SUPERNUS PHARMACEUTICALS, INC. - Quarter Report: 2014 June (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 June 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: 0-50440

 

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 July 31, 2014 was 42,921,376.

 

 

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SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED June 30, 2014

TABLE OF CONTENTS

 

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013		1
Consolidated Statements of Operations for the three and six month periods ended June 30, 2014 and 2013 (Unaudited)		2
Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30, 2014 and 2013 (Unaudited)		3
Consolidated Statements of Cash Flows for the six month periods ended June 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		25
Item 3. Defaults Upon Senior Securities		25
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)

 

		June 30,			December 31,
		2014			2013
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	11,956		$	32,980
Marketable securities		35,314			49,211
Accounts receivable, net		10,854			5,054
Interest receivable		496			483
Inventories		10,101			7,152
Prepaid expenses and other current assets		3,058			2,052
Deferred financing costs, current		202			229
Total current assets		71,981			97,161
Property and equipment, net		2,590			2,554
Intangible assets, net		3,083			1,158
Long term marketable securities		15,462			8,756
Other non-current assets		361			361
Deferred financing costs, long-term		713			1,005
Total assets		$	94,190		$	110,995
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	19,044		$	18,314
Deferred product revenue, net		—			7,882
Deferred licensing revenue		143			204
Total current liabilities		19,187			26,400
Deferred licensing revenue, net of current portion		1,345			1,417
Convertible notes, net of discount		28,671			34,393
Other non-current liabilities		2,784			2,677
Derivative liabilities		8,834			12,644
Total liabilities		60,821			77,531
Stockholders’ equity:
Common stock, $0.001 par value, 130,000,000 shares authorized at June 30, 2014 and December 31, 2013; 42,139,463 and 39,983,437 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		42			40
Additional paid-in capital		224,196			211,952
Accumulated other comprehensive income		1			—
Accumulated deficit		(190,870		)	(178,528		)
Total stockholders’ equity		33,369			33,464
Total liabilities and stockholders’ equity		$	94,190		$	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 June 30,						Six Months ended June 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Revenue
Net product sales		$	27,609		$	154		$	36,604		$	154
Licensing revenue		2,066			127			2,152			274
Total revenue		29,675			281			38,756			428
Costs and expenses
Cost of product sales		1,661			4			2,155			4
Research and development		4,677			3,542			9,159			8,065
Selling, general and administrative		19,581			12,214			37,109			25,747
Total costs and expenses		25,919			15,760			48,423			33,816
Operating income (loss)		3,756			(15,479		)	(9,667		)	(33,388		)
Other income (expense)
Interest income		85			55			187			107
Interest expense		(1,278		)	(2,144		)	(2,485		)	(2,872		)
Changes in fair value of derivative liabilities		678			(8,619		)	1,355			(8,540		)
Loss on extinguishment of debt		(39		)	(1,162		)	(1,732		)	(1,162		)
Other income		—			(8		)	—			84
Total other expense		(554		)	(11,878		)	(2,675		)	(12,383		)
Net income (loss)		$	3,202		$	(27,357	)	$	(12,342	)	$	(45,771	)
Income (loss) per common share:
Basic		$	0.08		$	(0.89	)	$	(0.30	)	$	(1.48	)
Diluted		$	0.08		$	(0.89	)	$	(0.30	)	$	(1.48	)
Weighted-average number of common shares:
Basic		42,056,285			30,897,075			41,595,232			30,886,309
Diluted		42,372,137			30,897,075			41,595,232			30,886,309

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

		Three Months ended June 30,						Six Months ended June 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Net income (loss)		$	3,202		$	(27,357	)	$	(12,342	)	$	(45,771	)
Other comprehensive income (loss):
Unrealized net gain (loss) on marketable securities		—			(147		)	1			(178		)
Other comprehensive income (loss)		—			(147		)	1			(178		)
Comprehensive income (loss)		$	3,202		$	(27,504	)	$	(12,341	)	$	(45,949	)

