible assets. The Company amortizes the cost of litigation through the settlement date of January 1, 2023.

 

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The net book value of intangible assets was $29.0 million as of June 30, 2017 and $16.5 million as of December 31, 2016. The increase in intangible assets reflects the settlement of lawsuits related to Trokendi XR patents during the first quarter of 2017.

 

Amortization expense related to intangible assets was approximately $1.0 million and $1.4 million for the three and six months ended June 30, 2017, and approximately $0.4 million and $0.5 million for the three and six months ended June 30, 2016, respectively.

 

There were no indicators of impairment identified.

 

7.  Accrued Expenses

 

Accrued expenses are comprised of the following, in thousands:

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued compensation

 

$

9,996

 

$

9,145

 

Accrued professional fees

 

3,579

 

6,447

 

Accrued clinical trial and clinical supply costs

 

5,241

 

4,350

 

Accrued product costs

 

155

 

1,794

 

Accrued interest expense

 

20

 

61

 

Other accrued expenses

 

4,443

 

5,630

 

 

 

$

23,434

 

$

27,427

 

 

8.   Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through June 30, 2017, 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

 

(85,425

)

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

 

25,767

 

Accretion of debt discount and deferred financing costs

 

5,429

 

December 31, 2016 carrying value

 

4,165

 

 

 

 

 

Conversion of debt to equity - principal

 

(3,000

)

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

 

257

 

Accretion of debt discount and deferred financing costs

 

50

 

June 30, 2017 carrying value, unaudited

 

$

1,472

 

 

During the six month period ended June 30, 2017, approximately $3.0 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.6 million shares of common stock in conversion of the principal amount of the Notes. The Company issued an additional 2,000 shares of common stock in settlement of the interest make-whole provision related to the converted Notes. As a result of the conversions, the Company incurred a loss of approximately $0.2 million on extinguishment of debt during the six month period ended June 30, 2017, 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, 2016, as a result of approximately $2.0 million in note conversions, the Company incurred a loss of approximately $0.4 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 six month period ended June 30, 2017, in thousands.

 

 

 

Common Stock

 

Additional Paid-in
Capital

 

Accumulated
Deficit

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

50

 

$

276,127

 

$

(84,288

)

Cumulative-effect adjustment 

 

 

211

 

181

 

Balance at January 1, 2017

 

50

 

276,338

 

(84,107

)

Share-based compensation

 

 

4,087

 

 

Issuance of ESPP shares

 

 

907

 

 

 

Exercise of stock options

 

1

 

1,256

 

 

Equity issued on note conversion

 

 

2,984

 

 

Net income

 

 

 

27,665

 

Balance, June 30, 2017

 

$

51

 

$

285,572

 

$

(56,442

)

 

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. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s Common Stock at the grant date. Option awards granted to employees, consultants and advisors 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, Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

 

 

 

Three Months ended

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Research and development

 

$

398

 

$

340

 

$

715

 

$

628

 

Selling, general and administrative

 

1,862

 

1,272

 

3,372

 

2,343

 

Total

 

$

2,260

 

$

1,612

 

$

4,087

 

$

2,971

 

 

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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, 2016

 

3,644,088

 

$

10.25

 

7.59

 

Granted

 

1,063,255

 

$

25.71

 

 

 

Exercised

 

(152,453

)

$

8.24

 

 

 

Forfeited or expired

 

(45,286

)

$

16.84

 

 

 

Outstanding, June 30, 2017

 

4,509,604

 

$

13.89

 

7.71

 

 

 

 

 

 

 

 

 

As of December 31, 2016:

 

 

 

 

 

 

 

Vested and expected to vest

 

3,591,528

 

$

10.22

 

7.57

 

Exercisable

 

1,503,004

 

$

8.62

 

6.49

 

 

 

 

 

 

 

 

 

As of June 30, 2017:

 

 

 

 

 

 

 

Vested and expected to vest

 

4,509,604

 

$

13.89

 

7.71

 

Exercisable

 

2,164,607

 

$

9.31

 

6.51

 

 

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, SAR, and potential ESPP awards, and the if-converted method is used to determine the dilutive effect of the Company’s Notes.

