NEOS THERAPEUTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K) | MarketScreener

You should read the following discussion and analysis of our financial condition
and results of operations together with the “Item 6. Selected Consolidated
Financial Data” and the consolidated financial statements and related notes that
are included elsewhere in this Annual Report on Form 10­K. This discussion
contains forward­looking statements based upon current expectations that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward­looking statements as a result of various factors,
including those set forth under “Item 1A. Risk Factors” or in other parts of
this Annual Report on Form 10­K.

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 the U.S. Food and Drug
Administration (“FDA”) and marketed and sold by us in the 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, on January 27, 2016 and commercially launched in May 2016; Cotempla
XR-ODT, our methylphenidate XR-ODT for the treatment of ADHD in patients 6 to 17
years old, on June 19, 2017 and commercially launched in September 2017; and
Adzenys ER, our amphetamine extended-release oral suspension for the treatment
of ADHD in patients 6 years and older, on September 15, 2017, and commercially
launched in February 2018. Products containing amphetamine and methylphenidate
are the most commonly prescribed medications in the 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 XR­ODT, Cotempla XR­ODT 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 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

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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, with top-line results expected in the first quarter of 2020.
Data from this study is expected to provide insights into the pharmacokinetic
profile of the four tested formulations and provide guidance on final
formulation selection and dosing for future clinical trials. In the second half
of 2020, we plan to initiate a Phase 1 single ascending dose/multiple ascending
dose study (“SAD/MAD study”) of NT0502.

On August 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 of Cornerstone 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.

On July 25, 2016, we received a paragraph IV certification from Actavis
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. On October 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 on September 1,
2025, or earlier under certain circumstances.

On October 31, 2017, we received a paragraph IV certification from Teva
Pharmaceuticals USA, Inc. (“Teva”) advising us that Teva has filed an ANDA with
the FDA for a generic version of Cotempla XR-ODT. On December 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 on July 1, 2026, or earlier under certain circumstances.

Our predecessor company was incorporated in Texas on November 30, 1994 as
PharmaFab, Inc. and subsequently changed its name to Neostx, Inc. On June 15,
2009, we completed a reorganization pursuant to which substantially all of the
capital stock of Neostx, Inc. was acquired by a newly formed Delaware
corporation, named Neos Therapeutics, Inc. The remaining capital stock of
Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged
with and into Neos 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 in March 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 in July 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 $16.9 million, $51.7 million and $65.8 million for
the year ended December 31, 2019, 2018 and 2017, respectively. As of
December 31, 2019 and 2018, we had an accumulated deficit of approximately
$334.0 million and $317.0 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 XR­ODT, Cotempla XR­ODT, and Adzenys ER;

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· research and development activities for new product candidates;

· post-marketing approval research activities for our approved products;

· manufacture supplies for our preclinical studies and ongoing and plannedclinical trials;· protection and enforcement of our intellectual property rights;· general operations as a public company; and· debt service costs on our existing debt facilities.FINANCIAL OPERATIONS OVERVIEWRevenue
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 XR­ODT on May 16, 2016, initiated an early
experience program with Cotempla XR­ODT with limited product availability on
September 5, 2017 before launching this product nationwide on October 2, 2017
and launched commercialization of Adzenys ER on February 26, 2018. We sell our
products to drug wholesalers in the 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 XR­ODT, Cotempla XR­ODT and Adzenys ER, we expect
our future revenue to increase from historical levels.

We restructured our commercial efforts for our ADHD products in January 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. As we focus on selling in more profitable business channels and
market segments, we would expect average net price per pack to increase.
Following the restructuring, although product mix has changed, average net price
per pack has increased. Unit shipments of Adzenys XR-ODT for the year ended
December 31, 2019 were 261,488, as compared to 275,476 for the same period in
2018. Unit shipments of Cotempla XR-ODT for the year ended December 31, 2019
were 212,989, as compared to 211,440 for the same period in 2018. Average net
price per pack (30-day supply) of Adzenys XR-ODT was $119 for the year ended
December 31, 2019, as compared to $97 for the same period in 2018. For Cotempla
XR-ODT, average net price per pack (30-day supply) was $120 for the year ended
December 31, 2019, as compared to $90 for the same period in 2018.