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

		Six Months ended June 30,
		2014			2013
		(unaudited)
Cash flows from operating activities
Net loss		$	(12,342	)	$	(45,771	)
Adjustments to reconcile loss to net cash used in operating activities:
Loss on extinguishment of debt		1,732			1,162
Change in fair value of derivative liabilities		(1,355		)	8,540
Unrealized gain (loss) on marketable securities		1			(178		)
Depreciation and amortization		460			326
Amortization of deferred financing costs and debt discount		1,087			887
Stock-based compensation expense		1,319			769
Changes in operating assets and liabilities:
Accounts receivable		(5,800		)	(537		)
Interest receivable		(13		)	(127		)
Inventories		(2,949		)	(3,163		)
Prepaid expenses and other assets		(1,006		)	(918		)
Accounts payable and accrued expenses		730			1,341
Deferred product revenue, net		(7,882		)	3,967
Deferred licensing revenue		(133		)	246
Other non-current liabilities		107			478
Net cash used in operating activities		(26,044		)	(32,978		)
Cash flows from investing activities
Purchases of marketable securities		(19,902		)	(61,004		)
Sales and maturities of marketable securities		27,093			24,413
Purchases of property and equipment, net		(381		)	(1,037		)
Capitalized patent defense costs		(2,040		)	—
Net cash provided by (used in) investing activities		4,770			(37,628		)
Cash flows from financing activities
Proceeds from issuance of common stock		251			2,153
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		—			(3,598		)
Net cash provided by financing activities		250			64,211
Net change in cash and cash equivalents		(21,024		)	(6,395		)
Cash and cash equivalents at beginning of period		32,980			40,302
Cash and cash equivalents at end of period		$	11,956		$	33,907
Supplemental cash flow information:
Cash paid for interest		$	1,502		$	975
Noncash financial activity:
Conversion of convertible notes		$	10,676		$	—
Initial value of interest make-whole derivative
issued in connection with the convertible debt		$	—		$	9,270

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements

For the Three and Six Months Ended June 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 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 six months ended June 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 June 30, 2014 or December 31, 2013.  The Company recorded an allowance of approximately $0.2 million and $0.1 million for expected prompt-pay discounts as of June 30, 2014 and December 31, 2013, respectively.

 

Revenue Recognition on Product Sales

 

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title of 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 of 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 estimated sales deductions, at the time of shipment to wholesalers.

 

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Change in Accounting Estimate

 

During the second quarter of 2014 the Company changed an accounting estimate regarding revenue recognition on product sales for Trokendi XR, which was launched in August 2013.  The Company now recognizes revenue from Trokendi XR based on shipments to wholesalers, because the Company now has sufficient historical experience to estimate sales deductions.  Previously, revenue was recognized based on prescriptions filled during the prior quarter.  The effect of this change was to increase net product sales by $15.4 million and cost of product sales by $0.9 million for the three and six month periods ended June 30, 2014.

 

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 $2.0 million in milestone revenue during the three and six months ended June 30, 2014 and no milestone revenue during the three and six months ended June 30, 2013.

 

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).

 

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

 

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

 

					Fair Value Measurements at
					June 30, 2014
					(unaudited)
								Significant
		Total Carrying			Quoted Prices			Other			Significant
		Value at			in Active			Observable			Unobservable
		June 30,			Markets			Inputs			Inputs
		2014			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and cash equivalents		$	11,956		11,956			—			—
Marketable securities		35,314			—			35,314			—
Long term marketable securities		15,462			—			15,462			—
Marketable securities - restricted (SERP)		305			—			305			—
Total assets at fair value		$	63,037		$	11,956		$	51,081		$	—
Liabilities:
Derivative liabilities		$	8,834		$	—		$	—		$	8,834

 

					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 2017 (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 June 30, 2014:

 

Exercise Price		$4 - $5 per share
Volatility		50%
Stock Price as of June 30, 2014		$10.95 per share
Term		6.5 - 7.5 years
Dividend Yield		0.0%
Risk-Free Rate		2.07% - 2.26%

 

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

 

Volatility		45%
Stock Price as of June 30, 2014		$10.95 per share
Credit Spread		1041 bps
Term		2.8 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 June 30, 2014 that are included in the Non-Current Liabilities section of the Consolidated Balance Sheets, in thousands:

 

		Six Months ended
		June 30, 2014
		(unaudited)
Balance at December 31, 2013		$	12,644
Changes in fair value of derivative liabilities included in earnings		(1,355		)
Reduction due to conversion of debt to equity		(2,455		)
Balance at June 30, 2014		$	8,834

 

The carrying value, face value and estimated fair value of the Notes was approximately $28.7 million, $39.8 million and $90.2 million, respectively, as of June 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 June 30, 2014, unaudited:

 

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	50,775		$	30		$	(29	)	$	50,776

 

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

 

		June 30,  2014
		(unaudited)
Less Than 1 Year		$	35,314
1 - 5 Years		15,462
Greater Than 5 Years		—
Total		$	50,776

 

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:

 

		June 30,			December 31,
		2014			2013
		(unaudited)
Raw materials		$	4,799		$	3,897
Work in process		2,280			1,347
Finished goods		3,022			1,908
Total		$	10,101		$	7,152

 

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5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