 

The following common stock equivalents were excluded in the calculation of diluted income per share because their effect would be anti-dilutive as applied to the income from continuing operations applicable to common stockholders for the three and six months ended June 30, 2017 and 2016:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Shares underlying Convertible Senior Secured Notes

 

 

 

 

 

Stock options, stock appreciation rights, and ESPP awards

 

122,666

 

1,124,100

 

206,448

 

1,159,100

 

 

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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 six months ended June 30, 2017 and 2016, in thousands, except share and per share amounts:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Numerator, in thousands:

 

 

 

 

 

 

 

 

 

Net income used for calculation of basic EPS

 

$

17,368

 

$

10,251

 

$

27,665

 

$

15,076

 

 

 

 

 

 

 

 

 

 

 

Interest expense on convertible debt

 

58

 

196

 

147

 

375

 

Changes in fair value of derivative liabilities

 

(23

)

(123

)

(76

)

(224

)

Loss on extinguishment of debt

 

103

 

 

204

 

382

 

Loss on extinguishment of outstanding debt, as if converted

 

(258

)

(849

)

(321

)

(1,183

)

Total adjustments

 

(120

)

(776

)

(46

)

(650

)

Net income used for calculation of diluted EPS

 

$

17,248

 

$

9,475

 

$

27,619

 

$

14,426

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

50,530,968

 

49,427,825

 

50,345,830

 

49,333,962

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

421,708

 

1,240,814

 

551,235

 

1,301,885

 

Shares issuable to settle interest make-whole derivatives

 

4,631

 

52,563

 

7,013

 

71,537

 

Stock options and stock appreciation rights

 

2,266,407

 

1,024,140

 

2,122,245

 

777,302

 

Total potential dilutive common shares

 

2,692,746

 

2,317,517

 

2,680,493

 

2,150,724

 

Weighted average shares outstanding, diluted

 

53,223,714

 

51,745,342

 

53,026,323

 

51,484,686

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.34

 

$

0.21

 

$

0.55

 

$

0.31

 

Net income per share, diluted

 

$

0.32

 

$

0.18

 

$

0.52

 

$

0.28

 

 

12. Income Taxes

 

The following table provides a comparative summary of our income tax expense and effective tax rate for the three and six months ended June 30, 2017 and 2016, in thousands:

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Income tax expense

 

$

9,057

 

$

405

 

$

14,983

 

$

605

 

Effective tax rate

 

34.3

%

3.8

%

35.1

%

3.9

%

 

The income tax expense for the three and six months ended June 30, 2017 is attributed to the U.S. federal and state income tax. The increase in the income tax expense and the effective tax rate for the three and six months ended June 30, 2017 as compared to the same period in the prior year is primarily attributable to the release of the valuation allowance on the deferred tax assets during the third quarter of 2016.

 

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 six months ended June 30, 2017, $49,000 and $79,000 of the allowance was utilized. During the three and six months ended June 30, 2016, none of the allowance was utilized. As of June 30, 2017, $0.4 million remains available for tenant improvements. Rent expense for the leased facilities and leased vehicles for the three and six months ended June 30, 2017 was $0.5 million and $1.2 million, respectively. Rent expense for the leased facilities and leased vehicles for the Company’s sales representatives for the three and six months ended June 30, 2016 was approximately $0.7 million and $1.3 million, respectively.

 

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Future minimum lease payments under non-cancelable operating leases as of June 30, 2017 are as follows, in thousands, unaudited:

 

Year ending December 31:

 

 

 

2017 (remaining)

 

1,468

 

2018

 

1,487

 

2019

 

1,344

 

Thereafter

 

454

 

 

 

$

4,753

 

 

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 exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties to Afecta as a low single digit percentage of worldwide net product sales.

 

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, the Company is obligated to pay royalties to Rune as a low single digit percentage of worldwide net product sales.