In the future, we will seek to generate additional revenue from product sales of
Adzenys XR­ODT, Cotempla XR­ODT, Adzenys ER 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 share­based compensation expense, ofemployees engaged in research and development activities;· expenses incurred under third party agreements with contract researchorganizations (“CROs”), and investigative sites that conduct our clinical trials and a portion of our pre­clinical activities;

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· cost of raw materials, as well as manufacturing cost of our materials used inclinical trials and other development testing;· cost of facilities, depreciation and other allocated expenses;· fees paid to regulatory authorities for review and approval of our productcandidates; 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. The following table summarizes our research and
development expenses for the periods indicated:

December 31,
2019 2018 2017
(in thousands)
Cotempla XR-ODT $ 719$ 1,724$ 2,034
Adzenys ER 16 23 155
Adzenys XR-ODT 1,849 1,248 760
NT0400 – 144 –
NT0502 605 83 –Other Research and Development Activities (1) 5,393 5,286 6,008
$ 8,582$ 8,508$ 8,957——————————————————————————–(1) Includes unallocated product development cost, salaries and wages, occupancyand 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 XR­ODT, Cotempla XR­ODT 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 share­based compensation expense, commercialization
activities for Adzenys XR­ODT, Cotempla XR­ODT and Adzenys ER,
pre­commercialization activities and preparation for the launch and
commercialization of 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.

We believe that our selling and marketing expenses may increase to support the
ongoing commercialization of Adzenys XR­ODT, Cotempla XR­ODT and Adzenys ER in
the United States.

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General and administrative

General and administrative expenses consist primarily of salaries and related
costs for personnel, including share­based compensation expense, for our
employees in executive, finance, information technology and human resources
functions. Other general and administrative expenses include facility­related
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 tax­related 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.

Interest expense, net

Interest expense to date has consisted primarily of interest expense on senior
debt, including the amortization of debt 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 statements of operations.

Other income (expense), net
Other income and expense to date has primarily consisted of amortization of the
net gain recorded on the sale­leaseback of our property and equipment. (See
Note 7 to our consolidated financial statements included elsewhere in this
Annual Report on Form 10­K for additional details). Other income and expense
also includes interest earned, accretion and gains on our cash and cash
equivalents and short­term 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 OPERATIONSYear ended December 31, 2019 compared to the year ended December 31, 2018Revenues
The following table summarizes our revenues for the year ended December 31, 2019
and 2018:

Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Net product sales $ 64,649$ 49,988$ 14,661 29.3 %

Total product revenues were $64.6 million for the year ended December 31, 2019,
an increase of $14.6 million, or 29.3%, from $50.0 million for the year ended
December 31, 2018. Sales from Cotempla XR­ODT increased $6.6 million to $25.6
million for the year ended December 31, 2019, compared to $19.0 million for the
year ended December 31, 2018. Sales from Adzenys XR­ODT increased $4.6 million
to $31.2 million for the year ended December 31, 2019, compared to $26.6 million
for the year ended December 31, 2018. Sales from our generic Tussionex increased
$2.6 million to $7.0 million for the year ended December 31, 2019, compared to
$4.4 million for the year ended December 31, 2018. Sales from Adzenys ER, which
launched on February 26, 2018, were $0.8 for the year ended December 31, 2019
and were negligible for the year ended December 31, 2018.

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Cost of goods sold
The following table summarizes our cost of goods sold for the year ended December 31, 2019 and 2018:
Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Cost of goods sold $ 25,123$ 26,928$ (1,805) (6.7) %

Total cost of goods sold was $25.1 million for the year ended December 31, 2019,
a decrease of $1.8 million, or 6.7%, from the $26.9 million for the year ended
December 31, 2018. This decrease was primarily due to a $3.9 million decrease in
product cost of goods sold resulting from improved manufacturing yields from our
branded products. This decrease was partially offset by a $2.1 million increase
in labor and indirect production aggregate costs. The lower cost of goods sold,
coupled with higher net product sales in 2019, increased our gross profit by 15%
for the year ended December 31, 2019, compared to the same period in 2018.

Research and development expensesThe following table summarizes our research and development expenses for the year ended December 31, 2019 and 2018:
Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Research and development expenses $ 8,582$ 8,508$ 74 0.9 %

Total research and development expenses were $8.6 million for the year ended December 31, 2019, an increases of $0.1 million, or 0.9%, compared to $8.5 million for the year ended December 31, 2018.Selling and marketing expensesThe following table summarizes our selling and marketing expenses for the year ended December 31, 2019 and 2018:
Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Selling and marketing expenses $ 28,122$ 44,133$ (16,011) (36.3) %

Total selling and marketing expenses were $28.1 million for the year ended
December 31, 2019, a decrease of $16.0 million, or 36.3%, from $44.1 million for
the year ended December 31, 2018. This decrease was primarily driven by lower
contract sales organization expenses of $8.0 million due to the internalization
of our sales force in April 2018, lower salary and incentive compensation
expenses of $4.4 million, lower marketing expenses of $2.6 million, lower
professional services expenses of $1.8 million, lower advertising expenses of
$0.6 million and lower travel and entertainment expenses of $0.8 million, all
primarily resulting from our reorganization in January 2019. These decreases
were partially offset by higher administrative expenses of $2.4 million
associated with the full-year cost of operating our internal sales team.

