SUPERNUS PHARMACEUTICALS, INC. - Quarter Report: 2014 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

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)

 

 

 

(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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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 October 31, 2014 was 42,930,326.

 

 

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SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

			Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
	Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013		1
	Consolidated Statements of Operations for the three and nine month periods ended September 30, 2014 and 2013 (Unaudited)		2
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2014 and 2013 (Unaudited)		3
	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2014 and 2013 (Unaudited)		4
	Notes to Consolidated Financial Statements (Unaudited)		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			24
Item 4. Controls and Procedures			24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Mine Safety Disclosures			26
Item 5. Other Information			26
Item 6. Exhibits			26
SIGNATURES			27

 

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PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		September 30,			December 31,
		2014			2013
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	37,780		$	32,980
Marketable securities		34,783			49,211
Accounts receivable, net		15,303			5,054
Interest receivable		493			483
Inventories		11,145			7,152
Prepaid expenses and other current assets		3,298			2,052
Deferred financing costs, current		166			229
Total current assets		102,968			97,161
Property and equipment, net		2,500			2,554
Intangible assets, net		4,135			1,158
Long term marketable securities		15,763			8,756
Other non-current assets		360			361
Deferred financing costs, long-term		599			1,005
Total assets		$	126,325		$	110,995
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	21,983		$	18,314
Deferred product revenue, net		—			7,882
Deferred licensing revenue		143			204
Total current liabilities		22,126			26,400
Deferred licensing revenue, net of current portion		1,310			1,417
Convertible notes, net of discount		26,497			34,393
Other non-current liabilities		3,015			2,677
Derivative liabilities		7,258			12,644
Total liabilities		60,206			77,531
Stockholders’ equity:
Common stock, $0.001 par value, 130,000,000 shares authorized at September 30, 2014 and December 31, 2013; 42,929,826 and 39,983,437 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		43			40
Additional paid-in capital		229,123			211,952
Accumulated other comprehensive income		(35		)	—
Accumulated deficit		(163,012		)	(178,528		)
Total stockholders’ equity		66,119			33,464
Total liabilities and stockholders’ equity		$	126,325		$	110,995

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

		Three Months ended September 30,						Nine Months ended September 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Revenue
Net product sales		$	22,452		$	1,130		$	59,056		$	1,283
Revenue from royalty agreement		30,000			—			30,000			—
Licensing revenue		36			127			2,188			401
Total revenue		52,488			1,257			91,244			1,684
Costs and expenses
Cost of product sales		1,321			33			3,476			37
Research and development		4,657			3,779			13,816			11,844
Selling, general and administrative		17,343			14,620			54,452			40,366
Total costs and expenses		23,321			18,432			71,744			52,247
Operating income (loss)		29,167			(17,175		)	19,500			(50,563		)
Other income (expense)
Interest income		78			96			265			203
Interest expense		(1,289		)	(2,870		)	(3,774		)	(5,742		)
Changes in fair value of derivative liabilities		760			(4,153		)	2,115			(12,692		)
Loss on extinguishment of debt		(860		)	—			(2,592		)	(1,162		)
Other income		2			6			2			89
Total other expense		(1,309		)	(6,921		)	(3,984		)	(19,304		)
Net income (loss)		$	27,858		$	(24,096	)	$	15,516		$	(69,867	)
Income (loss) per common share:
Basic		$	0.65		$	(0.78	)	$	0.37		$	(2.26	)
Diluted		$	0.39		$	(0.78	)	$	0.13		$	(2.26	)
Weighted-average number of common shares:
Basic		42,900,269			30,941,404			42,035,025			30,904,876
Diluted		50,825,633			30,941,404			50,378,186			30,904,876

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

		Three Months ended September 30,						Nine Months ended September 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Net income (loss)		$	27,858		$	(24,096	)	$	15,516		$	(69,867	)
Other comprehensive income (loss):
Unrealized net gain (loss) on marketable securities		(36		)	154			(35		)	(24		)
Other comprehensive income (loss)		(36		)	154			(35		)	(24		)
Comprehensive income (loss)		$	27,822		$	(23,942	)	$	15,481		$	(69,891	)

