NEOS THERAPEUTICS, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements for the years endedDecember 31, 2019 and 2018 and notes thereto included in our Annual Report on Form 10-K as filed with theSecurities and Exchange Commission (the "SEC") onMarch 13, 2020 . This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Part II, Item 1A. of this Quarterly Report on Form 10-Q. OVERVIEW We are a commercial-stage pharmaceutical company focused on developing, manufacturing and commercializing central nervous system-focused products. We currently have three branded products approved by theU.S. Food and Drug Administration ("FDA") and marketed and sold by us inthe United States using our internal commercial organization. Our products are extended-release ("XR"), medications in patient-friendly, orally disintegrating tablets ("ODT") or oral suspension dosage forms that utilize our microparticle modified-release drug delivery technology platform. We received approval from the FDA for our three attention deficit hyperactivity disorder ("ADHD") products as follows: Adzenys XR-ODT, our amphetamine XR-ODT for the treatment of ADHD in patients 6 years and older, onJanuary 27, 2016 and commercially launched inMay 2016 ; Cotempla XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17 years old, onJune 19, 2017 and commercially launched inSeptember 2017 ; and Adzenys ER, our amphetamine extended-release oral suspension for the treatment of ADHD in patients 6 years and older, onSeptember 15, 2017 , and commercially launched inFebruary 2018 . Products containing amphetamine and methylphenidate are the most commonly prescribed medications inthe United States for the treatment of ADHD. We believe Adzenys XR-ODT and Cotempla XR-ODT are the first amphetamine and methylphenidate extended release, orally disintegrating tablets, respectively, marketed for the treatment of ADHD. In addition to our marketed products, we are developing NT0502, our product candidate for the treatment
of
sialorrhea.
We manufacture Adzenys XR ODT, Cotempla XR ODT and Adzenys ER in our current
Good Manufacturing Practice ("cGMP") and U.S. Drug Enforcement Administration
("DEA") registered manufacturing facilities, which help control supply quality
and timing. We also currently use these facilities to manufacture our generic
equivalent to the branded product, Tussionex, an extended release, oral
suspension of hydrocodone and chlorpheniramine indicated for the relief of cough
and upper respiratory symptoms of a cold ("generic Tussionex").
On May 11, 2020 , we, upon the approval of our Board of Directors, announced a
restructuring and reduction in force of approximately 25 percent of our
workforce, or approximately 50 employees, as well as other cost savings
initiatives intended to lower our annualized net operating cash burn. Such
restructuring was completed in May 2020 and we recorded the total cost of $1.1
million , primarily related to severance costs and related expenses, of which
$0.8 million and $0.2 million were paid during the three months ended June 30,
2020 and September 30, 2020 , respectively. The remaining balance of $0.1 million
will be paid in the fourth quarter of 2020.
On October 23, 2018 , we entered into an Exclusive License Agreement (the
"License Agreement") with NeuRx Pharmaceuticals LLC ("NeuRx"), pursuant to which
NeuRx granted us an exclusive, world-wide, royalty-bearing license to research,
develop, manufacture, and commercialize certain pharmaceutical products
containing NeuRx's proprietary compound designated as NRX 101, referred to as
NT0502. NT0502 is a selective anticholinergic agent that we are developing as an
oral, once- or twice-daily treatment to reduce chronic sialorrhea in patients
with neurological conditions associated with excessive salivation or drooling.
In January 2020 , we announced that we had completed dosing in a Phase 1 pilot
pharmacokinetic study in healthy adults for NT0502. The top-line data confirms a
formulation for further clinical development. In the first half of 2021, we plan
to initiate a Phase 1 single ascending dose/multiple ascending dose study
("SAD/MAD study") of NT0502.
39
Table of Contents
OnAugust 28, 2014 , we completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug Application ("Tussionex ANDA"), which include the rights to produce, develop, market and sell, as well as all the profits from such selling activities, our generic Tussionex, which we previously owned the rights to manufacture, but which was marketed and sold by the generic drug division ofCornerstone Biopharma, Inc. ("Cornerstone"). These rights were acquired from the collaboration of the Company,Cornerstone and Coating Place, Inc. Prior to the acquisition, we shared profits generated by the sale and manufacture of the product under a development and manufacturing agreement
with those companies. OnJuly 25, 2016 , we received a paragraph IV certification fromActavis Laboratories FL, Inc. ("Actavis") advising us that Actavis has filed an Abbreviated New Drug Application ("ANDA") with the FDA for a generic version of Adzenys XR-ODT. OnOctober 17, 2017 , we entered into a Licensing Agreement with Actavis under which we have granted Actavis the right to manufacture and market its generic version of Adzenys XR-ODT under the ANDA beginning onSeptember 1, 2025 , or earlier under certain circumstances. OnOctober 31, 2017 , we received a paragraph IV certification fromTeva Pharmaceuticals USA, Inc. ("Teva") advising us that Teva has filed an ANDA with the FDA for a generic version of Cotempla XR-ODT. OnDecember 21, 2018 , we entered into a Licensing Agreement with Teva under which we granted Teva the right to manufacture and market its generic version of Cotempla XR-ODT under the ANDA beginning onJuly 1, 2026 , or earlier under certain circumstances. Our predecessor company was incorporated inTexas onNovember 30, 1994 asPharmaFab, Inc. and subsequently changed its name toNeostx, Inc. OnJune 15, 2009 , we completed a reorganization pursuant to which substantially all of the capital stock ofNeostx, Inc. was acquired by a newly formedDelaware corporation, namedNeos Therapeutics, Inc. The remaining capital stock ofNeostx, Inc. was acquired by us onJune 29, 2015 , andNeostx, Inc. was merged with and intoNeos Therapeutics, Inc. Historically, we were primarily engaged in the development and contract manufacturing of unapproved, or Drug Efficacy Study Implementation ("DESI"), pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The unapproved or DESI pharmaceuticals contract business was discontinued in 2007, and the manufacture of nutraceuticals for third parties was discontinued inMarch 2013 . Since our reorganization in 2009, we have devoted substantially all of our resources to funding our manufacturing operations, the development of our product candidates, and the commercialization of our approved products; these activities include the implementation and execution of our commercialization strategies, conducting research and development activities and clinical trials for our product candidates, providing general and administrative support of these operations, and seeking and maintaining intellectual property protection. Prior to our initial public offering of our common stock inJuly 2015 , we funded our operations principally through private placements of our common stock, redeemable convertible preferred stock, bank and other lender financings and through payments received under collaborative arrangements. We have incurred significant losses in each year since our reorganization in 2009. Our net losses were$18.4 million and$16.9 million for the nine months endedSeptember 30, 2020 and the year endedDecember 31, 2019 , respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , we had accumulated deficits of approximately$352.3 million and$333.9 million , respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including, among other things:
? sales and marketing efforts for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER;
? research and development activities for new product candidates;
? post-marketing approval research activities for our approved products;
? manufacture supplies for our nonclinical studies and planned clinical trials;
? protection and enforcement of our intellectual property rights;
40
Table of Contents
? general operations as a public company; and
? debt service costs on our existing debt facilities.
