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~~


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

For the quarterly period ended March 31, ~~2019~~

2020

o~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~


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

For the transition period from to

Commission File Number: 001-35518

SUPERNUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

~~Delaware~~

~~20-2590184~~

Delaware

20-2590184

(State or other jurisdiction of

~~(I.R.S. Employer~~

incorporation or organization)

(I.R.S. Employer
Identification No.)

~~1550 East Gude Drive, Rockville, MD~~

~~20850~~

9715 Key West Avenue

Rockville

20850

(Address of principal executive offices)

(Zip Code)

(301) 838-2500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x☒ Yes o☐ No

Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).x

☒ Yes No o

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerx

☒

Accelerated filer o

☐

Non-accelerated filero

☐

Smaller reporting company o

☐

Emerging growth companyo

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o☐ Yes x☒ No

Securities registered pursuant to Section 12(b) of the Exchange Act

Title of each class

Outstanding at ~~May 1, 2019~~

April 29, 2020

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

~~52,384,248~~

52,538,659

SUPN

The Nasdaq Global Market

Table of Contents

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED ~~MARCH~~March 31, ~~2019~~

2020

	~~Page No.~~
		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets ~~as of March 31, 2019 and December 31, 2018~~		3
Condensed Consolidated Statements of Earnings ~~for the three month periods ended March 31, 2019 and 2018~~		4
Condensed Consolidated Statements of Comprehensive Earnings ~~for the three month periods ended March 31, 2019 and 2018~~		5
Condensed Consolidated Statements of Changes in ~~Stockholder’s~~Stockholders' Equity ~~for the three month periods ended March 31, 2019 and 2018~~		6
Condensed Consolidated Statements of Cash Flows ~~for the three month periods ended March 31, 2019 and 2018~~		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk		34 38
Item 4. Controls and Procedures		34 39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		35 40
Item 1A. Risk Factors		35 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35 41
Item 3. Defaults Upon Senior Securities		35 41
Item 4. Mine Safety Disclosures		35 41
Item 5. Other Information		35 41
Item 6. Exhibits		35 42
SIGNATURES		38 43

Table of Contents

PART I — FINANCIAL INFORMATION

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share ~~amounts)~~

March 31,

December 31,

2019

2018

(unaudited)

Assets

Current assets

Cash and cash equivalents

$
122,778

$
192,248

Marketable securities

170,165

163,770

Accounts receivable, net

79,950

102,922

Inventories, net

26,518

25,659

Prepaid expenses and other current assets

20,556

8,888

Total current assets

419,967

493,487

Long term marketable securities

522,551

418,798

Property and equipment, net

4,226

4,095

Intangible assets, net

30,063

31,368

Lease assets

20,049

—

Deferred income taxes

27,967

29,683

Other assets

625

380

Total assets

$
1,025,448

$
977,811

Liabilities and stockholders’ equity

Current liabilities

Accounts payable

$
7,240

$
3,195

Accrued product returns and rebates

88,200

107,063

Accrued expenses and other current liabilities

36,607

36,535

Income taxes payable

17,233

12,377

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

2,426

2,183

Total current liabilities

151,706

161,353

Convertible notes, net

333,310

329,462

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

21,957

22,575

Lease liabilities, long term

27,824

—

Other non-current liabilities

10,633

11,398

Total liabilities

545,430

524,788

Stockholders’ equity

Common stock, $0.001 par value, 130,000,000 shares authorized 52,374,248 and 52,316,583 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

52

52

Additional paid-in capital

373,707

369,637

Accumulated other comprehensive earnings (loss), net of tax

1,427

(3,158
)
Retained earnings

104,832

86,492

Total stockholders’ equity

480,018

453,023

Total liabilities and stockholders’ equity

$
1,025,448

$
977,811

data)


	March 31,		December 31,
	2020		2019
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	225,767	$	181,381
Marketable securities	175,104		165,692
Accounts receivable, net	119,195		87,332
Inventories, net	24,418		26,628
Prepaid expenses and other current assets	12,564		11,611
Total current assets	557,048		472,644
Long term marketable securities	534,712		591,773
Property and equipment, net	18,011		17,068
Intangible assets, net	23,579		24,840
Lease assets	21,911		21,279
Deferred income taxes	34,067		32,063
Other assets	538		615

Total assets	$	1,189,866	$	1,160,282

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	3,124	$	10,141
Accrued product returns and rebates	119,453		107,629
Accrued expenses and other current liabilities	33,003		37,130
Income taxes payable	9,097		2,443
Nonrecourse liability related to sale of future royalties, current portion	3,658		3,244
Total current liabilities	168,335		160,587
Convertible notes, net	349,232		345,170
Nonrecourse liability related to sale of future royalties, long term	18,369		19,248
Lease liabilities, long term	30,804		30,440
Other liabilities	9,743		9,409
Total liabilities	576,483		564,854

Stockholders’ equity
Common stock, $0.001 par value; 130,000,000 shares authorized; 52,537,159 and 52,533,348 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	53		53
Additional paid-in capital	392,430		388,410
Accumulated other comprehensive earnings (loss), net of tax	(166)		7,417
Retained earnings	221,066		199,548
Total stockholders’ equity	613,383		595,428

Total liabilities and stockholders’ equity	$	1,189,866	$	1,160,282

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Earnings

(in thousands, except share and per share data)

Three Months ended March 31,

2019

2018

(unaudited)

Revenues

Net product sales

$
83,099

$
89,120

Royalty revenues

2,375

1,309

Total revenues

85,474

90,429

Costs and expenses

Cost of product sales

3,684

3,278

Research and development

15,394

18,908

Selling, general and administrative

40,968

36,849

Total costs and expenses

60,046

59,035

Operating earnings

25,428

31,394

Other expenses, net

(1,189
)
(212
)