 

14. Collaboration Agreement

 

Royalty Revenue

 

In the third quarter of 2014, the Company received a $30.0 million payment pursuant to a Royalty Interest Acquisition 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 (treprostinil) Extended-Release Tablets. We will retain full ownership of the royalty rights if and when a certain threshold is reached per the terms of the Agreement. We have recorded a non-recourse liability related to this transaction and have begun to amortize this amount to recognize non-cash royalty revenue as royalties are received by HC Royalty from United Therapeutics. We also recognized non-cash interest expense related to this liability that accrues at an effective interest rate, which is determined based on projections of HC Royalty’s rate of return. We recognized royalty revenue of $1.2 million for the three months ended June 30, 2017 and $1.2 million for the three months ended June 30, 2016, respectively. We recognized non-cash interest expense of $0.2 million for the three months ended June 30, 2017 and $1.3 million for the three months ended June 30, 2016, respectively. We recognized royalty revenue of $2.3 million for the six months ended June 30, 2017 and $2.3 million for the six months ended June 30, 2016, respectively. We recognized non-cash interest expense of $1.1 million for the six months ended June 30, 2017 and $2.6 million for the six months ended June 30, 2016, respectively.

 

15. Subsequent Event

 

Subsequent to June 30, 2017, holders of the Notes converted approximately $1.6 million of the Notes. We issued a total of approximately 297,000 shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon. Subsequent to these conversions, the principal amount of the Notes outstanding was zero. Our obligations under the Indenture governing the Notes were satisfied and discharged.

 

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Table of Contents

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition of the Company. The interim financial statements included in this report and this Management’s Discussion and Analysis of our 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, 2016 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 filed with the Securities and Exchange Commission on March 16, 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 among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in the Company’s business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K 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, launched in 2013 for the treatment of epilepsy in the U.S. market. On April 5, 2017, Trokendi XR received final approval from the United States Food and Drug Administration (FDA) for the additional indication of treatment of prophylaxis of migraine headache in adults and adolescents. These products differ from immediate release products by offering once-daily dosing and unique pharmacokinetic profiles which we believe can have positive clinical effects for many 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 and migraines. In addition, we believe that the unique smooth and steady pharmacokinetic profiles of our once-daily formulations reduce the peak to trough blood level fluctuations that are typically associated with immediate release products and which may result in increased adverse events (AEs), more side effects and decreased efficacy.

 

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

 

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Table of Contents

 

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

 

Product

 

Indication

 

Status

Oxtellar XR

 

Epilepsy

 

Launched in 2013

Trokendi XR

 

Epilepsy

 

Launched in 2013

 

 

Migraine*

 

Launched in 2017

SPN-810

 

IA**

 

Phase III

SPN-812

 

ADHD

 

Phase IIb

SPN-809

 

Depression

 

Phase II ready

 


*                                          Prophylaxis of migraine headache in adults and adolescents.

 

**                                   Initial program is in patients with ADHD, with plans to add other indications, such as IA in patients with autism, PTSD, bipolar disorder, schizophrenia, and some forms of dementia.

 

We are continuing to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. We currently have seven U.S. patents issued covering Oxtellar XR and nine 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 the current immediate release products, which must be taken multiple times per day.

 

In April 2017, we launched Trokendi XR for the treatment of prophylaxis of migraine headache in adults and adolescents after receiving final 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.

 

IMS Prescriptions

 

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through 2017 and in subsequent years. Data from Intercontinental Marketing Services (IMS) shows 293,607 prescriptions filled for both drugs during the six months ended June 30, 2017, which is 22.8% higher than the prescriptions reported for the six months ended June 30, 2016.

 

Since the migraine launch, IMS prescription data for Trokendi XR has shown robust acceleration in prescription growth. For the second quarter of 2017, total prescriptions for Trokendi XR increased by 22,534, or 22.2%, from the first quarter of 2017. This compares to an increase of 6,996 prescriptions, or 8.1%, in the second quarter of 2016 over the first quarter of 2016. Similarly, for the same sequential quarter-to-quarter time periods, new prescriptions for Trokendi XR increased by 14,594, or 31.2%, in 2017, compared to 2,352, or 5.8%, in 2016.