We believe that our working capital deficiency and our continued operating losses raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying financial statements are issued. See "-Sources of Liquidity" and Note 1 to the Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q for a further discussion of our liquidity and the conditions and events that raise substantial doubt regarding our ability to continue as a going concern. IMPACT OF COVID-19 InDecember 2019 , a novel (new) strain of coronavirus ("COVID-19") was identified inWuhan ,Hubei Province ,People's Republic of China . Since this time, COVID-19 has spread to over 200 countries and, onMarch 11, 2020 , theWorld Health Organization (the "WHO") declared the outbreak of COVID-19 as a "pandemic." To slow the spread of the virus, many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. OnMarch 13, 2020 , the President ofthe United States issued a proclamation declaring that the COVID-19 outbreak inthe United States constitutes a national emergency. Subsequently, the governors of numerous states, includingTexas andPennsylvania where our production and headquarters and sales offices are located, declared states of emergency and ordered non-essential businesses closed until further notice. We responded by establishing task forces to monitor the situation, minimize the disruption to our business, and ensure the wellbeing of our employees. As announced onMarch 30, 2020 , to help slow the spread of COVID-19, most of our employees began operating under a work-from-home policy in accordance with guidance issued by theCenters for Disease Control and Prevention (CDC ), theWHO and state and local authorities. As such, our sales representatives were not visiting provider offices, which we believed was a necessary step to help protect patient health and facilitate providers' attention to direct patient care.
EffectiveMarch 30, 2020 , our organization, with the exception of a limited number of essential roles, began operating under a reduction in hours or, in certain cases, furlough for approximately six weeks. OnMay 11, 2020 , we reopened our manufacturing facilities and our sales representatives began to again visit provider offices in addition to engaging in remote selling where necessary. Although the organization has since been brought back to full hours, in the future, it may be necessary to return to work-from-home arrangements for our employees because of restrictions related to COVID-19 and, as a result, we may again determine to reduce hours or, in certain cases, furlough employees. In such a case, our employees could find alternative employment and leave the Company, and we cannot provide assurance that our staff, when it returns from any such reduction in hours, will operate at the same level of effectiveness as before the reduction of hours. Sincemid-March 2020 , we believe COVID-19 has negatively impacted the overall market for prescription ADHD products, including our ADHD products. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets inthe United States and abroad. While some states and jurisdictions have started to rollback stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and if we or any of the third parties with whom we engages were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition. In addition, a recurrence or "second wave" of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We will continue to monitor developments as we deals with the disruptions and uncertainties relating to the COVID-19 pandemic. 41 Table of Contents
FINANCIAL OPERATIONS OVERVIEW
Revenue Since 2014, we have generated revenue from product sales of our generic Tussionex recorded on a net sales basis. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season. We launched commercialization of Adzenys XR ODT onMay 16, 2016 , initiated an early experience program with Cotempla XR ODT with limited product availability onSeptember 5, 2017 before launching this product nationwide onOctober 2, 2017 and launched commercialization of Adzenys ER onFebruary 26, 2018 . We sell our products to drug wholesalers inthe United States . We have also established indirect contracts with drug, food and mass retailers that order and receive our generic Tussionex product through wholesalers. As a result of the continuing commercialization of Adzenys XR ODT, Cotempla XR ODT and Adzenys ER, we expect our future revenue to continue at or increase from historical levels. We restructured our commercial efforts for our ADHD products inJanuary 2019 to focus on more profitable business channels and market segments. We believe that a useful indicator of our progress in these efforts is average net price per pack, which is derived from net sales for each product divided by units of that product shipped. Unit shipments of Adzenys XR-ODT for the three and nine months endedSeptember 30, 2020 were 56,065 and 155,329, respectively, as compared to 72,051 and 194,851, respectively, for the three and nine months endedSeptember 30, 2019 . Unit shipments of Cotempla XR-ODT for the three and nine months endedSeptember 30, 2020 were 42,013 and 129,536, respectively, as compared to 56,255 and 164,107, respectively, for the three and nine months endedSeptember 30, 2019 . Average net price per pack (30-day supply) of our Adzenys XR-ODT products was$110 for the three months endedSeptember 30, 2020 , as compared to$122 for the same period in 2019, and for Cotempla XR-ODT, average net price per pack was$133 for the three months endedSeptember 30, 2020 , as compared to$128 for
the same period in 2019.
In the future, we will seek to generate additional revenue from product sales of our branded products and generic Tussionex. If we are unsuccessful in these efforts, our results of operations and financial position may be adversely impacted.
Research and development We expense research and development costs as they are incurred. Research and development expenses consist of costs incurred in the discovery and development of our product candidates, and primarily include:
? expenses, including salaries, benefits, and share-based compensation expense,
of employees engaged in research and development activities;
expenses incurred under third party agreements with contract research
? organizations ("CROs"), and investigative sites that conduct our clinical
trials and a portion of our pre-clinical activities;
? cost of raw materials, as well as manufacturing cost of our materials used in
clinical trials and other development testing;
? cost of facilities, depreciation and other allocated expenses;
? fees paid to regulatory authorities for review and approval of our product
candidates;
? milestone payments earned in the performance of research and development for
licensed products; and
? expenses associated with obtaining and maintaining patents.
Direct development expenses associated with our research and development
activities are allocated to our products and product candidates. Indirect costs
related to our research and development activities that are not allocated to a
product or product candidate are included in "Other Research and Development
Activities" in the table below.
42
Table of Contents
The following table summarizes our research and development expenses for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cotempla XR-ODT $ - $ 159 $ 44 $ 644
Adzenys ER 2 6 11 13
Adzenys XR-ODT - 41 152 1,753
NT0502 48 131 803 345Other Research and Development Activities (1) 1,260 1,214
3,658 4,002
$ 1,310 $ 1,551 $ 4,668 $ 6,757 (1) Includes unallocated product development cost, salaries and wages, occupancy and depreciation and amortization.
We expect that our research and development expenses will fluctuate over time as we explore new product candidates, but will decrease as a percentage of revenue if Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are commercially successful. We expect to fund our research and development expenses from our current cash and cash equivalents, sales of our commercial products and, if approved, our product candidates, and the net proceeds from any future equity or debt financings. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. Selling and marketing Selling and marketing expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, commercialization activities for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER, and trade sales expenses for our generic Tussionex. Other selling and marketing expenses include market research, brand development, advertising agency and other public relations costs, managed care relations, medical marketing, sales support tools, sales planning and market data and analysis.
In light of the restructuring announced on
General and administrative General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, for our employees in executive, finance, information technology and human resources functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses or cost of goods sold, and professional fees for business development, accounting, tax and legal services, expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs, as well as accounting and compliance costs to support the commercialization of our products, and, if approved, our product candidates. In addition, general and administrative expenses include our Paragraph IV litigation costs, if any. We anticipate that our general and administrative expenses may increase as we incur additional costs and professional fees associated with future business development activities, if any. In addition, although we have settled our recent Paragraph IV litigation cases, we may be subject to future Paragraph IV litigation costs, and could incur material legal fees in the enforcement of
our
intellectual property rights.