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

		Nine Months ended September 30,
		2014			2013
		(unaudited)
Cash flows from operating activities
Net income (loss)		$	15,516		$	(69,867	)
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Loss on extinguishment of debt		2,592			1,162
Change in fair value of derivative liabilities		(2,115		)	12,692
Unrealized gain (loss) on marketable securities		(35		)	(24		)
Depreciation and amortization		701			526
Amortization of deferred financing costs and debt discount		1,599			2,070
Stock-based compensation expense		2,023			1,260
Changes in operating assets and liabilities:
Accounts receivable		(10,249		)	(7,208		)
Interest receivable		(10		)	(319		)
Inventories		(3,993		)	(4,036		)
Prepaid expenses and other assets		(1,246		)	(822		)
Accounts payable and accrued expenses		3,669			4,339
Deferred product revenue, net		(7,882		)	10,365
Deferred licensing revenue		(168		)	869
Other non-current liabilities		337			465
Net cash provided by (used in) operating activities		739			(48,528		)
Cash flows from investing activities
Purchases of marketable securities		(34,566		)	(78,968		)
Sales and maturities of marketable securities		41,987			47,666
Purchases of property and equipment, net		(475		)	(1,414		)
Capitalized patent defense costs		(3,149		)	(306		)
Net cash provided by (used in) investing activities		3,797			(33,022		)
Cash flows from financing activities
Proceeds from issuance of common stock		265			2,164
Proceeds from convertible debt issuance		—			90,000
Cash settlement of debt to equity conversion		(1		)	—
Repayment of secured notes payable		—			(24,344		)
Financing costs and underwriters discounts		—			(3,627		)
Net cash provided by financing activities		264			64,193
Net change in cash and cash equivalents		4,800			(17,357		)
Cash and cash equivalents at beginning of period		32,980			40,302
Cash and cash equivalents at end of period		$	37,780		$	22,945
Supplemental cash flow information:
Cash paid for interest		$	1,502		$	975
Noncash financial activity:
Conversion of convertible notes		$	14,887		$	—
Initial value of interest make-whole derivative issued in connection with the convertible debt		$	—		$	9,270
Initial value of conversion option reported in equity		$	—		$	22,336

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements

For the Three and Nine months ended September 30, 2014 and 2013
(unaudited)

 

1.  Organization and Business

 

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

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s unaudited consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd. These are 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 the 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, 2013.

 

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

 

The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the Company’s future financial results.

 

Accounts Receivable, net

 

Accounts receivable are reported in the consolidated balance sheets at outstanding amounts, less allowances for doubtful accounts and prompt pay 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. No accounts have been written off in 2014 or 2013.  No allowance for uncollectible receivables is recorded at September 30, 2014 or December 31, 2013.  The Company recorded an allowance of approximately $0.3 million and $0.1 million for expected prompt-pay discounts as of September 30, 2014 and December 31, 2013, respectively.

 

Revenue Recognition

 

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

 

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors will take title and ownership to the product upon physical receipt of the product and then distribute our products to pharmacies.  Beginning in the fourth quarter of 2013, the Company began recognizing revenue for Oxtellar XR, net of estimated sales deductions, at the time of shipment to wholesalers. Beginning in the second quarter of 2014, the Company began recognizing revenue for Trokendi XR, net of

 

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estimated sales deductions, at the time of shipment to wholesalers.  Prior to these changes in accounting estimate, the Company recognized revenue once delivery had occurred and all sales deductions were known or reasonably estimated.

 

In the third quarter of 2014, the Company recognized $30.0 million in revenue from a royalty agreement related to HealthCare Royalty Partners III, L.P.’s purchase of certain of the Company’s rights under the Royalty Interest Acquisition Agreement with United Therapeutics Corporation related to the commercialization of Orenitram.  The Company determined to recognize this revenue immediately because (1) the executed contract constituted persuasive evidence of an arrangement, (2) the delivery of the license occurred and the Company has no current or future performance obligations, (3) the total consideration for the license amendment was fixed and known at the time of its execution and there were no rights of return, and (4) the cash was received and is non-refundable.

 

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 revenue contingent upon the achievement of a milestone in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive.  The Company recorded zero and $2.0 million in milestone revenue during the three and nine months ended September 30, 2014, respectively, and no milestone revenue during the three and nine months ended September 30, 2013.

 

Income Taxes

 

During the nine months ended September 30, 2014, the Company had pre-tax net income of $15.5 million. The provision for Federal and state income taxes related to such pre-tax net income has been offset by the utilization of available net operating loss carryovers. Accordingly, the Company reduced its valuation allowance against its deferred tax assets and recognized an income tax benefit in an amount equal to the provision for income taxes.

 

Recently Issued Accounting Pronouncements

 

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

 

3.  Fair Value of Financial Instruments

 

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

 

The Company reports assets and liabilities that are measured at fair value using a three-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 or liabilities 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).