 

Patents

 

We received several Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties. (See Part II, Item 1—Legal Proceedings 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. The Phase III trials for SPN-810 are being conducted using an agreed-upon novel scale that was developed by us to measure IA. We initiated two Phase III clinical trials in 2015 (P301 and P302) and expect patient enrollment to continue through mid-2018.

 

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Table of Contents

 

SPN-812

 

SPN-812 is being developed as a novel non-stimulant treatment for ADHD. During 2016, we completed a Phase IIb dose ranging trial and announced positive topline results. Subsequent to the end of Phase II meeting with the FDA in the June 2017, we plan to initiate Phase III clinical trials for SPN-812 during the second half of 2017.

 

We expect to incur significant research and development expenses related to the continued development of each of our product candidates from 2017 through FDA approval or until the program terminates.

 

Collaboration

 

Mydayis (mixed salts of a single-entity amphetamine product) was originally developed by Shire Laboratories, the former division of Shire that subsequently became Supernus Pharmaceuticals. On June 20, 2017, Shire announced that the FDA approved Mydayis, a once-daily treatment comprised of three different types of drug-releasing beads, for patients 13 years and older with ADHD. Based on the agreement between the Company and Shire, Shire will pay to the Company 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 U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and to disclose 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, allowances, co-pay assistance payments 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 programs.

 

Deferred Legal Fees

 

Deferred legal fees are comprised of costs incurred in connection with defense of patents for Oxtellar XR and Trokendi XR. Amortization commences upon successful outcome of the ongoing 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 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), fees paid to investigators who are participating in our clinical sites, consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

 

Accrued Clinical Expenses

 

Clinical trials are inherently complex and often involve multiple service providers. 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

 

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Table of Contents

 

personnel to identify services that have been performed on our behalf. We accrue for the estimated but unbilled service performed and the associated cost incurred.

 

Payments to service providers can either be based on hourly rates for service 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 incurred but 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 expense incurred.

 

Results of Operations

 

Comparison of the three months ended June 30, 2017 and 2016

 

 

 

Three Months ended June 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

73,328

 

$

50,335

 

22,993

 

Royalty revenue

 

1,179

 

1,205

 

(26

)

Licensing revenue

 

1,322

 

86

 

1,236

 

Total revenues

 

75,829

 

51,626

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

3,861

 

2,751

 

1,110

 

Research and development

 

10,823

 

11,109

 

(286

)

Selling, general and administrative

 

35,078

 

26,121

 

8,957

 

Total costs and expenses

 

49,762

 

39,981

 

 

 

Operating income

 

26,067

 

11,645

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

656

 

365

 

291

 

Interest expense

 

(58

)

(196

)

(138

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(160

)

(1,281

)

(1,121

)

Changes in fair value of derivative liabilities

 

23

 

123

 

(100

)

Loss on extinguishment of debt

 

(103

)

 

103

 

Total other expenses

 

358

 

(989

)

 

 

Earnings before income taxes

 

26,425

 

10,656

 

 

 

Income tax expense

 

9,057

 

405

 

8,652

 

Net income

 

$

17,368

 

$

10,251

 

 

 

 

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Table of Contents

 

Net Product Sales.   The increase in net product sales for the three months ended June 30, 2017 as compared to the same period in 2016 is primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases taken over in 2016 and 2017 also contributed to increase in net product sales. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, allowances, other sales deductions and returns. The table below lists our net product sales by product, in thousands:

 

 

 

Net Product Sales

 

 

 

 

 

Three Months ended June 30,

 

Change in Net Product

 

 

 

2017

 

2016

 

Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

55,989

 

$

37,663

 

48.7

%

Oxtellar XR

 

17,339

 

12,672

 

36.8

%

 

 

 

 

 

 

 

 

Total

 

$

73,328

 

$

50,335

 

45.7

%

 

Royalty Revenue. Non-cash royalty revenue was $1.2 million during the three months ended June 30, 2017 as compared to $1.2 million for the three months ended June 30, 2016, based on sales of Orenitram (treprostinil) Extended-Release Tablets as reported to Healthcare Royalty Partners III, L.P. (HC Royalty).