70Table of ContentsGeneral and administrative expensesThe following table summarizes our general and administrative expenses for the year ended December 31, 2019 and 2018:
Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)General and administrative expense $ 13,237$ 13,915$ (678) (4.9) %

Total general and administrative expenses were $13.2 million for the year ended
December 31, 2019, a decrease of $0.7 million, or 4.9%, from the $13.9 million
for the year ended December 31, 2018. The decrease was primarily driven by lower
professional services expenses of $1.0 million and lower administrative expenses
of $0.6 million. These decreases were partially offset by higher salary and
incentive compensation expenses of $1.1 million.

Interest expense
The following table summarizes interest expense for the year ended December 31,
2019 and 2018:

Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Interest expense $ 8,009$ 8,974$ (965) (10.8) %

Total interest expense was $8.0 million for the year ended December 31, 2019, a
decrease of $1.0 million or 10.8%, from the $9.0 million for the year ended
December 31, 2018, primarily due to the decrease in outstanding principal under
the senior secured long-term credit facility with Deerfield. The decrease was
partially offset by an increase in interest expense under the senior secured
short-term line of credit with Encina that we entered into on October 2, 2019.
Interest expenses primarily consists of interest on the senior secured long-term
credit facility and senior secured short-term line of credit facility for the
year ended December 31, 2019, and interest on the senior secured long-term
credit facility for the year ended December 31, 2018.

Other income, net
The following table summarizes our other income for the year ended December 31,
2019 and 2018:

Year Ended
December 31, Increase % Increase
2019 2018 (Decrease) (Decrease)
(in thousands)
Other income, net $ 1,533$ 795$ 738 92.8 %

Total other income, net was $1.5 million for the year ended December 31, 2019,
an increase of $0.7 million, or 92.8%, from the $0.8 million for the year ended
December 31, 2018. Other income, net mainly consisted of change in fair value of
the Deerfield and Encina debt derivatives and interest income for the years
ended December 31, 2019, and change in fair value of the Deerfield debt
derivative and interest income for the years ended December 31, 2018.

71Table of ContentsYear ended December 31, 2018 compared to the year ended December 31, 2017Revenues
The following table summarizes our revenues for the year ended December 31, 2018
and 2017:

Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Net product sales $ 49,988$ 27,132$ 22,856 84.2 %

Total product revenues were $50.0 million for the year ended December 31, 2018,
an increase of $22.9 million or 84.2%, from the $27.1 million for the year ended
December 31, 2017. The increase was primarily due to a $17.4 million increase in
net sales of Cotempla XR-ODT, which we commenced commercialization of on
September 5, 2017 with an early experience program. Sales from Adzenys XR-ODT
increased approximately $6.3 million to $26.6 million for the year ended
December 31, 2018 from $20.4 million for the year ended December 31, 2017. Net
sales of Adzenys ER, which launched on February 26, 2018, were negligible for
the year ended December 31, 2018. These increases were partially offset by an
$0.8 million decrease in net sales of our generic Tussionex to $4.4 million for
the year ended December 31, 2018 from $5.2 million for the year ended December
31, 2017, primarily due to alternative treatment options for this product.

Cost of goods soldThe following table summarizes our cost of goods sold for the year ended December 31, 2018 and 2017:
Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Cost of goods sold $ 26,928$ 14,030$ 12,898 91.9 %

Total cost of goods sold was $26.9 million for the year ended December 31, 2018,
an increase of $12.9 million or 91.9%, from the $14.0 million for the year ended
December 31, 2017. This increase was due to a $9.3 million increase in product
costs and an associated increase of $1.7 million of finished drug, royalty fees
and logistic costs relating to the 30.7% increase in sales of Adzenys XR-ODT for
the year ended December 31, 2018 as compared to the year ended December 31, 2017
and sales of Cotempla XR-ODT and Adzenys ER, which commenced on September 5,
2017 and February 26, 2018, respectively. In addition, increased investment in
labor and indirect production activities associated with increased manufacturing
demand for our products of $1.6 million also contributed to the higher cost of
goods sold for the year ended December 31, 2018.