43
Table of Contents
Interest expense, net
Interest expense to date has consisted primarily of interest expense on senior
debt facilities, including the amortization of debt issuance costs and discounts
and the capitalized leases. We amortize debt issuance costs over the life of the
notes which are reported as interest expense in our consolidated statementsof operations. Other (expense) income, net Other income and expense includes interest earned, accretion and gains on our cash and cash equivalents and short term investments and changes resulting from the remeasurement of the fair value of our earnout and derivative liabilities. The primary objective of our investment policy is liquidity and capital preservation. RESULTS OF OPERATIONS
Three months ended
Revenues
The following table summarizes our revenues for the three months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)Net product sales$ 12,535 $ 17,540 $ (5,005) (28.5) % Net product sales were$12.5 million for the three months endedSeptember 30, 2020 , a decrease of$5.0 million , or 28.5%, compared to$17.5 million for the three months endedSeptember 30, 2019 . Sales from Cotempla XR-ODT decreased$1.6 million to$5.6 million for the three months endedSeptember 30, 2020 , compared to$7.2 million for the three months endedSeptember 30, 2019 . Sales from Adzenys XR-ODT decreased$2.6 million to$6.2 million for the three months endedSeptember 30, 2020 , compared to$8.8 million for the three months endedSeptember 30, 2019 . Sales from Adzenys ER was negligible for the three months endedSeptember 30, 2020 and$0.2 million for the three months endedSeptember 30, 2019 . Sales from our generic Tussionex decreased$0.6 million to$0.7 million for the three months endedSeptember 30, 2020 , compared to$1.3 million for the three months endedSeptember 30, 2019 . We believe that revenue may have been negatively affected by decreased utilization of our products as a result of the COVID-19 pandemic. Although the potential impact of the COVID-19 pandemic on our product revenue is unclear, we expect net product sales may continue to be negatively impacted by the COVID-19 pandemic during the fourth quarter and potentially into 2021, depending on its duration. Cost of goods sold
The following table summarizes our cost of goods sold for the three months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Cost of goods sold $ 5,120 $ 6,447 $ (1,327) (20.6) %
Cost of goods sold was $5.1 million for the three months ended September 30,
2020 , a decrease of $1.4 million , or 20.6%, compared to $6.5 million for the
three months ended September 30, 2019 . The decrease was due to lower product
cost of goods sold of $0.8 million due primarily to the lower quantity sold and
lower labor and indirect production aggregate costs of $0.6 million , compared to
the three months ended September 30, 2019 . Any decrease in product sales, as a
result of the COVID-19 pandemic or otherwise, may result in a reduction in costs
associated with the associated unit reduction in unit volume resulting in a
decrease in gross margin.
44
Table of Contents
Research and development expenses
The following table summarizes our research and development expenses for the
three months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Research and development expenses
(15.5) % Research and development expenses were$1.3 million for the three months endedSeptember 30, 2020 , a decrease of$0.2 million , or 15.5%, compared to$1.5 million for the three months endedSeptember 30, 2019 . The decrease was primarily due to a$0.3 million decrease in salary and incentive compensation expenses, a$0.2 million decrease in clinical studies expenses and a$0.1 million decrease in product development expenses. These decreases were partially offset by a$0.4 million increase in professional services expenses. It is anticipated the research and development expenses may increase as we advance our NT0502 product further into clinical development. However, although we do not currently expect the COVID-19 pandemic to affect our product development plans, any delay in our ability to access outsourced development operations and expertise as a result of the pandemic likely would result in a reduction in research and development expenses in future periods.
Selling and marketing expenses
The following table summarizes our selling and marketing expenses for the three
months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Selling and marketing expenses
(32.0) %
Selling and marketing expenses were$4.8 million for the three months endedSeptember 30, 2020 , a decrease of$2.3 million , or 32.0%, compared to$7.1 million for the three months endedSeptember 30, 2019 . This decrease was primarily driven by lower salary and incentive compensation expenses of$1.2 million , lower travel and entertainment expenses of$0.6 million , lower professional services expenses of$0.3 million , lower marketing expenses of$0.2 million and lower administrative expenses of$0.1 million , primarily resulting from reduced headcount and expenses due to the restructuring inMay 2020 . These decreases were partially offset by higher contract sales organization expenses of$0.1 million .
General and administrative expenses
The following table summarizes our general and administrative expenses for the
three months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
General and administrative expense
46.6 %
General and administrative expenses were$4.1 million for the three months endedSeptember 30, 2020 , an increase of$1.3 million , or 46.6%, compared to$2.8 million for the three months endedSeptember 30, 2019 . The increase was primarily driven by higher professional service expenses of$1.0 million and higher administrative expenses of$0.3 million . 45 Table of Contents Interest expense
The following table summarizes interest expense for the three months ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Interest expense $ 2,005 $ 1,869 $ 136 7.3 %
The total interest expense was $2.0 million for the three months ended September
30, 2020 , an increase of $0.1 million , or 7.3%, compared to $1.9 million for the
three months ended September 30, 2019 , primarily due to the increase in debt
discount amortization resulting from the amendment to the senior secured
long-term credit facility with Deerfield and an increase in interest expense
from the senior secured short-term line of credit facility with Encina, which we
entered into in October 2019 . The increase was partially offset by the decrease
in interest expense resulting from the decrease in outstanding principal under
the senior secured long-term credit facility with Deerfield . Interest expense
primarily consists of interest on the senior secured long-term credit facility
and senior secured short-term line of credit facility for the three months ended
September 30, 2020 , and interest only on the senior secured long-term credit
facility for the three months ended September 30, 2019 .
Other income (expense), net
The following table summarizes our other income (expense) for the three months
ended
Three Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Other income (expense), net $ 12 $ 251 $ (239) (95.2) %
Other income, net, was negligible for the three months endedSeptember 30, 2020 and$0.2 million for the three months endedSeptember 30, 2019 . The decrease in other income, net was primarily driven by a$0.3 million loss on disposal of assets through abandonment and lower interest income of$0.1 million , offset by$0.2 million change in fair value of derivative liabilities. Other (expense) income, net, mainly consisted of change in fair value of theDeerfield and Encina debt derivatives and interest income for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2019 , other income, net, consisted of change in fair value of theDeerfield debt derivative and interest income.
Nine months ended
Revenues
The following table summarizes our revenues for the nine months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)Net product sales$ 40,161 $ 47,817 $ (7,656) (16.0) %
Net product sales were$40.2 million for the nine months endedSeptember 30, 2020 , a decrease of$7.6 million , or 16.0%, compared to$47.8 million for the nine months endedSeptember 30, 2019 . Sales from Cotempla XR-ODT decreased$0.4 million to$19.1 million for the nine months endedSeptember 30, 2020 , compared to$19.5 million for 46 Table of Contents the nine months endedSeptember 30, 2019 . Sales from Adzenys XR-ODT decreased$6.1 million to$16.6 million for the nine months endedSeptember 30, 2020 , compared to$22.7 million for the nine months endedSeptember 30, 2019 . Sales from Adzenys ER was$0.4 million and$0.6 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Sales from our generic Tussionex decreased$0.9 million to$4.1 million for the nine months endedSeptember 30, 2020 , compared to$5.0 million for the nine months endedSeptember 30, 2019 . We believe that revenue may have been negatively affected by decreased utilization of our products as a result of the COVID-19 pandemic. Although the potential impact of the COVID-19 pandemic on our product revenue is unclear, we expect net product sales may continue to be negatively impacted by the COVID-19 pandemic during the fourth quarter and potentially into 2021, depending on its duration. Cost of goods sold
The following table summarizes our cost of goods sold for the nine months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Cost of goods sold $ 17,387 $ 17,942 $ (555) (3.1) %
Cost of goods sold was $17.4 million for the nine months ended September 30,
2020 , a decrease of $0.6 million , or 3.1%, compared to $18.0 million for the
nine months ended September 30, 2019 . Product cost of goods sold decreased by
$2.4 million due primarily to the lower quantity sold, compared to the nine
months ended September 30, 2019 , offset by a $1.8 million increase in labor and
indirect production aggregate costs resulting from an increase in unabsorbed
costs related to reduction in quantity produced in our manufacturing facilities,
in part due to the six-week reduction in hours and furlough implemented at our
facilities due to the COVID-19 pandemic. Any decrease in product sales, as a
result of the COVID-19 pandemic or otherwise, may result in a reduction in costs
associated with the associated unit reduction in unit volume and potentially an
increase in unabsorbed costs due to lower production requirements, resulting in
a decrease in gross margin.