Earnings before income taxes

24,239

31,182

Income tax expense

5,899

4,830

Net earnings

$
18,340

$
26,352

Earnings per share

Basic

$
0.35

$
0.51

Diluted

$
0.34

$
0.49

Weighted-average shares outstanding

Basic

52,336,443

51,536,474

Diluted

53,985,385

53,788,346


	Three Months ended March 31,
	2020		2019
	(unaudited)
Revenues
Net product sales	$	92,490	$	83,099
Royalty revenues	2,486		2,375
Total revenues	94,976		85,474

Costs and expenses
Cost of goods sold	4,152		3,684
Research and development	18,937		15,394
Selling, general and administrative	42,875		40,968

Total costs and expenses	65,964		60,046

Operating earnings	29,012		25,428

Other income (expense)
Interest expense	(5,755)		(5,870)
Interest income, net	5,777		4,681
Total other income (expense)	22		(1,189)

Earnings before income taxes	29,034		24,239

Income tax expense	7,516		5,899
Net earnings	$	21,518	$	18,340

Earnings per share
Basic	$	0.41	$	0.35
Diluted	$	0.40	$	0.34

Weighted-average shares outstanding
Basic	52,534,787		52,336,443
Diluted	53,581,051		53,985,385

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Earnings

(in thousands)

Three Months ended March 31,

2019

2018

(unaudited)

Net earnings

$
18,340

$
26,352

Other comprehensive earnings (loss)

Unrealized gain (loss) on marketable securities, net of tax

4,585

(1,544
)
Other comprehensive earnings (loss)

4,585

(1,544
)

Comprehensive earnings

$
22,925

$
24,808


	Three Months ended March 31,
	2020		2019
	(unaudited)
Net earnings	$	21,518	$	18,340
Other comprehensive (loss) earnings
Unrealized (loss) gain on marketable securities, net of tax	(7,583)		4,585
Other comprehensive (loss) earnings	(7,583)		4,585

Comprehensive earnings	$	13,935	$	22,925

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months ~~Ended~~ended March 31, ~~2019~~2020 and ~~2018~~

2019

(unaudited, in thousands, except share data)

Common Stock

Additional

Accumulated Other
Comprehensive

Retained

Total
Stockholders’

Shares

Amount

Paid-in Capital

Earnings (Loss)

Earnings

Equity

Balance, December 31, 2018

52,316,583

$
52

$
369,637

$
(3,158
)
$
86,492

$
453,023

Share-based compensation

—

—

3,287

—

—

3,287

Exercise of stock options

57,665

—

783

—

—

783

Net earnings

—

—

—

—

18,340

18,340

Unrealized gains on marketable securities, net of tax

—

—

—

4,585

—

4,585

Balance, March 31, 2019

52,374,248

$
52

$
373,707

$
1,427

$
104,832

$
480,018

Common Stock

Additional

Accumulated Other
Comprehensive

Retained
Earnings
(Accumulated

Total
Stockholders’

Shares

Amount

Paid-in Capital

Loss

Deficit)

Equity

Balance, December 31, 2017

51,314,850

$
51

$
294,999

$
(747
)
$
(26,823
)
$
267,480

Cumulative-effect of adoption of ASC 606

—

—

—

—

2,322

2,322

Balance, January 1, 2018

51,314,850

51

294,999

(747
)
(24,501
)
269,802

Share-based compensation

—

—

2,635

—

—

2,635

Exercise of stock options

319,141

1

2,857

—

—

2,858

Equity component of convertible notes, net of tax

—

—

56,215

—

—

56,215

Purchase of convertible note hedges, net of tax

—

—

(70,137
)
—

—

(70,137
)
Issuance of warrants

—

—

65,688

—

—

65,688

Net earnings

—

—

—

—

26,352

26,352

Unrealized loss on marketable securities, net of tax

—

—

—

(1,544
)
—

(1,544
)
Balance, March 31, 2018

51,633,991

$
52

$
352,257

$
(2,291
)
$
1,851

$
351,869


j	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2019	52,533,348	$	53	$	388,410	$	7,417	$	199,548	$	595,428
Share-based compensation	—	—		3,988		—		—		3,988
Exercise of stock options	3,811	—		32		—		—		32
Net earnings	—	—		—		—		21,518		21,518
Unrealized loss on marketable securities, net of tax	—	—		—		(7,583)		—		(7,583)
Balance, March 31, 2020	52,537,159	$	53	$	392,430	$	(166)	$	221,066	$	613,383


	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2018	52,316,583	$	52	$	369,637	$	(3,158)	$	86,492	$	453,023
Share-based compensation	—	—		3,287		—		—		3,287
Exercise of stock options	57,665	—		783		—		—		783
Net earnings	—	—		—		—		18,340		18,340
Unrealized gain on marketable securities, net of tax	—	—		—		4,585		—		4,585
Balance, March 31, 2019	52,374,248	$	52	$	373,707	$	1,427	$	104,832	$	480,018

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

Three Months ended March 31,

2019

2018

(unaudited)

Cash flows from operating activities

Net earnings

$
18,340

$
26,352

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

Realized loss on sales of securities

(8
)
—

Depreciation and amortization

1,679

1,707

Amortization of operating lease assets

879

—

Amortization of deferred financing costs and debt discount

3,848

612

Amortization of premium/discount on marketable securities

(1,094
)
89

Non-cash interest expense

1,437

701

Non-cash royalty revenue

(1,576
)
(1,300
)
Share-based compensation expense

3,287

2,635

Deferred income tax (benefit) provision

279

(1,120
)
Changes in operating assets and liabilities:

Accounts receivable

23,013

(798
)
Inventories

(859
)
(2,771
)
Prepaid expenses and other current assets

(1,799
)
(62
)
Other non-current assets

(196
)
(342
)
Accounts payable

4,045

(3,440
)
Accrued product returns and rebates

(18,863
)
4,691

Accrued expenses and other current liabilities

(3,177
)
(1,132
)
Income taxes payable

4,856

327

Other non-current liabilities

(1,098
)
984

Net cash provided by operating activities

32,993

27,133

Cash flows from investing activities

Purchases of marketable securities

(150,167
)
(57,757
)
Sales and maturities of marketable securities

47,143

7,343

Purchases of property and equipment

(221
)
(253
)
Deferred legal fees

(1
)
(343
)
Net cash used in investing activities

(103,246
)
(51,010
)

Cash flows from financing activities

Proceeds from issuance of convertible notes

—

402,500

Convertible notes issuance financing costs

—

(10,435
)
Proceeds from issuance of warrants

—

65,688

Purchases of convertible note hedges

—

(92,897
)
Proceeds from issuance of common stock

783

2,857

Net cash provided by financing activities

783

367,713

Net change in cash and cash equivalents

(69,470
)
343,836

Cash and cash equivalents at beginning of year

192,248

100,304

Cash and cash equivalents at end of period

$
122,778

$
444,140

Supplemental cash flow information

Cash paid for interest on convertible notes

$
1,258

$
—

Income taxes paid

$
800

$
5,623

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$
1,313

$
1,385

Non-cash investing and financing activities

Deferred legal fees included in accounts payable and accrued expenses

$
250

$
304

Lease assets and tenant receivable obtained for new operating leases

$
17,136

$
—


	Three Months ended March 31,
	2020		2019
	(unaudited)
Cash flows from operating activities
Net earnings	$	21,518	$	18,340

Adjustments to reconcile net earnings to net cash provided by operating activities:
Share-based compensation expense	3,988		3,287
Depreciation and amortization	1,732		1,679
Amortization of premium/discount on marketable securities	(451)		(1,102)
Amortization of deferred financing costs and debt discount	4,061		3,848
Noncash interest expense	1,366		1,437
Noncash royalty revenue	(1,567)		(1,576)
Noncash operating lease cost	991		879
Deferred income tax benefit	538		279
Changes in operating assets and liabilities:
Accounts receivable	(31,823)		23,013
Inventories	2,210		(859)
Prepaid expenses and other current assets	(454)		(1,799)
Other noncurrent assets	—		(196)
Accounts payable	(7,017)		4,045
Accrued product returns and rebates	11,824		(18,863)
Accrued expenses and other current liabilities	(3,634)		(3,177)
Income taxes payable	6,654		4,856
Other liabilities	(1,020)		(1,098)
Net cash provided by operating activities	8,916		32,993

Cash flows from investing activities
Purchases of marketable securities	(15,382)		(150,167)
Sales and maturities of marketable securities	53,357		47,143
Purchases of property and equipment	(2,537)		(221)
Deferred legal fees	—		(1)
Net cash provided by (used in) investing activities	35,438		(103,246)

Cash flows from financing activities




Proceeds from issuance of common stock	32		783
Net cash provided by financing activities	32		783

Net change in cash and cash equivalents	44,386		(69,470)
Cash and cash equivalents at beginning of year	181,381		192,248
Cash and cash equivalents at end of period	$	225,767	$	122,778

Supplemental cash flow information
Cash paid for interest on convertible notes	$	1,258	$	1,258
Income taxes paid	$	324	$	800

Noncash investing and financing activities
Deferred legal fees and fixed assets included in accounts payable and accrued expenses	$	708	$	250
Property and equipment additions from utilization of tenant improvement allowance	$	—	$	282

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Organization and Business

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. The Company markets ~~two products;~~2 products: Oxtellar XR for the treatment of epilepsy and Trokendi XR for the prophylaxis of migraine headache and the treatment of epilepsy. The Company ~~has several~~is also developing multiple proprietary CNS product candidates ~~in clinical development that~~to address ~~the CNS market.~~

significant unmet medical needs and market opportunities.

The Company launched Oxtellar XR and Trokendi XR for the treatment of epilepsy in 2013, ~~launched~~followed by the launch of Trokendi XR for the prophylaxis of migraine headache in adolescents and adults in ~~April 2017 and~~2017. The Company launched Oxtellar XR with an expanded indication to include monotherapy for partial seizures in January 2019.

COVID-19 Impact

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business operations, and has assessed the impact of the COVID-19 pandemic on its condensed consolidated financial statements as of March 31, 2020. Since the situation surrounding the COVID-19 pandemic remains fluid, the long term duration, nature, and extent of the effects cannot be reasonably estimated at this time.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s condensed consolidated financial statements include the accounts ofof: Supernus Pharmaceuticals, Inc.,; Supernus Europe Ltd.,; Biscayne Neurotherapeutics, Inc.; and ~~its wholly-owned subsidiary,~~ Biscayne Neurotherapeutics Australia Pty 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 condensed consolidated financial statements have been prepared in accordance with thethe requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information. As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited condensed 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 most recent ~~annual report~~Annual Report on Form 10-K, for the year ended December 31, ~~2018,~~2019, filed with the SEC.

In management’s opinion, the condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for any interim period are not necessarily indicative of the Company’s future quarterly or annual results.

The Company, which is primarily located in the United States (U.S.), operates in ~~one~~1 operating segment.

Use of Estimates

The Company bases its estimates on: historical experience; various forecasts; information received from its service providers; information from other sources; and other assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from the Company’s estimates. The Company evaluates the ~~methodology~~methodologies employed in making its estimates on an ongoing basis.

~~Revenue~~ ~~Recognition~~

Inventories

Inventories, which are recorded at the lower of cost or net realizable value, include materials, labor, direct costs and indirect costs. These are valued using the first-in, first-out method. The Company ~~recognizes revenue when control~~writes down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value. Expired inventory is disposed of, and the related costs are recognized as Cost of goods ~~or provision~~sold in the condensed consolidated statement of ~~services are transferred~~earnings.