Research and development expensesThe following table summarizes our research and development expenses for year ended December 31, 2018 and 2017:
Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Research and development expenses $ 8,508$ 8,957$ (449) (5.0) %

Total research and development expenses were $8.5 million for the year ended
December 31, 2018, a decrease of approximately $0.4 million or 5.0%, from $9.0
million for the year ended December 31, 2017. The decrease was primarily related
to lower product development expenses for the year ended December 31, 2018 as a
result of the FDA approvals of Cotempla XR-ODT in June 2017 and Adzenys ER in
September 2017.

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Selling and marketing expensesThe following table summarizes our selling and marketing expenses for the year ended December 31, 2018 and 2017:
Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Selling and marketing expenses $ 44,133$ 46,881$ (2,748) (5.8) %

Total selling and marketing expenses were $44.1 million for the year ended
December 31, 2018, a decrease of $2.7 million or 5.8%, from $46.9 million for
the year ended December 31, 2017. The main decreases in selling and marketing
expenses for the year ended December 31, 2018 as compared to the year ended
December 31, 2017 were contract sales organization expenses of $17.4 million due
to the internalization of our sales force in April 2018, marketing expenses of
$1.1 million and professional service expenses of $0.8 million. Partially
offsetting the decreases were increased salary and benefit expenses of $11.4
million, travel and entertainment expenses of $3.6 million and administrative
expenses of $1.1 million due to the establishment of our internal sales team in
April 2018 and to support the sales of Cotempla XR-ODT and Adzenys ER, which
commenced on September 5, 2017 and February 26, 2018, respectively.

General and administrative expensesThe following table summarizes our general and administrative expenses for the year ended December 31, 2018 and 2017:
Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)General and administrative expenses $ 13,915$ 13,805$ 110 0.8 %

Total general and administrative expenses were $13.9 million for the year ended
December 31, 2018, an increase of $0.1 million or 0.8%, from the $13.8 million
for the year ended December 31, 2017. The increase was primarily from higher
administrative expenses and professional service expenses for the year ended
December 31, 2018.

Interest expense
The following table summarizes interest expense and loss on debt extinguishment for the year ended December 31, 2018 and 2017:
Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Interest expense $ 8,974$ 10,085$ (1,111) (11.0) %

Total interest expense was $9.0 million for the year ended December 31, 2018, a
decrease of $1.1 million or 11.0%, from the $10.1 million for the year ended
December 31, 2017. Interest expenses for both periods were primarily from
interest on the Facility (see Note 11 to the notes to our consolidated financial
statements included elsewhere in this Annual Report on Form 10 K for additional
details).

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Other income, net

The following table summarizes our other income for the year ended December 31,
2018 and 2017:

Year Ended
December 31, Increase % Increase
2018 2017 (Decrease) (Decrease)
(in thousands)
Other income, net $ 795$ 854$ (59) (6.9) %

Total other income, net was $0.8 million for the year ended December 31, 2018, a
slight decrease of 6.9% from the $0.9 million for the year ended December 31,
2017. Other income, net mainly consisted of change in fair value of the
Deerfield debt derivative and interest income for both of the years ended
December 31, 2018 and 2017.

LIQUIDITY AND CAPITAL RESOURCESSources 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 senior secured credit
agreements.

On May 11, 2016, we entered into a $60.0 million senior secured credit facility (the “Facility”) with Deerfield Private Design Fund III, L.P. and Deerfield Special Situations Fund, L.P. (collectively, “Deerfield”) as lenders. For additional description of this Facility, see “-Credit facilities” below.
In February 2017, we entered into an agreement with Essex for the sale­leaseback
of newly acquired assets of up to $5.0 million to finance our capital
expenditures. Each lease under this master agreement is for an initial term of
36 months and will have 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 $481,000 and $2,742,000 at effective interest rates of 14.3%
and 14.9% on February 13, 2017 and June 30, 2017, respectively.

In February 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 over­allotment option at the public offering price on
February 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.

On June 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 30­day option to purchase up to an additional 720,000 shares
of our common stock which the underwriter exercised in full on July 26, 2017.
The net proceeds to us from this offering, after deducting offering expenses
payable by us, were approximately $34.3 million.

The shares of common stock for both the June 2017 and February 2017 offerings
were offered pursuant to a shelf registration statement on Form S­3, including a
base prospectus, filed by us on August 1, 2016, and declared effective by the
SEC on August 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”).

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We simultaneously entered into a sales agreement with Cowen 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 “at­the­market” offerings
under the Shelf (the “Cowen Sales Agreement”). During the year ended
December 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 ended
December 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.
On November 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 on November 5,
2018. As of the date hereof, aggregate gross proceeds of sales of our common
stock under the Sales Agreement total $7,825,113, and sales of our common stock
under the Cowen Sales Agreement have been suspended. The Cowen Sales Agreement
terminated with the expiration of the 2016 Shelf on August 12, 2019.