Research and development expenses
The following table summarizes our research and development expenses for the
nine months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Research and development expenses
(30.9) % Research and development expenses were$4.6 million for the nine months endedSeptember 30, 2020 , a decrease of$2.1 million , or 30.9%, compared to$6.7 million for the nine months endedSeptember 30, 2019 . The decrease was primarily due to a$2.1 million decrease in clinical studies expenses, a$0.3 million decrease in product development expenses and a$0.3 million decrease in salary and incentive compensation expenses, partially offset by$0.5 million in milestone achievement license fees for NT0502, our product candidate for sialorrhea and a$0.1 million increase in professional services expenses. It is anticipated the research and development expenses may increase as we advance our NT0502 product further into clinical development. However, although we do not currently expect the COVID-19 pandemic to affect our product development plans, any delay in our ability to access outsourced development operations and expertise as a result of the pandemic likely would result in a reduction in research and development expenses in future periods. 47 Table of Contents
Selling and marketing expenses
The following table summarizes our selling and marketing expenses for the nine
months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Selling and marketing expenses
(17.8) %
Selling and marketing expenses were$17.7 million for the nine months endedSeptember 30, 2020 , a decrease of$3.8 million , or 17.8%, compared to$21.5 million for the nine months endedSeptember 30, 2019 . This decrease was primarily driven by lower travel and entertainment expenses of$1.3 million , lower salary and incentive compensation expenses of$0.7 million , lower marketing expenses of$0.7 million , lower professional services expenses of$0.6 million , lower team events and training expenses of$0.4 million and lower administrative expenses of$0.2 million , primarily resulting from reduced expenses due to the six-week reduction in hours implemented in the wake of the COVID-19 pandemic and also due to the restructuring inMay 2020 . These decreases were partially offset by higher contract sales organization expenses of$0.1 million .
General and administrative expenses
The following table summarizes our general and administrative expenses for the
nine months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
General and administrative expense
17.2 %
General and administrative expenses were$12.1 million for the nine months endedSeptember 30, 2020 , an increase of$1.7 million , or 17.2%, compared to$10.4 million for the nine months endedSeptember 30, 2019 . The increase was primarily driven by higher professional services expenses of$1.2 million , higher salary and incentive compensation expenses of$0.3 million and higher administrative expenses of$0.3 million , partially offset by lower travel and entertainment expenses of$0.1 million . Interest expense
The following table summarizes interest expense for the nine months ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Interest expense $ 6,131 $ 5,971 $ 160 2.7 %
The total interest expense was $6.1 million for the nine months ended September
30, 2020 , an increase of $0.1 million , or 2.7%, compared to $6.0 million for the
nine months ended September 30, 2019 , primarily due to the increase in debt
discount amortization resulting from the amendment to the senior secured
long-term credit facility with Deerfield and an increase in interest expense
from the senior secured short-term line of credit facility with Encina, which we
entered into in October 2019 . The increase was partially offset by the decrease
in interest expense resulting from the decrease in outstanding principal under
the senior secured long-term credit facility with Deerfield . Interest expense
primarily consists of interest on the senior secured long-term credit facility
and senior secured short-term line of credit facility for the nine months ended
September 30, 2020 , and interest only on the senior secured long-term credit
facility for the nine months ended September 30, 2019 .
48
Table of Contents
Other (expense) income, net
The following table summarizes our other (expense) income for the nine months
ended
Nine Months Ended
September 30, Increase % Increase
2020 2019 (Decrease) (Decrease)
(in thousands)
Other (expense) income, net $ (557) $ 1,257 $ (1,814) (144.3) %
Other expense, net, was $0.6 million for the nine months ended September 30,
2020 , an increase of $1.8 million , or 144.3%, compared to other income, net of
$1.2 million for the nine months ended September 30, 2019 . The increase in other
expense, net was primarily driven by a $1.1 million change in fair value of
Deerfield debt derivative liability, a $0.3 million loss on disposal of assets
through abandonment and a $0.4 million decrease in interest income. Other
(expense) income, net, mainly consisted of change in fair value of the Deerfield
and Encina debt derivatives and interest income for the nine months ended
September 30, 2020 . For the nine months ended September 30, 2019 , other income,
net, consisted of change in fair value of the Deerfield debt derivative and
interest income.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
From our reorganization in 2009 until our initial public offering ("IPO"), we
financed our operations primarily through private placements of common stock and
redeemable convertible preferred stock and bank and other lender financing.
Since that time, we have financed our operations principally through public
offerings of our common stock and borrowings under our lending facilities.
On
InFebruary 2017 , we entered into an agreement withEssex Capital Corporation for the sale-leaseback of newly acquired assets of up to$5.0 million to finance our capital expenditures. Each lease under this master agreement was for an initial term of 36 months and had a bargain purchase option at the end of the respective lease. Under this agreement, we entered into leases and sold assets with a total capitalized cost of$0.5 million and$2.7 million at effective interest rates of 14.3% and 14.9% onFebruary 13, 2017 andJune 30, 2017 , respectively. The Essex leases matured inFebruary 2020 andMay 2020 and all lease buy-out liabilities were satisfied. InFebruary 2017 , we closed an underwritten public offering of 5,750,000 shares of our common stock at a public offering price of$5.00 per share, which includes 750,000 shares of our common stock resulting from the underwriters' exercise of their over-allotment option at the public offering price onFebruary 17, 2017 .Deerfield , our senior lender, participated in the purchase of our common shares as part of this public offering, and as a result, was classified as a related party at the time of the corresponding transactions. The net proceeds to us from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by us were approximately$26.7 million . OnJune 30, 2017 , we closed an underwritten public offering of 4,800,000 shares of our common stock at a price of$6.25 per share for total proceeds of$30.0 million before estimated offering costs of$0.2 million . We also granted the underwriter a 30-day option to purchase up to an additional 720,000 shares of our common stock which the underwriter exercised in full onJuly 26, 2017 . The net proceeds to us from this offering, after deducting offering expenses payable by us, were approximately$34.3 million . 49 Table of Contents The shares of common stock for both theJune 2017 andFebruary 2017 offerings were offered pursuant to a shelf registration statement on Form S-3, including a base prospectus, filed by us onAugust 1, 2016 , and declared effective by theSEC onAugust 12, 2016 . This shelf registration statement covered the offering, issuance and sale by us of up to an aggregate of$125.0 million of our common stock, preferred stock, debt securities, warrants and/or units (the "2016 Shelf"). We simultaneously entered into a sales agreement withCowen and Company, LLC , as sales agent, to provide for the offering, issuance and sale by us of up to$40.0 million of our common stock from time to time in "at-the-market" offerings under the Shelf (the "Cowen Sales Agreement"). During the year endedDecember 31, 2017 , we sold an aggregate 749,639 shares of common stock under the Cowen Sales Agreement, at an average sale price of approximately$5.01 per share for gross proceeds of$3.7 million and net proceeds of$3.6 million after paying compensation to the sales agent of$0.1 million . During the year endedDecember 31, 2018 , we sold an aggregate 651,525 shares of common stock under the Sales Agreement, at an average sale price of approximately$6.25 per share for gross proceeds of$4.1 million and net proceeds of$3.9 million and paying total compensation to the sales agent and other costs of approximately$0.2 million . OnNovember 5, 2018 , we supplemented the 2016 Shelf to reduce the size of the Sales Agreement to up to$7,825,113 of our common stock (inclusive of amounts previously sold thereunder prior to the date hereof), effective onNovember 5, 2018 , which equaled the aggregate gross proceeds of sales of our common stock under the Sales Agreement as of that date, and sales of our common stock under the Cowen Sales Agreement were suspended. The Cowen Sales Agreement terminated with the expiration of the 2016 Shelf onAugust 12, 2019 . OnNovember 8, 2018 , we closed an underwritten public offering of 19,999,999 shares of our common stock at a public offering price of$2.30 per share, which includes 2,608,695 shares of our common stock resulting from the underwriters' exercise of their over-allotment option at the public offering price. The net proceeds to us from this offering, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately$43.4 million . Also, onNovember 5, 2018 , we entered into a Second Amendment to the Facility withDeerfield under which we used$7.5 million of proceeds of the offering to prepay$7.5 million of principal on the Facility otherwise due onMay 11, 2019 . Pursuant to the Second Amendment, the schedule of principal repayments under the facility was further modified to allow for the$15.0 million payment otherwise due onMay 11, 2020 to be deferred until eitherMay 2021 orMay 2022 if certain annual revenue milestones for the years endedDecember 31, 2019 andDecember 31, 2020 were achieved. The revenue milestone was not met for the period endingDecember 31, 2019 . Finally, the Second Amendment provides us with a right, subject to the terms and conditions of the Facility and certain other limitations, to make interest and principal payments through the issuance of our common stock, and providesDeerfield with a right, subject to the terms and conditions of the Facility and the amended and restated convertible notes (the "A&R Notes") issued under the Facility and certain other limitations, to convert principal under the A&R Notes into our common stock, subject to a floor ranging from 95% to 83% of$10.00 per share. OnMarch 18, 2019 , we filed a shelf registration statement covering the offering, issuance and sale by us of up to an aggregate of$100.0 million of our common stock, preferred stock, debt securities, warrants and/or units (the "2019 Shelf"), which was declared effective by theSEC onMay 1, 2019 . Effective as ofAugust 12, 2019 , the 2016 Shelf is no longer available for further primary offerings or sales of our securities. We simultaneously entered into a sales agreement withCantor Fitzgerald & Co. , as sales agent, to provide for the offering, issuance and sale by us of up to$30.0 million of our common stock from time to time in "at-the-market" offerings under the 2019 Shelf (the "Cantor Sales Agreement").