Inventories Produced in Preparation of Product Launches

Table of Contents

The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable and when future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the ~~Company’s customers, in an amount that reflects the consideration~~product. Capitalization of such inventory begins when the Company ~~expects~~determines that (i) positive results have been obtained for the clinical trials that are necessary to ~~receive~~support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit in ~~exchange~~excess of capitalized costs.

In evaluating whether these conditions are met, the Company considers the following factors: the product candidate’s current status in the regulatory approval process; results from the related pivotal clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; compilation of the regulatory applications; consequent acceptance by the regulatory body; potential impediments to the approval process, such as product safety or efficacy concerns, potential labeling restrictions, and other impediments; historical experience with manufacturing and commercializing similar products as well as the relevant product candidate; and the resilience of the Company’s manufacturing environment, including its supply chain, in determining logistical constraints that could hamper approval or commercialization. In assessing the economic benefit that the Company is likely to realize, the Company considers: the shelf life of the product in relation to the expected timeline for ~~those goods~~approval; patent related or ~~services.~~ contract issues that may prevent or delay commercialization; product stability data of all pre-approval production to determine whether there is adequate expected shelf life; viability of commercialization, taking into account competitive dynamics in the marketplace and market acceptance; anticipated future sales; and anticipated reimbursement strategies that may prevail with respect to the product, if approved.

In applying the lower of cost or net realizable value to pre-launch inventory, the Company estimates a range of likely commercial prices based on comparable commercial products and pre-launch discussions with managed care providers.

The Company ~~does not adjust revenue for any financing effects for transactions where the Company expects the period between the transfer~~could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment(s), due to, among other potential factors, a denial or significant delay of ~~the goods~~approval by regulatory bodies, a delay in commercialization, or ~~services and collection to be less than one year.~~

~~There were no contract assets or liabilities recorded as of March 31, 2019.~~

other adverse factors.

Revenuefrom Product Sales

~~The Company’s products are distributed through a third party fulfillment center.~~

The Company’s customers, who are primarily pharmaceutical wholesalers and distributors, purchase product to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and ~~buying~~purchasing power. The Company recognizes gross revenue when its products are ~~shipped from its fulfillment center to~~physically received by its customers, ~~and the customers~~upon shipment from a third party fulfillment center. Customers take control of ~~the products. The Company’s customers take control of the~~our products, including title and ownership, upon physical receipt of ~~the~~our products at ~~their~~the customers' facilities.

Customer orders are generally fulfilled within a few days of receipt, resulting in minimal order backlog. The Company does not adjust revenue for any financing effects, in transactions where the Company expects the period between the transfer of the goods or services and collection to be less than one year. There are no minimum product purchase requirements with customers.

The Company recognizes revenue from product sales in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Product sales are recorded net of various forms of variable consideration, ~~including~~including: provision for estimated ~~rebates, discounts, allowances,~~rebates; provision for estimated future product returns; and an estimated ~~liability~~allowance for ~~future product returns (collectively, “sales deductions”).~~

~~Variability~~discounts. These are collectively considered "sales deductions."

As described below, variability in the net transaction price for the Company’s products arises primarily ~~arises~~ from the aforementioned sales ~~deductions, as described below.~~deductions. Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur. Significant judgment is required in estimating certain sales deductions. In ~~estimating sales deductions~~making these estimates, the Company considers: historical experience; product price increases; current ~~contract prices~~contractual arrangements under applicable payor programs; unbilled claims; processing time lags; and inventory levels in the wholesale and retail distribution channel. The Company adjusts its estimates of revenue either when the most likely amount of consideration it expects to receive changes, or when the consideration becomes fixed.

If actual results in the future vary from our estimates, the Company adjusts these estimates. These adjustments could materially affect net product sales and earnings in the period that such adjustments ~~become known.~~

are recorded.

Sales Deductions

~~Sales deductions are primarily comprised of rebates, product returns and sales discounts.~~

The Company records product sales net of the following sales deductions:

•Rebates: Rebates are discounts which the Company pays under either ~~private~~public sector or ~~public~~private sector health care programs. Public sector rebate programs encompass: various Medicaid ~~Drug Rebate Programs;~~drug rebate programs; Medicare ~~Coverage Gap Programs; and~~gap coverage

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programs; programs covering public health service ~~institutions~~institutions; and government entities. All federal employees and agencies purchase drugs under the Federal Supply Schedule. Private sector rebate programs include: contractual agreements with managed care providers, under which the Company pays fees to gain access to that provider’s patient drug formulary; and Company sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care ~~provider.~~ provider in order to fill their prescription.

Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by the Company with managed care providers.

Both types of rebates vary over time.

Rebates are owed upon dispensing our product to a ~~patient (i.e.~~patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three ~~components).~~components. First, because rebates are generally invoiced and paid quarterly in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters’ unpaid rebates, to cover prescriptions dispensed in past ~~quarters.~~quarters, but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed, for prescriptions filled in future ~~quarters (i.e., for~~quarters. This pertains to product ~~which~~that has been sold by the Company to wholesalers or distributors, and which resides either as wholesaler/distributor inventory or ~~is held~~ as inventory held at ~~pharmacies).~~

~~Because~~pharmacies, but as of the end of the reporting period, ~~from the date on which the prescription is filled~~this product has not been dispensed to ~~the date the Company receives and pays the invoice varies, the~~a patient.