On November 8, 2018, we closed an underwritten public offering 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 over­allotment 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, on November 5, 2018, we entered into a Second Amendment to
the Facility with Deerfield under which we used $7.5 million of proceeds of the
offering to prepay $7.5 million of principal on the Facility otherwise due on
May 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 on May 11, 2020 to be deferred until either
May 2021 or May 2022 if certain annual revenue milestones for the years ended
December 31, 2019 and December 31, 2020 are achieved. The revenue milestone was
not met for the period ending December 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 provides Deerfield 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.

On March 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 its
common stock, preferred stock, debt securities, warrants and/or units (the “2019
Shelf”), which was declared effective by the SEC on May 1, 2019. Effective as of
August 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 with Cantor 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”).

On October 2, 2019, we entered into a senior secured credit agreement with
Encina 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 “-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 short­term investments are invested in
bank deposits, money market funds, financials and corporate debt securities, all
of which are currently providing only minimal returns.

As of December 31, 2019, we had $16.8 million in cash and cash equivalents and
$8.1 million in short-term investments. We believe that our existing cash and
cash equivalents and short-term investments, together with our credit facility
with Encina and any cash generated from operations, will be sufficient to fund
our operations for at least the next 12 months after the filing date of this
Annual Report on Form 10­K.

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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, or that we will be able to
successfully commercialize our product candidates. In addition, we may not be
profitable even if we succeed in commercializing Adzenys XR­ODT, Cotempla XR­ODT
and Adzenys ER.

Cash flows

The following table sets forth the primary sources and uses of cash for the
periods indicated:

Year ended Year ended
December 31, Increase December 31, Increase
2019 2018 (Decrease) 2018 2017 (Decrease)
(in thousands) (in thousands)
Net cash (used in) provided by:
Net cash used in operating activities $ (10,783)$ (41,441) $ 30,658 $ (41,441)$ (53,261)$ 11,820 Net cash (used in) provided by investing activities (9,118) 17,219 (26,337) 17,219 (2,533) 19,752 Net cash (used in) provided by financing activities (9,747) 38,731 (48,478) 38,731 63,411 (24,680)
Net decrease in cash and cash
equivalents $ (29,648)$ 14,509$ (44,157)$ 14,509$ 7,617$ 6,892Cash 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 non­cash
charges including deferred interest on debt, changes in fair value of earnout,
derivative and warrant liabilities, share­based compensation expense,
depreciation expense, amortization of patents and other intangible assets and
amortization of senior debt fees.

Net cash used in operating activities was $10.8 million and $41.4 million for
the years ended December 31, 2019 and 2018, respectively. The $30.6 million
decrease in net cash used from operating activities was due to the $34.8 million
decrease in our net losses, as discussed in “Results of Operations” above, a
$0.2 million increase in noncash items and a $4.4 million decrease in cash
provided by working capital. The increase of $0.2 million in noncash items was
primarily due to a $0.5 million increase in amortization of senior debt issuance
costs and discounts, a $0.4 million increase in amortization of intangible
assets and a $0.3 million increase depreciation and amortization of property and
equipment, partially offset by a $0.6 million decrease from the fair value
change of earnout and derivative liabilities and a $0.4 million decrease in
share-based compensation expense. The $4.4 million decrease in cash provided by
working capital included a $18.0 million decrease from a decrease in accounts
payable and accrued expenses and $2.0 million decrease from an increase in
inventories, partially offset by a $15.4 million increase in accounts receivable
due to timing of collections, and $0.3 million increase from a decrease in other
assets.

Net cash used in operating activities was $41.4 million and $53.3 million for
the years ended December 31, 2018 and 2017, respectively. The $11.8 million
decrease in net cash used from operating activities was due to the $14.1 million
decrease in our net losses, as discussed in “Results of Operations” above, a
$2.5 million decrease in noncash items and a $0.2 million increase in cash
provided by working capital. The decrease of $2.5 million in noncash items was
primarily due to a $2.1 million decrease in deferred interest on debt to
Deerfield, a $0.7 million decrease in share based compensation expense and a
$0.4 million decrease on amortization of senior debt discounts, partially offset
by a $0.1 million increase from the fair value change of earnout and derivative
liabilities and a $0.4 million increase in depreciation and amortization of
property and equipment. The $0.2 million increase in cash provided by working
capital included a $7.6 million increase from decreased inventories due to
increased sales for our branded products, Adzenys XR-ODT and Cotempla XR-ODT, in
2018, partially offset by a $6.6 million decrease in accounts receivable due to
timing of collections, and a $0.7 million decrease from the discontinued
deferred commercial sales organization costs due to the transitioning of our
sales organization from contracted to internal in April 2018.