OnOctober 2, 2019 , we entered into a senior secured credit agreement withEncina Business Credit, LLC ("Encina") as agent for the lenders (the "Loan Agreement"). Under the Loan Agreement, Encina will extend up to$25.0 million in secured revolving loans to us (the "Revolving Loans"), of which up to$2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. For additional description of this Facility, see "-Loan and Credit facilities" below. OnApril 18, 2020 , we entered into a$3.6 million U.S. Small Business Administration Paycheck Protection Program Loan, (the "PPP Loan") with First Republic Bank (the "PPP Lender"). We repaid the full amount of the PPP Loan to the PPP Lender onMay 6, 2020 . 50 Table of Contents OnMay 6, 2020 , we entered in to an agreement withDeerfield to further amend the Facility (the "Fifth Amendment"), under which we deferred$5.0 million of principal ("Deferred Principal") otherwise due onMay 11, 2020 . We are required to pay the Deferred Principal in eight equal monthly installments which began onSeptember 11, 2020 and ends onApril 11, 2021 . In total, we are required to pay toDeerfield $19.4 million of principal betweenSeptember 30, 2020 andMay 11, 2021 . We paid in cash the$10.0 million principal payment otherwise due onMay 11, 2020 . For additional description of this amendment, see "-Loan and Credit facilities" below.
Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash equivalents and short-term investments are invested in bank deposits, money market funds, financials and corporate debt securities, all of which are currently providing only minimal returns. As ofSeptember 30, 2020 , we had$12.7 million in cash and cash equivalents. We believe that our working capital deficiency and our continued operating losses raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying financial statements are issued. We will need to raise further capital, through the sale of additional equity or debt securities, to support our future operations, service our debt obligations and to further execute our business plan. Alternatively, we may be required to take further measures to reduce our expenses or renegotiate our debt facilities. Our operating needs include costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully increase sales of our products, as well as market developments. Our plans that are intended to mitigate the conditions or events that raise substantial doubt about our ability to continue as a going concern are primarily focused on raising additional capital to meet our obligations and execute our business plan or otherwise to reduce our expenses or renegotiate our debt facilities. We believe that we may have access to capital resources through possible public or private equity offerings, debt financings, or other means; however, we may be unable to raise sufficient additional capital when we need it or raise capital on favorable terms, if at all. Debt financing may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness; and may contain other terms that are not favorable to our stockholders or us. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or seek to obtain funds by entering into financing agreements on unattractive terms. Alternatively, any efforts to reduce our expenses may adversely impact our ability to sustain revenue-generating activities or otherwise operate our business, and there can be no assurance that we will be able to renegotiate our debt facilities on commercially reasonable terms or at all. As a result, there can be no assurance we will be successful in implementing our plans to alleviate this substantial doubt about our ability to continue as a going concern. Cash flows The following table sets forth the primary sources and uses of cash for the periods indicated: Nine months ended September 30, Increase 2020 2019 (Decrease) (in thousands) Net cash (used in) provided by: Net cash used in operating activities$ (7,644) $ (12,019) $ 4,375 Net cash provided by (used in) investing activities 7,820 (2,727) 10,547 Net cash used in financing activities (4,262) (8,448) 4,186 Net decrease in cash and cash equivalents$ (4,086) $ (23,194) $ 19,108
Cash used in operating activities
Net cash used in operating activities during these periods primarily reflected our net losses, partially offset by changes in working capital and non-cash charges including deferred interest on debt, changes in fair value of earnout,
51
Table of Contents
derivative and warrant liabilities, share-based compensation expense, depreciation expense, amortization of patents and other intangible assets and amortization of senior debt fees.
Net cash used in operating activities was$7.6 million and$12.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The$4.4 million decrease in net cash used in operating activities was due to the$5.0 million increase in our net losses, as discussed in "Results of Operations" above, offset by a$1.8 million increase in noncash items and a$7.6 million decrease in cash usage for working capital. The net decrease in cash usage for working capital changes resulted primarily from a$7.2 million increase in cash provided from accounts receivable primarily due to timing of collections in the first nine months of 2020 and a$3.9 million decrease in cash usage for inventory, partially offset by a$2.9 million increase in cash usage for accounts payable and accrued expenses due to the timing of vendor invoicing and payments and a$0.6 million increase in cash usage for other assets mainly associated with prepaid expenses. The increase in noncash items was principally due to a$1.1 million increase in the fair value change of derivative liabilities and a$0.8 million increase in amortization of senior debt issuance costs and discounts and$0.3 million in loss on disposal of assets through abandonment, partially offset by a$0.3 million decrease in share-based compensation expenses and a$0.1 million decrease in depreciation and amortization of property and equipment.
Cash provided by (used in) investing activities
Net cash provided by (used in) investing activities is generally due to investments of cash in excess of our operating needs as well as purchase of equipment to support our research and development and manufacturing activities.
Net cash provided by investing activities of
Net cash used by investing activities of$2.7 million for the nine months endedSeptember 30, 2019 was primarily due to$9.2 million in purchases of short-term investments, partially offset by the$7.3 million of sales and maturities of short-term investments and$0.7 million of capital expenditure principally
for production equipment.