The Company’s estimates of expected rebate claims vary by program and by type of ~~customer.~~customer, because the period from the date at which the prescription is filled and the date at which the Company receives and pays the invoice varies substantially. For each of its products, the Company bases its estimates of expected rebate claims on multiple factors, ~~including~~including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service ~~contractual agreements;~~contracts; prospective changes in co-pay assistance programs; and anticipated changes in program utilization rates ~~(i.e.~~i.e., patient participation ~~rates).~~

The sensitivity of the Company’s estimates can vary by program and by type of customer. If actual rebates vary from estimated amounts, the Company may need to adjust the balances of such accrued rebates to reflect actual expenditures with respect to these programs. These changes could materially affect net product sales and earnings in the period of adjustment.rates under each specific program. The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors), and records this liability as a reduction to gross product ~~sales and~~sales. This liability is recorded as an increase in Accrued product returns and rebates,in current ~~liabilities.~~

·liabilities on our condensed consolidated balance sheets.

The sensitivity of the Company’s estimates varies by program and by type of customer. If actual rebates vary from estimated amounts, the Company will adjust the balances of such accrued rebates to reflect actual experience with respect to these programs. These adjustments could materially affect the estimated liability balance, net product sales and earnings in the period in which the adjustment(s) is made.

•Returns: ~~Sale~~Sales of the Company’s products are not subject to a general right of return. Product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept return of product that is damaged or defective when shipped from its ~~warehouse. In addition, the~~third party fulfillment center.

The Company will accept return of expired product six months prior to and up to 12 months subsequent to the product’s expiry date. Expired or defective returned product cannot be re-sold and is therefore destroyed.

The Company estimates the liability for returns based on the actual returns experience for its two commercial products, in conjunction with industry experience for return of similar products (i.e., ambient temperature storage for oral formulations). Because the Company’s products have not reached maturity, the return rate of its products has and is expected to continue to vary.

The Company records an estimated liability for product returns at the time the customer takes title to the product (i.e., at time of sale) as a reduction to gross product ~~sales and~~sales. This liability is recorded as an increase in Accrued product returns and rebates, in current ~~liabilities.~~

liabilities on our condensed consolidated balance sheets. The ~~Company’s estimated~~Company estimates the liability for ~~product~~ returns ~~is also affected by price increases taken subsequent to~~based primarily on the ~~date of sale. The~~actual returns experience for its 2 commercial products.

Because the Company’s products have a shelf life of ~~36 to~~ 48 months from date of ~~manufacture. Because~~manufacture, and because the Company accepts return of ~~the extended shelf life coupled with its return policy,~~product up to 12 months post expiry, there ~~typically~~ is a significant time lag of several years between the time ~~at which~~when the product is sold and the time when the Company issues credit on expired product. The Company’s returns policy generally permits product returns to be processed at current wholesaler price rather than at historical acquisition price. ~~Therefore, price increase(s) taken during~~Hence, the ~~current period increase(s) the provision for product returns because it affects the~~Company’s estimated liability for product returns ~~for both sales made in~~is affected by price increases taken subsequent to the ~~current period as well as sales made in prior periods.~~ date of sale.

When the Company adjusts its estimates for product returns, ~~either favorably or unfavorably, this~~the adjustment affects the estimated liability, product sales and earnings in the period of adjustment.

· Those adjustments may be material to our financial results.

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•Sales discounts: Distributors and wholesalers of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements, and are estimated as a percentage of the price at which the Company sells product to them. In addition, ~~they~~distributors and wholesalers are offered a prompt pay discount for payment within a specified period.

The Company accounts for these discounts at the time of sale, as a reduction to gross product sales, and records these ~~amounts~~discounts as an a valuation allowance against Accounts receivable ~~valuation allowance.~~

~~Customer orders are generally fulfilled within a few days of receipt, resulting in minimal order backlog. Open purchase orders for products from customers are expected to be fulfilled within~~on the ~~next 12 months. There are no minimum product purchase requirements.~~

condensed consolidated balance sheets.

License Revenues

License and Collaboration Agreements

The Company has entered into collaboration agreements to ~~commercialize~~facilitate commercialization of both Oxtellar XR and Trokendi XR outside of the U.S.~~, which involve~~ Those agreements include the right to use the Company’s intellectual property as a functional ~~license. These agreements~~license, and generally include an up-front license fee and ongoing milestone payments upon the achievement of certain specific events. These agreements may also require minimum royalty payments based on sales of products ~~developed from~~which use the applicable intellectual property.

Up-front license fees are recognized once the license has been ~~delivered to~~executed between the ~~customer.~~

Company and its licensee.

Milestones are a form of variable consideration that are recognized when either the underlying events have ~~been achieved~~transpired (i.e., event-based milestone) or when the sales-based targets have been met by the collaborative partner (i.e., sales-based milestone). Both types of milestone payments are ~~non-refundable.~~nonrefundable. The Company ~~evaluates whether achieving the milestones is considered probable and~~ estimates the amount of the milestone to be included in the transaction price by using the most likely amount method. ~~This can involve management’s~~The Company includes in the transaction price some or all of the amount of variable consideration (i.e., the value of the associated milestone), but includes this only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Assessing whether it is probable that a significant revenue reversal will not occur once the uncertainty related to the variable consideration is subsequently resolved requires management judgment, ~~that includes~~and may require assessing factors that are outside of the Company’s influence, such as: likelihood of regulatory success; availability of third party information; and expected ~~duration of~~ time period until achievement of the event. These factors are evaluated based on the specific facts and circumstances. ~~If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price.~~

Event-based milestones are recognized in the period that the related event, such as regulatory approval, occurs. Milestone payments that are not within the control of the Company, such as approval from regulatory authorities, or where attainment of the specified event is dependent on the success of a third-party, are not considered probable of being achieved until the specified event ~~occurs.~~ Sales-based milestones are recognized as revenue only when the sales-based target is achieved. ~~Revenue is recognized from the satisfaction of performance obligations in the amount billable to the customer.~~

~~Revenue associated with future milestones will be recognized when the related event occurs or sales-based target is achieved.~~

There are no0 guaranteed minimum amounts owed to the Company related to license and collaboration agreements.