76Table of ContentsCash (used in) provided by investing activities
Net cash 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 used in investing activities was $9.1 million for the year ended
December 31, 2019 primarily due to $17.2 million of purchase of short term
investments and $1.1 million of capital expenditures principally for production
equipment, partially offset by the $9.3 million sales and maturities of short
term investments.

Net cash provided by investing activities was $17.2 million for the year ended
December 31, 2018 primarily due to $36.5 million of sales and maturities of
short term investments and $1.4 million of capital expenditures principally for
production equipment, partially offset by the $17.9 million purchase of short
term investments.

Net cash used in investing activities was $2.5 million for the year ended
December 31, 2017 primarily due to the $48.0 million purchase of short term
investments and $2.5 million of capital expenditures principally for production
equipment, partially offset by the $45.1 million of sales and maturities of
short term investments and $3.2 million of proceeds from the sale leaseback of
equipment.

Cash (used in) provided by financing activities
Net cash used in financing activities was $9.7 million for the year ended
December 31, 2019 primarily due to $7.5 million principal payment of the senior
secured long-term debt, $1.2 million payment of debt financing costs related to
the senior secured short-term line of credit and $1.1 million principal payment
of finance lease obligations.

Net cash provided by financing activities of $38.7 million in the year ended
December 31, 2018 principally included $47.3 million of proceeds from the
issuance of common stock net of related underwriting discounts, commissions and
issuance costs and partially offset by $8.4 million due to the $7.5 million
principal payment of the senior facility under the Second Amendment with
Deerfield and the principal payments under the sales leasebacks.

Net cash provided by financing activities of $63.4 million in the year ended
December 31, 2017 principally included $64.6 million of proceeds from the
issuance of common stock net of related underwriting discounts, commissions and
issuance costs and partially offset by $1.0 million of principal payments under
the sales leasebacks.

Loan and Credit facilities

Principal on the Deerfield Facility was initially due in three equal annual
installments beginning in May 2019 and continuing through May 2021, with a final
payment of principal, interest and all other obligations under the Facility due
May 11, 2022. Interest is due quarterly beginning in June 2016, at a rate of
12.95% per year. In connection with the Facility, we paid a $1.35 million yield
enhancement fee to Deerfield 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 on June 1, 2017.

However, on June 1, 2017, we entered into an amendment (the “Amendment”) to the
Facility to provide a one-year deferral to June 1, 2018, with an option for a
second year of deferral to June 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 to Deerfield 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. On October 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 to Deerfield on
this date and the cancellation of the Convertible Notes.

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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 from June 1, 2017 through the period ending prior to May 11, 2020 for the
change in control prepayment fees and through the period ending prior to May 11,
2022 for any other prepayments, respectively (the “Prepayment Premiums”). Such
Prepayment Premiums, as amended, ranged from 12.75% to 2%.

On November 5, 2018, we entered into a Second Amendment to the Facility with
Deerfield under which we used $7.5 million of proceeds of an underwritten public
offering of shares of our common stock, which closed on November 8, 2018, to
prepay $7.5 million of principal on the Facility otherwise due on May 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 on May 11, 2020 to be deferred until either May 2021 or May 2022 if certain
annual revenue milestones for the years ended December 31, 2019 and December 31,
2020 are achieved. The revenue milestone was not met for the period ending
December 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 provides Deerfield 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.

Borrowings under the Facility are collateralized by substantially all of our
assets, except the assets under capital 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 of December 31, 2019, 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-month London
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 is May
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 before October 2, 2020, (ii) 1.0% of the aggregate principal amount
prepaid if such prepayment occurs after October 2, 2020 but on or before October
2, 2021, and (iii) 0.5% of the aggregate principal amount prepaid if such
prepayment occurs after October 2, 2021 but before May 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 of December 31, 2019, we are in
compliance with the covenants under the Loan Agreement.

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During the year ended December 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 is 14.9%. In addition, during the year
ended December 31, 2019 and 2018, the Company entered into equipment leases with
a total capitalized cost of $0.4 million and $0.1 million, respectively, with
bargain purchase option at the end of each respective lease. The approximate
interest rate on these leases is 6.5% and 5.3%, respectively. These leases were
classified as finance leases as of December 31, 2019 and capital leases as of
December 31, 2018. See “Contractual Commitments and Obligations” below for
future payments under these leases.