 

Licensing Revenue. Total licensing revenue for the three months ended June 30, 2017 and 2016 was $1.3 million and $86,000 respectively. The increase of $1.2 million is primarily due to milestone revenue from our collaboration partners.

 

Cost of Product Sales. Cost of product sales during the three months ended June 30, 2017 was $3.9 million, an increase of $1.1 million, or 40.3%, as compared to $2.8 million for the three months ended June 30, 2016. The quarter over quarter increase is attributable primarily to increased number of units sold.

 

Research and Development Expense.   Research and development (R&D) expenses during the three months ended June 30, 2017 were $10.8 million as compared to $11.1 million for the three months ended June 30, 2016, a decrease of $0.3 million or 2.6%. This decrease is primarily due to the completion of enrollment in 2016 of the Phase IIb dose ranging trial for SPN-812.

 

Selling, General and Administrative Expenses.   Our selling, general and administrative (SG&A) expenses were $35.1 million during the three months ended June 30, 2017 as compared to $26.1 million for the three months ended June 30, 2016, an increase of $9.0 million or 34.3%. The increase in SG&A expenses is primarily due to the sales and marketing activities and programs related to the April 2017 launch of the migraine indication for Trokendi XR.

 

Interest Income. During the three months ended June 30, 2017 and 2016, we recognized $0.7 million and $0.4 million, respectively, of interest income earned on our cash and marketable securities investments.

 

Interest Expense.  Interest expense was $58,000 during the three months ended June 30, 2017 as compared to $196,000 for the three months ended June 30, 2016. The decrease of $138,000 was primarily due to the decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes due in 2019 (the Notes) from $6.6 million at June 30, 2016 to $1.6 million at June 30, 2017. During the three months ended June 30, 2017, a total of $2.0 million of Notes and related accrued interest converted into 0.4 million shares of common stock.

 

Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $0.2 million during the three months ended June 30, 2017 as compared to $1.3 million for the three months ended June 30, 2016. The decrease of $1.1 million for this non-cash expense item was primarily due to a decrease in our projection of future royalties related to Orenitram.

 

Changes in Fair Value of Derivative Liability.   During the three months ended June 30, 2017 and 2016, we recognized a non-cash gain of $23,000 and $123,000, respectively, related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. The decrease of $100,000 is primarily due to the decrease in the derivative liability balance as a result of notes conversions during the period.

 

Loss on Extinguishment of Debt.  During the three months ended June 30, 2017, we recognized a non-cash loss on extinguishment of debt of $0.1 million related to the conversion of $2.0 million of our Notes. During the three months ended June 30, 2016, there was no loss on extinguishment of debt as no Notes were converted.

 

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Table of Contents

 

Income Tax.   During the three months ended June 30, 2017, we recorded $9.1 million of tax expense as compared to $0.4 million for the three months ended June 30, 2016, an increase of $8.7 million. During the third quarter of 2016, we released the full amount of the valuation allowance recorded against our deferred tax assets. As a result, 2017 tax expense is recognized at a rate of approximately 35%, consistent with our expectations going forward.

 

Net Income.   We realized net income of $17.4 million during the three months ended June 30, 2017, as compared to net income of $10.2 million during the three months ended June 30, 2016, an increase of $7.2 million. This change was primarily due to increased revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased SG&A spending and the increased tax rate.