Royalty Revenues

The Company recognizes ~~non-cash~~noncash royalty revenue for amounts earned pursuant to aits royalty agreement with United Therapeutics Corporation (United Therapeutics) ~~that involves~~, based on estimated product sales by United Therapeutics (see Note 3). This agreement includes the right to use the Company’s intellectual property as a functional license. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 17, Commitments and Contingencies). ~~Accordingly, the Company records non-cash royalty revenue based on estimated product sales~~Sales of Orenitram by United Therapeutics ~~in which those product sales~~ result in payments made ~~from~~by United Therapeutics to HC Royalty, in ~~connection~~accordance with these agreements.

Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction, and amortizes this amount as noncash royalty revenue.

The Company also recognizes noncash interest expense related to this liability, and accrues interest expense at an effective interest rate (see Note 16). The interest rate is determined based on projections of HC Royalty’s rate of return.

Royalty revenue also includes cash royalty amounts received from collaboration partners, including from Shire Plc ~~(Shire) (now~~(Shire, a subsidiary of Takeda Pharmaceutical Company Ltd), based on net product sales in the current period of Shire’s product, ~~Mydayis, in the current period.~~Mydayis. Royalty revenue is only recognized when the underlying product sale by Shire occurs. The Shire arrangement also ~~involves the~~includes Shire's right to use the Company’s intellectual property as a functional license.

There are no0 guaranteed minimum amounts owed to the Company related to any of these royalty revenue ~~agreement.~~

~~Preclinical Study~~agreements.

Research and ~~Clinical Trial Accruals~~

Development Expense and Related Accrued Research and Development Expenses

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Research and development expenditures are expensed as incurred. These expenses include: salaries, benefits and share-based compensation; contract research and development services provided by third parties; costs for conducting preclinical and clinical studies; cost of acquiring or manufacturing clinical trial materials; regulatory costs; facilities costs; depreciation expense and other allocated expenses; and license fees and milestone payments related to in-licensed products and technologies. Assets acquired that are used for research and development and that have no future alternative use are expensed as in-process research and development.

The Company estimates preclinical ~~study~~ and clinical trial expenses based on ~~the~~ services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs) and other service providers that ~~conduct activities~~provide services on the Company’s behalf. In recording service fees, the Company estimates the ~~time~~cost of those services which have been performed on behalf of the Company during the current period, ~~over which the related services are performed~~ and compares ~~the level of effort expended through the end of each period~~those costs with the cumulative expenses recorded and cumulative payments made for such services. As appropriate, the Company accrues additional service fees, or defers ~~any non-refundable~~nonrefundable advance payments, until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts its accrued expenses, or its deferred advance payments, accordingly. If the Company ~~later~~subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expense in the period in which such a determination is made.

Marketable Securities

Marketable securities consist of investments in: U.S. Treasury bills and notes; certificates of deposit; various U.S. governmental agency debt securities; corporate and municipal bonds; and other fixed income securities. The Company places all investments with governmental, industrial or financial institutions whose debt is rated as investment grade.

The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets. The Company's investments are classified as available-for-sale and are carried at fair value.

Any unrealized holding gains or losses on debt securities are reported, net of any tax effects, as a component of other comprehensive earnings (loss) in the condensed consolidated statement of comprehensive earnings. Realized gains and losses are included in interest income, and are determined using the specific identification method for determining the cost of securities sold.

The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses), if any, are included in the condensed consolidated statement of earnings. A corresponding allowance is established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings, and adjust accordingly the allowance (see Note 2 - Recently Issued Accounting Pronouncements).

Share-Based Compensation

Stock Options

The Company recognizes share-based compensation expense over the service period using the straight-line method. Employee share-based compensation for stock options is measured based on estimated fair value as of the grant ~~date. The Company uses~~date, using the Black-Scholes option-pricing model, in calculating the fair value of option grants as of the grant date. The Company uses the following assumptions for estimating fair value of option grants:

Fair Value of Common Stock—The fair value of ~~the~~ common stock underlying the option grants is determined based on observable market prices of the Company’s common stock.

Expected Volatility—Volatility is a measure of the amount by which the Company’s share price has historically fluctuated ~~(historical volatility)~~ or is expected to fluctuate ~~(expected~~(i.e., expected volatility) during a period. Beginning in the first quarter of 2019, the Company ~~uses~~began using the historical volatility of its common stock to measure expected ~~volatility for future option grants.~~volatility. Prior to the first quarter of 2019, volatility was estimated using the ~~Company used the~~observed volatility of the common stock of several public entities of similar size, complexity, and stage of ~~development. Prior to the first quarter of 2019, volatility was estimated using the volatility of the stock of these companies,~~development, as well as taking into consideration the Company’s actual volatility since the Company’s IPO in 2012.

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Dividend Yield—The Company has never declared or paid dividends, and has no plans to do so in the foreseeable future.

Expected Term—This is the period of time during which options are expected to remain unexercised. Options have a maximum contractual term of ten years. Beginning in the first quarter of 2019, the Company ~~determines~~began estimating the average expected life of stock options using its historical experience. Prior to the first quarter of 2019, the Company determined the average expected life of stock options according to the “simplified method”, as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term.

Risk-Free Interest Rate—This is the observed U.S. Treasury ~~note~~Note rate, as of the week each option grant is issued, with a term that most closely resembles the expected term of the option.

Expected Forfeiture Rate—Forfeitures are accounted for as they occur.

~~Self-insurance Liabilities~~

Restricted Stock Units (RSUs)

Compensation expense is recorded based on amortizing the fair market value as of ~~January 1, 2019,~~ the date of the grant over the implied service period. RSUs generally vest one year from the date of grant and are subject to continued service requirements.