Capital resources and funding requirements
On March 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 with Cantor 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 the SEC on May 1, 2019.

On 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 our existing cash and cash equivalents and short-term
investments, together with our credit facility with Encina and any cash
generated from operations, will be sufficient to fund our anticipated operating
requirements for at least the next twelve months from the date of the filing of
this Annual Report on Form 10-K.

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 andrelated 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 commercializationactivities, including any costs associated with adding new capabilities;· the costs and timing involved in obtaining regulatory approvals for our newproduct candidates;· the timing and number of product candidates for which we obtain regulatoryapproval;· the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

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· the number and characteristics of new product candidates that we pursue; and· our ability to hire qualified employees at salary levels consistent with ourestimates 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 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 in the United States
(“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 audited financial statements included elsewhere in this
Annual Report on Form 10­K, 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.

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We sell our generic Tussionex, Adzenys XR­ODT, Cotempla XR­ODT 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 XR­ODT, Cotempla
XR­ODT and Adzenys ER include savings offers, prompt payment discounts,
wholesaler fees, 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.Savings offers for branded products
We offer savings programs for Adzenys XR­ODT, Cotempla XR­ODT 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 third­party 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 feesWholesale 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.RebatesOur branded Adzenys XR­ODT, Cotempla XR­ODT 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 third­party providers.
Our generic Tussionex product is subject to state government­managed 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.

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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.

We analyzed recent branded product return data to determine a reliable return
rate for branded Adzenys XR­ODT, Cotempla XR­ODT 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 for generic product
Our generic Tussionex 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.

Due to estimates and assumptions inherent in determining the amount of generic
Tussionex 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. Wholesale distribution fees and the
allowance for prompt pay discounts are recorded at the time of shipment and such
fees and allowances are recorded in the same period that the related revenue is
recognized.

The following table presents our gross to net sales deductions for our Adzenys
XR­ODT which we commercially launched in May 2016, our Cotempla XR­ODT which we
commercially launched in September 2017 and Adzenys ER which we commercially
launched in February 2018 for the years ended December 31, 2019, 2018 and 2017:

Total Gross
Cash Savings Wholesaler to Net Sales
Chargebacks Discounts Offers Fees Returns Rebates Deductions
(in thousands)
Balance at December 31, 2016 $ – $ 60$ 2,070$ 460$ 274$ 505$ 3,369
Provision, net – 1,468 30,978 6,791 1,625 7,793 48,655
Payments / credits – (1,288) (25,880) (5,047) (80) (4,354) (36,649) Balance at December 31, 2017 $ – $ 240$ 7,168$ 2,204$ 1,819$ 3,944$ 15,375
Provision, net – 3,210 71,303 16,150 3,506 18,709 112,878
Payments / credits – (2,997) (67,183) (14,362) (1,145) (14,973) (100,660) Balance at December 31, 2018 $ – $ 453$ 11,288$ 3,992$ 4,180$ 7,680$ 27,593
Provision, net 1,542 3,364 69,540 15,558 3,366 17,306 110,676
Payments / credits (438) (3,259) (64,038) (14,997) (3,210) (18,955) (104,897) Balance at December 31, 2019 $ 1,104$ 558$ 16,790$ 4,553$ 4,336$ 6,031$ 33,372

Total items deducted from gross product sales were $110,676, $112,878 and
$48,655, or 65.7%, 71.2% and 68.9% as a percentage of gross product sales, for
the years ended December 31, 2019, 2018 and 2017, respectively, due principally
to the savings offers made. The reduction in gross to net sales percentage
resulted primarily from reductions in government rebates and sales offers
programs resulting from refocusing our commercial efforts on more profitable
business channels and market segments.

82Table of ContentsThe following table presents our gross to net sales deductions for our generic Tussionex for the years ended December 31, 2019, 2018 and 2017:

Total Gross to
Cash Wholesaler Net Sales
Chargebacks Discounts Fees Returns Rebates Deductions
(in thousands)
Balance at December 31, 2016 $ 779 $ 111 $ 49 $ 884$ 38 $ 1,861
Provision, net 10,146 346 1,452 167 43 12,154
Payments / credits (10,109) (359) (1,360) (158) (18) (12,004)
Balance at December 31, 2017 $ 816 $ 98$ 141$ 893$ 63 $ 2,011
Provision, net 8,565 308 1,263 297 37 10,470
Payments / credits (8,067) (308) (1,147) (213) (17) (9,752)
Balance at December 31, 2018 $ 1,314$ 98$ 257$ 977$ 83 $ 2,729
Provision, net 10,593 437 1,667 (67) 49 12,679
Payments / credits (8,861) (395) (1,463) (124) (54) (10,897)
Balance at December 31, 2019 $ 3,046$ 140$ 461$ 786$ 78 $ 4,511

Total items deducted from gross product sales were $12,679, $10,470 and $12,154,
or 64.6%, 70.6% and 70.2% as a percentage of gross product sales, for the years
ended December 31, 2019, 2018 and 2017, respectively. The decrease in the gross
to net sales deduction percentage resulted from the addition of major customers
with better pricing and lower wholesaler fees.