 

Comparison of the six months ended June 30, 2017 and June 30, 2016

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

129,697

 

$

93,360

 

36,337

 

Royalty revenue

 

2,328

 

2,324

 

4

 

Licensing revenue

 

1,380

 

135

 

1,245

 

Total revenues

 

133,405

 

95,819

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

6,809

 

4,786

 

2,023

 

Research and development

 

20,425

 

21,671

 

(1,246

)

Selling, general and administrative

 

63,316

 

51,281

 

12,035

 

Total costs and expenses

 

90,550

 

77,738

 

 

 

Operating income

 

42,855

 

18,081

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

1,187

 

693

 

494

 

Interest expense

 

(147

)

(375

)

(228

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(1,119

)

(2,560

)

(1,441

)

Changes in fair value of derivative liabilities

 

76

 

224

 

(148

)

Loss on extinguishment of debt

 

(204

)

(382

)

(178

)

Total other expenses

 

(207

)

(2,400

)

 

 

Earnings before income taxes

 

42,648

 

15,681

 

 

 

Income tax expense

 

14,983

 

605

 

14,378

 

Net income

 

$

27,665

 

$

15,076

 

 

 

 

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Table of Contents

 

Net Product Sales.   The increase in net product sales for the six months ended June 30, 2017 as compared to the same period 2016, $36.3 million, was primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases taken over in 2016 and 2017 also contributed to increases in net product sales. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, allowances, other sales deductions and returns. The table below lists our net product sales by product, in thousands:

 

 

 

Net Product Sales

 

 

 

 

 

Six Months ended June 30,

 

Change in Net Product

 

 

 

2017

 

2016

 

Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

97,998

 

$

69,983

 

40.0

%

Oxtellar XR

 

31,699

 

23,377

 

35.6

%

 

 

 

 

 

 

 

 

Total

 

$

129,697

 

$

93,360

 

38.9

%

 

Royalty Revenue. Non-cash royalty revenue was $2.3 million during the six months ended June 30, 2017 as compared to $2.3 million for the six months ended June 30, 2016, based on sales of Orenitram (treprostinil) Extended-Release Tablets as reported to Healthcare Royalty Partners III, L.P. (HC Royalty).

 

Licensing Revenue. Total licensing revenue for the six months ended June 30, 2017 and 2016 was $1.4 million and $0.1 million respectively. The increase of $1.2 million is primarily due to milestone revenue from payments received from our collaboration partners.

 

Cost of Product Sales. Cost of product sales during the six months ended June 30, 2017 was $6.8 million, an increase of $2.0 million, or 42.3%, as compared to $4.8 million for the six months ended June 30, 2016. The quarter over quarter increase is attributable primarily to increased number of units sold.

 

Research and Development Expense.   Research and development (R&D) expenses during the six months ended June 30, 2017 were $20.4 million as compared to $21.7 million for the six months ended June 30, 2016, a decrease of $1.3 million or 5.7%. This decrease is primarily due to the completion of enrollment in 2016 of the Phase IIb dose ranging trial for SPN-812.

 

Selling, General and Administrative Expenses.   Our selling, general and administrative (SG&A) expenses were $63.3 million during the six months ended June 30, 2017 as compared to $51.3 million for the six months ended June 30, 2016, an increase of $12.0 million or 23.5%. The increase in SG&A expenses is primarily due to the sales and marketing activities and programs related to the April 2017 launch of the migraine indication for Trokendi XR.

 

Interest Income. During the six months ended June 30, 2017 and 2016, we recognized $1.2 million and $0.7 million, respectively, of interest income earned on our cash and marketable securities investments.

 

Interest Expense.  Interest expense was $0.1 million during the six months ended June 30, 2017 as compared to $0.4 million for the six months ended June 30, 2016. The decrease of $0.3 million was primarily due to a decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes due in 2019 (the Notes) from $6.6 million at June 30, 2016 to $1.6 million at June 30, 2017. During the six months ended June 30, 2017, a total of $3.0 million of Notes and related accrued interest converted into 0.6 million shares of common stock.

 

Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $1.1 million during the six months ended June 30, 2017 as compared to $2.6 million for the six months ended June 30, 2016. The decrease of $1.5 million for this non-cash expense item was primarily due to a decrease in our projection of future royalties related to Orenitram.