		June 30,			December 31,
		2014			2013
		(unaudited)
Computer equipment		$	847		$	798
Software		225			209
Lab equipment and furniture		5,065			4,809
Leasehold improvements		2,389			2,329
		8,526			8,145
Less accumulated depreciation and amortization		(5,936		)	(5,591		)
		$	2,590		$	2,554

 

Depreciation expense on property and equipment was approximately $176,000 and $345,000 for the three and six months ended June 30, 2014, respectively, and $105,000 and $211,000 for the three and six months ended June 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 (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:

 

				June 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		$	1,953		$	2,292		$	1,838
Patent defense costs(1)				$	2,744		$	—		$	704		$	—

 

(1)           Amortization of capitalized patent defense costs will begin upon successful outcome of the on-going litigation.  Three U.S. patents have been issued covering Oxtellar XR, providing patent protection through 2027.

 

Amortization expense was approximately $57,000 for each of the three month periods ended June 30, 2014 and 2013 and was approximately $115,000 for each of the six month periods ended June 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 June 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:

 

		June 30,			December 31,
		2014			2013
		(unaudited)
Accrued clinical trial and clinical supply costs		$	427		$	2,253
Accrued compensation		5,415			5,016
Accrued sales rebates and allowances		4,823			1,903
Accrued product costs		2,057			2,503
Accrued sales and marketing expenses		1,309			1,077
Accrued interest		498			619
Other accrued liabilities		2,701			1,801
		$	17,230		$	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 June 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)		(9,707		)
Conversion of debt to equity - accretion of debt discount (unaudited)		2,977
Accretion of debt discount (unaudited)		1,008
June 30, 2014 carrying value (unaudited)		$	28,671

 

During the six month period ended June 30, 2014, approximately $9.7 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 1.8 million shares of common stock in conversion of the principal amount of the Notes.  The Company issued an additional 0.3 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 an approximately $1.7 million loss on extinguishment of debt during the six months ended June 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

 

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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 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, and non-vested stock was as follows, in thousands:

 

		Three Months ended June 30,						Six Months ended June 30,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Research and development		$	162		$	131		$	320		$	239
Selling, general and administrative		448			301			897			530
Total		$	610		$	432		$	1,217		$	769

 

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)		656,285		$	9.23
Exercised (unaudited)		(10,179	)	$	2.98
Forfeited or expired (unaudited)		(32,720	)	$	7.49
Outstanding, June 30, 2014 (unaudited)		2,076,429		$	7.91		8.52
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 June 30, 2014
Vested and expected to vest (unaudited)		2,022,291		$	7.89		8.50
Exercisable (unaudited)		515,995		$	6.23		7.36

 

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10.  Income (Loss) Per Share

 

Basic income/(loss) per common share is determined by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SAR and warrants, and the if-converted method (which reflects a calculated loss on debt extinguishment) is used to determine the dilutive effect of the Company’s Notes. The following common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive for the periods ended June 30, 2014 and 2013:

 

		Three Months ended June 30,				Six Months ended June 30,
		2014		2013		2014		2013
		(unaudited)				(unaudited)
Shares underlying Convertible Senior Secured Notes		7,548,143		11,011,300		7,733,266		5,536,068
Warrants to purchase common stock		20,571		9,543		20,928		12,592
Stock options, stock appreciation rights, and non-vested stock options		—		137,349		259,478		160,061

 

The following table sets forth the computation of basic and diluted net income per share for the quarter ended June 30, 2014, unaudited, in thousands, except share and per share amounts:

 

		Three Months ended June 30,
		2014
		(unaudited)
Numerator, in thousands:
Net income		$	3,202
Denominator:
Weighted average shares outstanding, basic		42,056,285
Effect of dilutive potential common shares:
Stock options, Stock appreciation rights, and non-vested stock options		315,852
Total dilutive potential common shares		315,852
Weighted average shares outstanding, diluted		42,372,137
Net income per share, basic		$	0.08
Net income per share, diluted		$	0.08

 

11. Subsequent Events

 

In July 2014, the Company entered into a Royalty Interest Acquisition Agreement with HealthCare Royalty Partners III, L.P. (HC Royalty).  Pursuant to this Agreement, HC Royalty made a $30.0 million cash payment to the Company in consideration for acquiring from the Company certain royalty and milestone rights related to the commercialization of Orenitram™ (treprostinil) Extended-Release Tablets by the Company’s partner United Therapeutics Corporation. The Company will retain full ownership of the royalty rights after a certain threshold has been reached per the terms of the Agreement. The Company anticipates using these funds primarily to strengthen the balance sheet and enhance financial flexibility.

 

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