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, pre­launch inventories are
expensed into research and development. Manufacturing costs for the production
of Adzenys XR­ODT incurred after the January 27, 2016 FDA approval date, for the
production of Cotempla XR­ODT incurred after June 30, 2017, following the FDA
approval date of June 19, 2017, and for the production of Adzenys ER incurred
after September 30, 2017, following the FDA approval date of September 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.

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Share­based compensation expense
Share­based 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 straight­line 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 share­based awards to
employees and directors is estimated using the Black­Scholes 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
risk­free interest rate and (4) expected dividends.

Under recent guidance for accounting for share­based 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 share­based compensation awards using the
Black­Scholes option­pricing model. The Black­Scholes option­pricing 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. As a formerly private company, we do not
have sufficient history to estimate the volatility of our common stock price or
the expected life of our options. We have not paid and do not anticipate paying
cash dividends. Therefore, the expected dividend rate is assumed to be 0%. 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 publicly­available industry
and market capitalization data and 53 months of our stock price volatility. The
risk­free rate was based on the U.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 risk­free interest rate was determined by reference to
implied yields available from U.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
Black­Scholes 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 option­pricing models
to estimate share­based compensation. There is currently no market­based
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 stock­based awards is determined using an option­pricing 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 marked­to­market 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

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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 non­current based on whether or
not net­cash 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 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 modified­release 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 OBLIGATIONSThe following table reflects summaries of our estimates of future material contractual obligations as of December 31, 2019. Future events could cause actual payments to differ from these estimates.
Total < 1 Yr. 1-3 Yrs. 3-5 Yrs. Thereafter
(In thousands)
Deerfield senior secured facility $ 54,281$ 18,842$ 35,439 $ – $ –
Texas facility operating lease 5,227 1,005 2,061 2,161 –
Finance leases for equipment 1,261 894 232 135 –
Pennsylvania facility operating lease 208 156 52 – –
Equipment operating leases 130 65 65 – –
Earnout liability 30 – – – 30
$ 61,137$ 20,962$ 37,849$ 2,296 $ 30

We had borrowed $60.0 million under the Deerfield Facility. On November 5, 2018,
we amended the facility and prepaid $7.5 million otherwise due in May 2019.
Pursuant to the terms of the Facility, as amended, we made a $7.5 million
principal payment in May 2019, and we currently have a principal balance of
$45.0 million of senior secured credit as of December 31, 2019. The payments
above are inclusive of related interest amounts as of December 31, 2019.

In addition to the commitments shown above, in response to a lawsuit brought
against us by Shire 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 non­exclusive license
to certain patents for certain activities with respect to our New Drug
Application (the “NDA”) No. 204326 for an extended­release orally disintegrating
amphetamine polistirex tablet in July 2014. Under the terms of the 2014 License
Agreement, following FDA approval of our NDA for Adzenys XR­ODT, in the first
quarter of 2016, we paid a lump sum, non­refundable 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 XR­ODT during the life of the
licensed patents.

On March 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 Hatch­Waxman Amendments, we entered into
a License Agreement (the “2017 License Agreement”) with Shire. Pursuant to this
agreement, Shire granted us a non­exclusive license to certain patents owned by
Shire for certain activities with respect to our NDA No. 204325 for an
extended­release amphetamine liquid suspension. Under the terms of the 2017
License

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Agreement, following FDA approval of our NDA for Adzenys ER, in October 2017, we
paid a lump sum, non­refundable 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 XR­ODT and Adzenys ER, we have not presented such amounts in the table
above. The license fees are paid and recorded as an intangible asset 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.

OFF­BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any
off­balance sheet arrangements, as defined in the rules and regulations of the
SEC, 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
off­balance sheet arrangements or other contractually narrow or limited
purposes.

RECENT ACCOUNTING PRONOUNCEMENTSSee Note 2 to the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10­K for further discussion of recent accounting pronouncements.© Edgar Online, source Glimpses

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