 

Changes in Fair Value of Derivative Liability.   During the six months ended June 30, 2017 and 2016, we recognized a non-cash gain of $76,000 and $224,000, respectively, related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. The decrease of $148,000 is primarily due to the decrease in the derivative liability balance as a result of notes conversions during the period.

 

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Table of Contents

 

Loss on Extinguishment of Debt.  During the six months ended June 30, 2017, we recognized a non-cash loss on extinguishment of debt of $0.2 million related to the conversion of $3.0 million of our Notes. During the six months ended June 30, 2016, we recognized a non-cash loss on extinguishment of debt of $0.4 million related to the conversion of $2.0 million of our Notes.

 

Income Tax.   During the six months ended June 30, 2017, we recorded $15.0 million of tax expense as compared to $0.6 million for the six months ended June 30, 2016, an increase of $14.4 million. During the third quarter of 2016, we released the full amount of the valuation allowance recorded against our deferred tax assets. As a result, 2017 tax expense is recognized at a rate of approximately 35%, consistent with our expectations going forward.

 

Net Income.   We realized net income of $27.7 million during the six months ended June 30, 2017, as compared to net income of $15.1 million during the six months ended June 30, 2016, an increase of $12.6 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, offset by increased SG&A spending, and the increased tax rate.

 

Liquidity and Capital Resources

 

We believe our increasing levels of net product sales will be sufficient to finance our operations in 2017 and subsequent years, including the increased R&D expenses for our clinical trials. We expect to incur significantly increased R&D expenses for the remainder of 2017 and in subsequent years to support the development of SPN-810 and SPN-812, including their respective Phase III trials.

 

Our working capital at June 30, 2017 was $80.0 million, an increase of $9.2 million compared to our working capital of $70.7 million at December 31, 2016. Our long term marketable securities at June 30, 2017 were $104.6 million, an increase of $29.2 million compared to $75.4 million at December 31, 2016.

 

Our stockholders’ equity increased by $37.6 million during the six month period ended June 30, 2017, primarily as a result of net income, the issuance of shares related to the conversion of our Notes and share-based compensation.

 

As of June 30, 2017, holders of the Notes have converted a total of approximately $88.4 million of the Notes. Cumulatively, through June 30, 2017, we issued a total of approximately 16.7 million shares of common stock in the conversion of the principal amount of the Notes. We issued an additional 2.2 million shares of common stock and also paid approximately $1.7 million in cash in settlement of the interest make-whole provision related to the converted Notes.

 

Subsequent to June 30, 2017, holders of the Notes converted approximately $1.6 million of the Notes. We issued a total of approximately 297,000 shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon. Subsequent to these conversions, the principal amount of the Notes outstanding was zero. Our obligations under the Indenture governing the Notes were satisfied and discharged.

 

We achieved positive cash flow and profitability from operations in each quarter of 2016 and in the first and second quarters of 2017. While we expect to maintain profitability in 2017 as we continue to increase sales, we anticipate there may be significant variability from quarter to quarter in our level of profitability due to increasing spending to advance our clinical product candidates.

 

Cash Flows

 

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

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

39,300

 

$

13,635

 

25,665

 

 

 

 

 

 

 

 

 

Investing activities

 

(46,125

)

(11,972

)

(34,153

)

 

 

 

 

 

 

 

 

Financing activities

 

2,164

 

995

 

1,169

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

(4,661

)

$

2,658

 

 

 

 

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Table of Contents

 

Operating Activities

 

Net cash provided by/used in operating activities is comprised of two components: cash provided by operating income/loss and cash provided by/used in changes in working capital.

 

Results for the six months ended June 30, 2017 and 2016 are summarized below, in thousands:

 

 

 

Six Months ended June 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating income

 

$

44,150

 

$

19,963

 

24,187

 

 

 

 

 

 

 

 

 

Cash used in working capital

 

(4,850

)