Cash used in financing activities
Net cash used in financing activities of$4.3 million for the nine months endedSeptember 30, 2020 was primarily from$10.6 million in principal payment of senior secured long-term debt,$0.8 million in principal payments of finance lease obligations and$0.2 million payment of debt financing costs related to the senior secured short-term line of credit, partially offset by a net$7.3 million draw made on the senior secured short-term line of credit. Net cash used in financing activities of$8.4 million for the nine months endedSeptember 30, 2019 was primarily due to$7.5 million principal payment of senior secured debt and$0.8 million in principal payments of finance lease obligations. Loan and Credit facilities
Principal on the Deerfield Facility was initially due in three equal annual installments beginning inMay 2019 and continuing throughMay 2021 , with a final payment of principal, interest and all other obligations under the Facility dueMay 11, 2022 . Interest is due quarterly beginning inJune 2016 , at a rate of 12.95% per year. In connection with the Facility, we paid a$1.35 million yield enhancement fee toDeerfield and approximately$0.2 million of legal fees. We had an option, which we exercised, to defer payment of each of the first four interest payments, adding such amounts to the outstanding loan principal. The aggregate$6.6 million of first year accrued interest (the "Accrued Interest") was to be paid in cash onJune 1, 2017 . 52 Table of Contents
However, onJune 1, 2017 , we entered into an amendment (the "Amendment") to the Facility to provide a one-year deferral toJune 1, 2018 , with an option for a second year of deferral toJune 1, 2019 , at our election, of payment of the Accrued Interest, provided that we met certain sales revenue targets and obtained FDA approval of certain of our product candidates on or before the Prescription Drug User Fee Act ("PDUFA") goal date. The right to payment of the$6.6 million of accrued interest was memorialized in the form of senior secured convertible notes (the "Convertible Notes") issued toDeerfield on the Amendment Date. Interest was due quarterly at a rate of 12.95% per year.Deerfield had an option to convert these notes into our common stock. OnOctober 26, 2017 ,Deerfield elected to convert the entire$6.6 million of Convertible Notes into shares of our common stock at a conversion price of$7.08 per share. This resulted in our issuance of 929,967 shares of our common stock toDeerfield on this date and the cancellation of the Convertible Notes. Per the Amendment, we will prepay all of the outstanding obligations under the Facility and the Convertible Notes upon the occurrence of a change in control or a sale of substantially all of our assets and liabilities. The Amendment increased the staggered prepayment fees for prepayments due upon a change of control or any other prepayment made or required to be made by us by 300 basis points fromJune 1, 2017 through the period ending prior toMay 11, 2020 for the change in control prepayment fees and through the period ending prior toMay 11, 2022 for any other prepayments, respectively (the "Prepayment Premiums"). Such Prepayment Premiums, as amended, ranged from 12.75% to 2%. OnNovember 5, 2018 , we entered into a Second Amendment to the Facility withDeerfield under which we used$7.5 million of proceeds of an underwritten public offering of shares of our common stock, which closed onNovember 8, 2018 , to prepay$7.5 million of principal on the Facility otherwise due onMay 11, 2019 . Pursuant to the Second Amendment, the schedule of principal repayments under the facility was further modified to allow for the$15.0 million payment otherwise due onMay 11, 2020 to be deferred until eitherMay 2021 orMay 2022 if certain annual revenue milestones for the years endedDecember 31, 2019 andDecember 31, 2020 were achieved. The revenue milestone was not met for the period endingDecember 31, 2019 . Finally, the Second Amendment provides us with a right, subject to the terms and conditions of the Facility and certain other limitations, to make interest and principal payments through the issuance of our common stock, and providesDeerfield with a right, subject to the terms and conditions of the Facility and the amended and restated convertible notes and certain other limitations, to convert outstanding principal under such notes into our common stock, subject to a floor ranging from of 95% to 83% of$10.00 per share ("Variable Price Conversion"). OnMay 6, 2020 , the Company andDeerfield entered into an amendment (the "Fifth Amendment") to the Facility pursuant to which the Company deferred$5.0 million of principal ("Deferred Principal") otherwise due onMay 11, 2020 . The Company is required to pay the Deferred Principal in eight equal monthly installments which began onSeptember 11, 2020 and ends onApril 11, 2021 . Under the Amendment,Deerfield may convert up to$10.0 million of the remaining debt due under the Facility into the Company's common stock at a conversion price of$1.50 per share. Any monthly payment otherwise due for the Deferred Principal will be deferred toMay 11, 2021 for any month in which the Company's common stock trades above$1.50 for 10 consecutive days. In addition, the Deferred Principal obligation is reduced by principal converted during the previous calendar month. A$250,000 incremental exit fee (the "Additional Exit Payment") will be due in cash when the Facility is paid in full. Pursuant to the terms of the Facility, as amended, a$10.0 million principal payment was paid in cash onMay 11, 2020 . The remaining$35.0 million of principal under the Facility is due as follows:$5.0 million in equal monthly installments of$625,000 which began inSeptember 2020 and end inApril 2021 ,$15.0 million onMay 11, 2021 (the "2021 Principal Payment"),$15.0 million onMay 11, 2022 (the "2022 Principal Payment"). In addition, upon the payment in full of the Obligations (whether voluntarily, in the connection with a Change of Control or an Event of Default and whether before, at the time of or after the Maturity Date), the Company shall pay toDeerfield an additional non-refundable exit fee in the amount of$1,000,239 inclusive of the Additional Exit Payment, which shall be due and payable in cash. Under the Fifth Amendment, upon the effectiveness thereof, the Company amended and restated the Senior Secured Convertible Notes (as amended and restated, the "Convertible Notes") to provide for the conversion of up to$10.0 million of the remaining principal due under the facility into the Company's common stock at a conversion price of$1.50 per share (the "Fixed Price Conversion"). The ability to issue shares upon a Fixed Price Conversion is also subject to customary beneficial ownership caps as described in the Convertible Notes. The Convertible Notes retained 53 Table of Contents
the Variable Price Conversion for any additional conversions, which remain subject to customary beneficial ownership caps and exchange caps as described therein. The shares of common stock issuable upon the Fixed Price Conversion and the Variable Price Conversion are referred to herein as the "Conversion Shares". Borrowings under the Facility are collateralized by substantially all of our assets, except the assets under finance lease, and we will maintain cash on deposit of not less than$5.0 million . The Facility also contains certain customary nonfinancial covenants, including limitations on our ability to transfer assets, engage in a change of control, merge or acquire with or into another entity, incur additional indebtedness and distribute assets to shareholders. Upon an event of default, the lender may declare all outstanding obligations accrued under the Facility to be immediately due and payable, and exercise its security interests and other rights. As ofSeptember 30, 2020 , we were in compliance with the covenants under the Facility. Under the Loan Agreement with Encina, the lenders will extend to us up to$25.0 million in Revolving Loans, of which up to$2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bear variable interest through maturity at the one-monthLondon Interbank Offered Rate ("LIBOR"), plus an applicable margin of 4.50%. In addition, we are required to pay an unused line fee of 0.50% of the average unused portion of the maximum revolving facility amount during the immediately preceding month. Interest is payable monthly in arrears, upon a prepayment of a loan and on the maturity date. The maturity date under the Loan Agreement isMay 11, 2022 . We may permanently terminate the Loan Agreement by prepaying all outstanding principal amounts and accrued interest at any time, subject to at least five (5) business days prior notice to the lender and the payment of a prepayment fee equal to (i) 2.0% of the aggregate principal amount prepaid if such prepayment occurs on or beforeOctober 2, 2020 , (ii) 1.0% of the aggregate principal amount prepaid if such prepayment occurs afterOctober 2, 2020 but on or beforeOctober 2, 2021 , and (iii) 0.5% of the aggregate principal amount prepaid if such prepayment occurs afterOctober 2, 2021 but beforeMay 11, 2022 . The Loan Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, require us to satisfy certain capital expenditure and other financial covenants, and restrict our ability to incur liens, incur additional indebtedness, engage in mergers and acquisitions or make asset sales without the prior written consent of the Lenders. Failure to comply with these covenants could permit the lenders to declare our obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and payable, plus any applicable additional amounts relating to a prepayment or termination, as described above. As ofSeptember 30, 2020 , we were in compliance with the covenants under the Loan Agreement. During the year endedDecember 31, 2017 , we entered into an agreement for the sale-leaseback of newly acquired assets with a total capitalized cost of$3.2 million , with bargain purchase option at the end of the lease. The approximate imputed interest rate on these leases was 14.9%. The leases matured inFebruary 2020 andMay 2020 and all lease buy-out liabilities were satisfied. In addition, during the year endedDecember 31, 2019 , we entered into an equipment lease with a total capitalized cost of$0.4 million , with a bargain purchase option at the end of the lease term. The approximate interest rate on the lease was 6.5%. See "Contractual Commitments and Obligations" below for future payments under these leases.