 

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

 

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

 

					Fair Value Measurements at
					September 30, 2014
					(unaudited)
								Significant
		Total Carrying			Quoted Prices			Other			Significant
		Value at			in Active			Observable			Unobservable
		September 30,			Markets			Inputs			Inputs
		2014			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and cash equivalents		$	37,780		37,780			—			—
Marketable securities		34,783			—			34,783			—
Long term marketable securities		15,763			—			15,763			—
Marketable securities - restricted (SERP)		305			—			305			—
Total assets at fair value		$	88,631		$	37,780		$	50,851		$	—
Liabilities:
Derivative liabilities		$	7,258		$	—		$	—		$	7,258

 

						Fair Value Measurements at
						December 31, 2013
										Significant
		Total Carrying				Quoted Prices				Other				Significant
		Value at				in Active				Observable				Unobservable
		December 31,				Markets				Inputs				Inputs
		2013				(Level 1)				(Level 2)				(Level 3)
Assets:
Cash and cash equivalents		$		32,980		$		32,980		$		—		$	—
Marketable securities		49,211				—				49,211				—
Long term marketable securities		8,756				—				8,756				—
Marketable securities - restricted (SERP)		305				—				305				—
Total assets at fair value		$		91,252		$		32,980		$		58,272		$	—
Liabilities:
Derivative liabilities		$		12,644		$		—		$		—		$	12,644

 

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 money market funds and U.S. Treasury and government agency debt securities with quoted prices in active markets.

 

Level 2 assets include mutual funds in which the SERP (Supplemental Executive Retirement Plan) assets are invested, 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.

 

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Level 3 liabilities include the fair market value of the interest make-whole liability associated with the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes) and the outstanding warrants to purchase Common Stock, which are recorded as derivative liabilities. The fair value of the common stock warrant liability was calculated using a Monte-Carlo simulation with a Black-Scholes model with the following assumptions as of September 30, 2014:

 

Exercise Price		$4 - $5 per share
Volatility		50%
Stock Price as of September 30, 2014		$8.69 per share
Term		6.3 - 7.2 years
Dividend Yield		0.0%
Risk-Free Rate		2.03% - 2.18%

 

The fair value of the interest make-whole liability of the Notes was calculated using a binomial-lattice model with the following key assumptions as of September 30, 2014:

 

Volatility		45%
Stock Price as of September 30, 2014		$8.69 per share
Credit Spread		1254 bps
Term		2.6 years
Dividend Yield		0.0%

 

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

 

Changes in the fair value of the warrants and the interest make-whole liability are recognized as a component of Other Income (Expense) in the Consolidated Statements of Operations. The following table presents information about the Company’s Level 3 liabilities as of December 31, 2013 and September 30, 2014 that are included in the Non-Current Liabilities section of the Consolidated Balance Sheets, in thousands:

 

		Nine Months ended
		September 30, 2014
		(unaudited)
Balance at December 31, 2013		$	12,644
Changes in fair value of derivative liabilities included in earnings		(2,115		)
Reduction due to conversion of debt to equity		(3,271		)
Balance at September 30, 2014		$	7,258

 

The carrying value, face value and estimated fair value of the Notes was approximately $26.5 million, $36.1 million and $65.3 million, respectively, as of September 30, 2014. The fair value was estimated based on actual trade information as well as quoted prices provided by bond traders, which would be characterized within Level 2 of the fair value hierarchy.  This fair value amount gives recognition to the value of the interest make-whole liability and the value of the conversion option.  These items have been accounted for as derivative liabilities and additional paid-in-capital, respectively.

 

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

 

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Unrestricted marketable securities held by the Company were as follows, in thousands:

 

At September 30, 2014, unaudited:

 

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	50,581		$	14		$	(49	)	$	50,546

 

At December 31, 2013:

 

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	57,967		$	33		$	(33	)	$	57,967

 

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

 

		September 30, 2014
		(unaudited)
Less Than 1 Year		$	34,783
1 - 5 Years		15,763
Greater Than 5 Years		—
Total		$	50,546

 

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.

 

4.  Inventories

 

Inventories consist of the following, in thousands:

 

		September 30,			December 31,
		2014			2013
		(unaudited)
Raw materials		$	4,502		$	3,897
Work in process		3,190			1,347
Finished goods		3,453			1,908
Total		$	11,145		$	7,152

 

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5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

		September 30,			December 31,
		2014			2013
		(unaudited)
Computer equipment		$	858		$	798
Software		225			209
Lab equipment and furniture		5,114			4,809
Leasehold improvements		2,423			2,329
		8,620			8,145
Less accumulated depreciation and amortization		(6,120		)	(5,591		)
		$	2,500		$	2,554

 

Depreciation expense on property and equipment was approximately $184,000 and $529,000 for the three and nine months ended September 30, 2014, respectively, and $143,000 and $355,000 for the three and nine months ended September 30, 2013, respectively.