Performance Stock Units (PSUs)

Performance-Based Awards

Compensation expense for performance-based awards is recognized based on amortizing the fair market value as of the grant date over the periods during which the achievement of the performance is probable. Performance-based PSU awards require certain performance targets to be achieved in order for these awards to vest. These awards vest on the date of achievement of the performance target.

Market-Based Awards

Compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition is satisfied. Market-based PSU awards subject to market-based performance targets require achievement of the performance target in order for these units to vest. The Company ~~self-insures its employee medical insurance liability.~~estimates fair value as of the grant date and expected term using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the derived requisite service period. The ~~self-insurance liability~~expected volatility as of grant date is ~~undiscounted and determined actuarially. It~~estimated based historical daily volatility of the Company's common stock over the expected term of the award. The risk-free interest rate is based on ~~claims filed, historical and industry claims experience, and an estimate of claims incurred but not yet paid. The Company has established stop-loss amounts that limit~~ the ~~Company’s further exposure after a claim reaches the designated stop-loss threshold. The stop-loss limit for self-insured employee medical claims is $150,000 per employee per year.~~

~~The Company recorded self-insurance liability of approximately $515,000~~U.S. Treasury Note rate, as of ~~March 31, 2019 in~~ ~~Accrued expenses and other current liabilities~~ in the ~~condensed consolidated balance sheets.~~

week the award is issued, with a term that most closely resembles the expected term of the award.

Advertising Expense

Advertising expense includes ~~costs~~the cost of promotional materials and activities, such as printed marketing materials, marketing programs and speaker programs. The ~~costs~~cost of the ~~Company’s~~Company's advertising efforts are expensed as incurred.

The Company incurred approximately ~~$9.9~~$11.6 million and ~~$7.9~~$9.9 million in advertising costs for the three ~~month periods~~months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. These expenses are recorded in as a component of Selling, general and administrative expensesin the condensed consolidated statements of earnings.

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Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases for assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be estimated as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities, based on full knowledge of the position and relevant facts. The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

~~In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “~~~~Leases (Topic 842)~~” and its related amendments (New Lease Standard). The New Lease Standard requires a lessee to recognize a right-of-use (ROU) lease asset and a corresponding lease liability on the balance sheet. The Company adopted the New Lease Standard on January 1, 2019 using the modified retrospective method, which applies the provision of the New Lease Standard at the effective date without adjusting comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the New Lease Standard which, among other things, allowed the Company to carry forward the historical lease classification.

The adoption of the New Lease Standard resulted in the recognition of lease assets and lease liabilities for operating leases as of January 1, 2019 of approximately $4.0 million. Financial reporting for periods on or after January 1, 2019 are presented under the new guidance. Prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. The standard did not materially impact the Company’s condensed consolidated net earnings and had no impact on cash flows (see Note 14, ~~Leases~~).

~~New Accounting Pronouncements Not Yet Adopted~~

~~In June 2016, the FASB issued~~

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326)~~, which~~ - The new standard, issued in July 2016, requires credit losses on financial assets ~~measured on an amortized cost basis~~ to be ~~presented at~~measured as the net amount expected to be collected, rather than based on incurred losses. ~~Further,~~For available-for-sale debt securities, the new standard did not revise the definition of impairment; i.e., the investment is impaired if the fair value of the investment is less than its cost. It also did not revise the requirement under ASC 320, for an entity to recognize in net income only the impairment amount related to credit risk, and to recognize, in other comprehensive income, the noncredit impairment amount. The new standard made certain targeted changes to the impairment of available-for-sale debt securities, to eliminate the concept of "other than temporary" from the impairment model. Targeted changes to the impairment model included recognition of credit losses on available-for-sale debt securities ~~should be recorded through an~~using the allowance ~~for credit losses, limited~~method, and limiting the allowance to the amount by which fair value is below amortized cost. The new standard also requires enhanced disclosure of credit risk associated with respective assets.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract - The new standard, issued in August 2018, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or to obtain internal-use software. This includes hosting arrangements that include an internal-use software license. This ASU also requires that the implementation costs of a hosting arrangement that is a service contract are expensed over the term of the hosting arrangement, which includes reasonably certain renewals.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 - The new standard, issued in November 2018, clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) - The new standard, issued in August 2018, improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard isremoves, modifies and adds certain disclosure requirements.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for ~~fiscal years beginning after~~Income Taxes - The new standard, issued in December ~~15,~~ 2019, simplifies the accounting for ~~interim and annual periods within those years,~~income taxes. This guidance will be effective on January 1, 2021 on a prospective basis, with early adoption permitted.

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The Company is currently ~~assessing~~evaluating the impact of ~~this~~the new ~~standard.~~ guidance on its consolidated financial statements and will adopt the new standard effective January 1, 2021.

3.Disaggregated Revenues

The following table summarizes the disaggregation of revenues by nature, (dollars in thousands):


	Three Months ended March 31,
	2020		2019
	(unaudited)
Net product sales
Trokendi XR	$	68,551	$	63,693
Oxtellar XR	23,939		19,406
Total net product sales	$	92,490	$	83,099
Royalty revenues	2,486		2,375
Total revenues	$	94,976	$	85,474

Trokendi XR accounted for 74% and 77% of the Company’s total net product sales for the three months ended March 31, 2020 and 2019, respectively.

The Company ~~does not expect it~~recognized noncash royalty revenue of $1.6 million for the three months ended March 31, 2020 and 2019, respectively, consequent to ~~have~~the Company's agreement with HC Royalty (see Note 2).

3.multi-year period. However, in the first quarter of 2020, the return rate for the final blister pack lots of Trokendi XR produced in 2017 exhibited a return rate significantly higher than had been experienced with all previous lots. The lots for which a higher return rate was observed are the last lots which were produced and distributed.

As a result, the Company changed its estimate of the provision for product returns, based on the most recent experience. This change in estimate resulted in an increase to the provision for product returns of $8.0 million, decreased net product sales of $8.0 million and decreased net earnings of $5.9 million, or $0.11 per basic and per diluted share, for the three months ended March 31, 2020.