Capital resources and funding requirements
OnMarch 18, 2019 , we filed the 2019 Shelf which covers the offering, issuance and sale by us of up to an aggregate of$100.0 million of our common stock, preferred stock, debt securities, warrants and/or units. We simultaneously entered the Cantor Sales Agreement withCantor Fitzgerald & Co. , as sales agent, to provide for the offering, issuance and sale by us of up to$30.0 million of our common stock from time to time in "at-the-market" offerings under the 2019 Shelf. The 2019 Shelf was declared effective by theSEC onMay 1, 2019 . 54 Table of Contents
October 2, 2019 , we entered into the Loan Agreement with Encina. Under the Loan Agreement, Encina will extend up to$25.0 million in secured Revolving Loans to us, of which up to$2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no assurance that such funds will be available on terms favorable to us, if at all. We expect to continue to incur operating losses for the foreseeable future as we seek to increase net sales and profitability of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER and continue the development of our product candidates. There can be no assurance that we will ever attain sufficient levels of net sales of our commercial products to achieve profitability or that we will be successful in developing and attaining regulatory approval of our development candidates. We believe that working capital deficiency and our continued operating losses raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying financial statements are issued. See "-Sources of Liquidity" and Note 1 to the Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q for a further discussion of our liquidity and the conditions and events that raise substantial doubt regarding our ability to continue as a going concern. We have based our estimate of our future operating requirements on assumptions that may prove to be wrong, resulting in the use of our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our products and product candidates, we are unable to estimate the amount of increased capital required to become profitable. Our future funding requirements will depend on many factors, including:
? the costs of operating our sales, marketing and distribution capabilities;
the market acceptance of our products and, if approved, product candidates and
? related success in commercializing and generating sales from our products and,
if approved, product candidates, that we may develop;
? the costs of our manufacturing capabilities to support our commercialization
activities, including any costs associated with adding new capabilities;
? the costs and timing involved in obtaining regulatory approvals for our new
product candidates;
? the timing and number of product candidates for which we obtain regulatory
approval;
? the costs of maintaining, expanding and protecting our intellectual property
portfolio, including potential litigation costs and liabilities;
? the number and characteristics of new product candidates that we pursue;
the direct and indirect impact of COVID-19 on our business and operations,
? including product sales, expenses, supply chain, manufacturing, research and
development costs, clinical trials and employees; and
our ability to hire qualified employees at salary levels consistent with our
estimates to support our growth and development, including additional general
? and administrative personnel as a result of increased product sales and
commercial operations, as well as sales and marketing personnel to
commercialize our approved products.
Accordingly, we may need to obtain additional financing in the future which may
include public or private debt and equity financings and/or entrance into
product and technology collaboration agreements or licenses and asset sales.
There can be no assurance that additional capital will be available when needed
on acceptable terms, or at all. The issuance of equity securities may result in
dilution to stockholders. If we raise additional funds through the issuance of
debt securities, these securities may have rights, preferences and privileges
senior to those of our common stock and the
55
Table of Contents
terms of the debt securities could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we may have to scale back our commercial operations or limit our research and development activities, which would have a material adverse impact on our business prospects and results
of operations.
Please see "Risk Factors" for additional risks associated with our substantial capital requirements.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to the notes to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue recognition
Revenue is recognized when a customer obtains control of promised goods or
services, in an amount that reflects the consideration which we expect to
receive in exchange for those goods or services at a point in time. We make
estimates of the net sales price, including estimates of variable consideration
(e.g., savings offers, prompt payment discounts, product returns, wholesaler
fees, wholesaler chargebacks and estimated rebates) to be incurred on the
selling price of the respective product sales, and recognize the estimated
amount as revenue when control of the product transfers to the customers (e.g.,
upon delivery). Variable consideration is determined using either an expected
value or a most likely amount method. The estimate of variable consideration is
also subject to a constraint such that some or all of the estimated amount of
variable consideration will only be included in the transaction price to the
extent that it is probable that a significant reversal of revenue (in the
context of the contract) will not occur when the uncertainty associated with the
variable consideration is subsequently resolved. Estimating variable
consideration and the related constraint will require the use of significant
management judgment and other market data. We provide for prompt payment
discounts, wholesaler fees and wholesaler chargebacks based on customer
contractual stipulations. We analyze recent product return history and other
market data obtained from our third-party logistics providers ("3PLs") to
determine a reliable return rate. Additionally, we analyze historical savings
offers and rebate payments based on patient prescriptions dispensed for Adzenys
XR-ODT, Cotempla XR-ODT and Adzenys ER and information obtained from third party
providers to determine these respective variable considerations.
We sell our generic Tussionex, Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to
a limited number of pharmaceutical wholesalers, all subject to rights of return.
Pharmaceutical wholesalers buy drug products directly from manufacturers. Title
to the product passes upon delivery to the wholesalers, when the risks and
rewards of ownership are assumed by the wholesaler. These wholesalers then
resell the product to retail customers such as food, drug and mass
merchandisers.
Net product sales
Net product sales represent total gross product sales less gross to net sales
adjustments. Gross to net sales adjustments for branded Adzenys XR-ODT, Cotempla
XR-ODT and Adzenys ER include savings offers, prompt
56
Table of Contents
payment discounts, wholesaler fees, estimated wholesaler chargebacks and estimated rebates to be incurred on the selling price of the respective product sales and estimated allowances for product returns.
Gross to net sales adjustments for generic Tussionex include prompt payment discounts, estimated allowances for product returns, wholesaler fees, estimated government rebates and estimated chargebacks to be incurred on the selling price of generic Tussionex related to the respective product sales.
We recognize total gross product sales less gross to net sales adjustment as revenue based on shipments from 3PLs to our wholesaler customers.
Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns, claims for rebates and chargebacks may be different from the estimates, at which time reserves would be adjusted accordingly.
Savings offers for branded products
We offer savings programs for Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER to patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The amount of redeemed savings offers is recorded based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustment at the time revenue is recognized. Prompt payment discounts Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized. Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of our products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.
Rebates
Our branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER are subject to commercial managed care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Calculations related to rebate accruals of branded products are estimated based on information from third-party providers.
Our generic Tussionex product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. Generic Tussionex government rebates are estimated based upon rebate payment data available from sales of our generic Tussionex product over the past three years. Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated rebates will be continually monitored and may result in future adjustments
to such estimates. Product returns Wholesalers' contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustment at the
time
revenue is recognized.
57
Table of Contents
We analyzed recent branded product return data to determine a reliable return
rate for branded Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER. Generic
Tussionex product returns were estimated based upon return data available from
sales of our generic Tussionex product over the past three years.
Wholesaler chargebacks
Our products are subject to certain programs with wholesalers whereby pricing on
products is discounted below wholesaler list price to participating entities.
These entities purchase products through wholesalers at the discounted price,
and the wholesalers charge the difference between their acquisition cost and the
discounted price back to us. Estimated chargebacks are recorded as a discount
allowance against accounts receivable and as a gross to net sales adjustment at
the time revenue is recognized based on information provided by third parties.
Inventories
Inventories are measured at the lower of cost (first in, first out) or net realizable value. Inventories have been reduced by an allowance for excess and obsolete inventories. Cost elements include material, labor and manufacturing overhead. Inventories consist of raw materials, work in process and finished goods.
Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable, pre-launch inventories are expensed into research and development. Manufacturing costs for the production of Adzenys XR-ODT incurred after theJanuary 27, 2016 FDA approval date, for the production of Cotempla XR-ODT incurred afterJune 30, 2017 , following the FDA approval date ofJune 19, 2017 , and for the production of Adzenys ER incurred afterSeptember 30, 2017 , following the FDA approval date ofSeptember 15, 2017 , are being capitalized into inventory.
Research and development expenses
Research and development expenses include costs incurred in performing research and development activities, personnel related expenses, laboratory and clinical supplies, facilities expenses, overhead expenses, fees for contractual services, including preclinical studies, clinical trials and raw materials. We estimate clinical trial expenses based on the services received pursuant to contracts with research institutions and CROs which conduct and manage clinical trials on our behalf. We accrue service fees based on work performed, which relies on estimates of total costs incurred based on milestones achieved, patient enrollment and other events. The majority of our service providers invoice us in arrears, and to the extent that amounts invoiced differ from our estimates of expenses incurred, we accrue for additional costs. The financial terms of these agreements vary from contract to contract and may result in uneven expenses and cash flows. To date, we have not experienced any events requiring us to make material adjustments to our accruals for service fees. If we do not identify costs that we incurred or if we underestimate or overestimate the level of services performed, our actual expenses could differ from our estimates which could materially affect our results of operations. Adjustments to our accruals are recorded as changes in estimates become evident. In addition to accruing for expenses incurred, we may also record payments made to service providers as prepaid expenses that we will recognize as expense in future periods as services are rendered.
Share-based compensation expense
Share-based compensation awards, including grants of stock options and
restricted stock and modifications to existing stock options, are recognized in
the statement of operations based on their fair values. Compensation expense
related to stock-based awards is recognized on a straight-line basis, based on
the grant date fair value, over the requisite service period of the award, which
is generally the vesting term. The fair value of our share-based awards to
employees and directors is estimated using the Black-Scholes option pricing
model, which requires the input of subjective assumptions, including (1) the
expected stock price volatility, (2) the expected term of the award, (3) the
risk-free interest rate and (4) expected dividends.
58
Table of Contents
Under recent guidance for accounting for share-based payments, we have elected to continue estimating forfeitures at the time of grant and, if necessary, revise the estimate in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
We calculated the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. We have not paid and do not anticipate paying cash dividends. Therefore, the expected dividend rate is assumed to be 0%. Historically, the expected stock price volatility for stock option awards was based on a blended volatility rate of prior studies of historical volatility from a representative peer group of comparable companies' selected using publicly-available industry and market capitalization data and our stock price volatility. As ofJanuary 1, 2020 , we use our stock price volatility in the valuation model. The risk-free rate was based on theU.S. Treasury yield curve in effect commensurate with the expected life assumption. The average expected life of stock options was determined according to the "simplified method" as described in SAB Topic 110, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate was determined by reference to implied yields available fromU.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. We estimate the fair value of all stock option awards on the grant date by applying the Black-Scholes option pricing valuation model. Given the absence of an active market for our common stock prior to our IPO, our board of directors was required to estimate the fair value of our common stock at the time of each option grant primarily based upon valuations performed by a third-party valuation firm. After the closing of our IPO, our board of directors has determined the fair value of each share of underlying common stock based on the closing price of our common stock as reported by the NASDAQ Global Market on the date of grant. There is a high degree of subjectivity involved when using option-pricing models to estimate share-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, such a model value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we
have historically reported. Derivative liabilities We evaluate our debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives requiring separate recognition in our financial statements. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability and the change in fair value is recorded in other income (expense) in the consolidated results of operations. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within twelve months of
the balance sheet date.
When we have determined that the embedded conversion options should not be
bifurcated from their host instruments, we record, when necessary, discounts to
convertible notes for the intrinsic value of conversion options embedded in debt
instruments based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under
59
Table of Contents
these arrangements are amortized over the term of the related debt to their stated date of redemption and recorded in interest expense in the consolidated financial statements.
Intangible assets Intangible assets subject to amortization, which principally include our proprietary modified-release drug delivery technology, the costs to acquire the rights to Tussionex ANDA and patents, are recorded at cost and are amortized over the estimated lives of the assets, which primarily range from 10 to 20 years.
CONTRACTUAL COMMITMENTS AND OBLIGATIONS
The following table reflects summaries of our estimates of future material
contractual obligations as of
Total < 1 Yr. 1-3 Yrs. 3-5 Yrs. Thereafter
(In thousands)
Deerfield senior secured facility $ 40,273 $ 22,913 $ 17,360 $ - $ -
Texas facility operating lease 4,474 1,006 2,098 1,370 -
Finance leases for equipment 397 117 216 64 -
Pennsylvania facility operating lease 91 91
- - -
Equipment operating leases 81 62 19 - -
Earnout liability 30 - - - 30
$ 45,346 $ 24,189 $ 19,693 $ 1,434 $ 30
We had borrowed$60.0 million under the Deerfield Facility. OnNovember 5, 2018 , we amended the facility and prepaid$7.5 million otherwise due inMay 2019 . We further amended the facility onMay 6, 2020 and deferred$5.0 million otherwise due onMay 11, 2020 . Pursuant to the terms of the Facility, as amended, we made a$7.5 million principal payment in 2019 and a further$10.6 million in principal payments during the nine months endedSeptember 30, 2020 , and we currently have a principal balance of$34.4 million of senior secured credit as ofSeptember 30, 2020 . The payments above are inclusive of related interest amounts as ofSeptember 30, 2020 . In addition to the commitments shown above, in response to a lawsuit brought against us byShire LLC ("Shire") for infringement of certain of Shire's patents, we entered into a Settlement Agreement and an associated License Agreement (the "2014 License Agreement") with Shire for a non-exclusive license to certain patents for certain activities with respect to our New Drug Application (the "NDA") No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet inJuly 2014 . Under the terms of the 2014 License Agreement, following FDA approval of our NDA for Adzenys XR-ODT, in the first quarter of 2016, we paid a lump sum, non-refundable license fee to Shire of an amount less than$1.0 million . This license fee was capitalized and is being amortized over the life of the longest associated patent. We are paying a single digit royalty to Shire on our net sales of Adzenys XR-ODT during the life of the licensed patents. OnMarch 6, 2017 , after our NDA submission for Adzenys ER requiring a Paragraph IV certification notification to the producer of Adderall XR, Shire Pharmaceuticals, in accordance with the Hatch-Waxman Amendments, we entered into a License Agreement (the "2017 License Agreement") with Shire. Pursuant to this agreement, Shire granted us a non-exclusive license to certain patents owned by Shire for certain activities with respect to our NDA No. 204325 for an extended-release amphetamine liquid suspension. Under the terms of the 2017 License Agreement, following FDA approval of our NDA for Adzenys ER, inOctober 2017 , we paid a lump sum, non-refundable license fee to Shire of an amount less than$1.0 million . This license fee was capitalized and is being amortized over the life of the longest associated patent. We are paying a single digit royalty to Shire on our net sales of Adzenys ER during the life of the licensed patents.
Due to the uncertainty of the amount and timing of the royalty payments for Adzenys XR-ODT and Adzenys ER, we have not presented such amounts in the table above. The license fees are paid and recorded as an intangible asset
60
Table of Contents
and amortized over the term of the license. The royalties are being recorded as cost of goods sold in the same period as the net sales upon which they are calculated.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC , including any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the notes to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of recent accounting pronouncements.
JOBS ACT InApril 2012 , the Jumpstart Our Business Startups Act (the "JOBS Act"), was enacted inthe United States . Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
© Edgar Online, source