 

6.  Intangible Assets

 

The Company purchased certain patents from Shire Laboratories, Inc. pursuant to a 2005 purchase agreement.  These patents are being amortized over the weighted average life of the patents purchased in that transaction.  Patent defense costs have been incurred in connection with complaints related to patents for Oxtellar XR and Trokendi XR (see Part II, Item I, Legal Proceedings). The following sets forth the gross carrying amount and related accumulated amortization of these intangible assets, in thousands:

 

				September 30, 2014
				(unaudited)						December 31, 2013
		Weighted-		Gross Carrying			Accumulated			Gross Carrying			Accumulated
		Average Life		Amount			Amortization			Amount			Amortization
Purchased patents		10.0		$	2,292		$	2,010		$	2,292		$	1,838
Patent defense costs				$	3,853		$	—		$	704		$	—

 

Amortization of capitalized patent defense costs will begin upon successful outcome of the on-going litigation.  Four U.S. patents have been issued covering Oxtellar XR and three U.S. patents have been issued covering Trokendi XR, providing patent protection through at least 2027.

 

Amortization expense was approximately $57,000 for each of the three month periods ended September 30, 2014 and 2013 and was approximately $172,000 for each of the nine month periods ended September 30, 2014 and 2013. The estimated annual aggregate amortization expense through December 31, 2015 is $229,000.

 

There were no indicators of impairment identified at September 30, 2014 or December 31, 2013.

 

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7.  Accrued Liabilities

 

Accrued liabilities are comprised of the following (and are included within the accounts payable and accrued expenses line item on the consolidated balance sheets), in thousands:

 

		September 30,			December 31,
		2014			2013
		(unaudited)
Accrued clinical trial and clinical supply costs		$	877		$	2,253
Accrued compensation		5,011			5,016
Accrued sales rebates and allowances		7,298			1,903
Accrued product costs		1,909			2,503
Accrued sales and marketing expenses		807			1,077
Accrued interest		1,292			619
Other accrued liabilities		3,216			1,801
		$	20,410		$	15,172

 

Accrued clinical trial and clinical supply costs consist primarily of investigator fees, contract research organization services, contract manufacturing, pass-through costs and laboratory costs.  Other accrued liabilities consist primarily of professional fees, distribution fees, and miscellaneous accrued expenses.

 

8.   Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through September 30, 2014, 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		(40,492		)
Conversion of debt to equity - accretion of debt discount		13,833
Accretion of debt discount		2,658
December 31, 2013 carrying value		34,393
Conversion of debt to equity - principal (unaudited)		(13,449		)
Conversion of debt to equity - accretion of debt discount (unaudited)		4,093
Accretion of debt discount (unaudited)		1,460
September 30, 2014 carrying value (unaudited)		$	26,497

 

During the nine month period ended September 30, 2014, approximately $13.4 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 2.5 million shares of common stock in conversion of the principal amount of the Notes.  The Company issued an additional 0.4 million 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 $2.6 million on extinguishment of debt during the nine months ended September 30, 2014.

 

9. 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 4,000,000 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

 

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at the grant date; those option awards generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten-year contractual terms. The 2012 Plan provides for the issuance of Common Stock of the Company upon the exercise of stock options. Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, potential Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

 

		Three Months ended September 30,						Nine Months ended September 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Research and development		$	196		$	134		$	559		$	373
Selling, general and administrative		508			357			1,464			887
Total		$	704		$	491		$	2,023		$	1,260

 

The following table summarizes stock option and SAR activity:

 

							Weighted-
				Weighted-			Average
		Number of		Average			Remaining
		Options and SAR		Exercise Price			Contractual Term
Outstanding, December 31, 2013		1,463,043		$	7.27		8.51
Granted (unaudited)		672,185		$	9.21
Exercised (unaudited)		(14,814	)	$	2.95
Forfeited or expired (unaudited)		(40,620	)	$	7.56
Outstanding, September 30, 2014 (unaudited)		2,079,794		$	7.93		8.28
As of December 31, 2013
Vested and expected to vest		1,425,752		$	7.26		8.50
Exercisable		256,227		$	4.47		6.44
As of September 30, 2014
Vested and expected to vest (unaudited)		2,032,896		$	7.91		8.27
Exercisable (unaudited)		546,672		$	6.55		7.18

 

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