4. Fair Value of Financial Instruments

The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The Company reports assets and liabilities measured at fair value using a three level ~~fair value~~ hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

•Level 1—Inputs are unadjusted, quoted prices in active markets for identical ~~assets that the~~assets. The Company has the ability to access these prices as of the measurement date.

Level 1 assets include: cash held at banks; certificates of deposit; money market funds; investment grade corporate debt securities and U.S. government agency and municipal debt securities.

•Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs ~~are:~~are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets orand liabilities in markets that are not active; inputs other than quoted prices but that are observable for the asset or liability (e.g., interest ~~rates,~~rates; yield ~~curves, etc.)~~curves); and inputs that are derived principally from or corroborated by observable market data, by correlation, or by other means (i.e., market corroborated inputs).

Level 2 assets include: investment grade corporate debt securities, U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair

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value of the restricted marketable securities is recorded in Other assets on the condensed consolidated balance sheets.

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

There were 0 level 3 assets as of March 31, 2020 or December 31, 2019.

Financial Assets

The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in ~~thousands~~thousands):


			Fair Value Measurements at March 31, 2020 (unaudited)
	Total Fair Value at March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	19,911	$	19,911	$	—
Money market funds	205,856		205,856
Marketable securities
Corporate debt securities	174,939		—		174,939
Municipal debt securities	165		—		165
Long term marketable securities
Corporate debt securities	524,683		255		524,428
U.S. government agency debt securities	10,029		—		10,029
Other noncurrent assets
Marketable securities - restricted (SERP)	342		8		334
Total assets at fair value	$	935,925	$	226,030	$	709,895


			Fair Value Measurements at December 31, 2019 (unaudited)
	Total Fair Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	78,912	$	78,912	$	—
Money market funds	102,469		102,469		—
Marketable securities
Corporate debt securities	165,527		—		165,527
Municipal debt securities	165		—		165
Long term marketable securities
Corporate debt securities	571,828		254		571,574
U.S. government agency and municipal debt securities	19,945		—		19,945
Other noncurrent assets
Marketable securities - restricted (SERP)	418		3		415
Total assets at fair value	$	939,264	$	181,638	$	757,626

Table of ~~dollars:~~

Fair Value Measurements at

March 31, 2019

(unaudited)

Significant

Total Fair

Quoted Prices

Other

Significant

Value at

in Active Markets

Observable

Unobservable

March 31,

for Identical Assests

Inputs

Inputs

2019

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash and cash equivalents

$
122,778

$
122,778

$
—

$
—

Marketable securities

Corporate debt securities

170,165

246

169,919

—

Long term marketable securities

Corporate debt securities

521,398

450

520,948

—

Government debt securities

1,153

—

1,153

—

Other non-current assets

Marketable securities - restricted (SERP)

375

1

374

—

Total assets at fair value

$
815,869

$
123,475

$
692,394

$
—

Fair Value Measurements at

December 31, 2018

Significant

Total Fair

Quoted Prices

Other

Significant

Value at

in Active Markets

Observable

Unobservable

December 31,

for Identical Assests

Inputs

Inputs

2018

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash and cash equivalents

$
192,248

$
192,248

$
—

$
—

Marketable securities

Corporate debt securities

163,770

245

163,525

—

Long term marketable securities

Corporate debt securities

415,650

445

415,205

—

Government debt securities

3,148

—

3,148

—

Other non-current assets

Marketable securities - restricted (SERP)

326

1

325

—

Total assets at fair value

$
775,142

$
192,939

$
582,203

$
—

~~Level 1 assets include cash held at banks, certificates of deposit, money market funds, and investment grade corporate and government debt securities.~~

Level 2 assets include the SERP (Supplemental Executive Retirement Plan) assets, commercial paper and investment grade corporate and government debt securities and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data in their models to estimate fair value. The fair value of the restricted marketable securities is recorded in ~~Other Assets~~ ~~in the condensed consolidated balance sheets.~~

Contents

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

Unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):


	March 31, 2020		December 31, 2019
	(unaudited)
Corporate and U.S. government agency and municipal debt securities
Amortized cost	$	710,072	$	747,598
Gross unrealized gains	5,362		10,031
Gross unrealized losses	(5,618)		(164)
Total fair value	$	709,816	$	757,465

The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):


	March 31, 2020
	(unaudited)
Less than 1 year	$	175,104
1 year to 2 years	181,141
2 years to 3 years	199,207
3 years to 4 years	154,364
Greater than 4 years	—
Total	$	709,816

As of March 31, 2020, there was 0 impairment due to credit loss on any available-for-sale marketable securities.

Financial Liabilities

The following table sets forth the Company’s financial liabilities that are not carried at fair value, (dollars in ~~thousands of dollars:~~

March 31, 2019

December 31, 2018

(unaudited)

Carrying Value

Fair Value

Carrying Value

Fair Value

2023 Notes

$
333,310

$
388,664

$
329,462

$
375,834

thousands):


	March 31, 2020						December 31, 2019
	(unaudited)
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
2023 Notes	$	349,232	$	328,038	$	345,170	$	366,023

The fair value is estimated based on actual ~~trade~~trading information, as well as quoted prices provided by bond ~~traders and is characterized within Level 2 of the fair value hierarchy.~~

~~Unrestricted available-for-sale marketable securities held by the Company are as follows, in thousands of dollars:~~

March 31, 2019

December 31, 2018

(unaudited)

Corporate and government debt securities

Amortized cost

$
690,853

$
586,726

Gross unrealized gains

2,905

55

Gross unrealized losses

(1,042
)
(4,213
)
Total fair value

$
692,716

$
582,568

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

March 31,

2019

(unaudited)

Less than 1 year

$
170,165

1 year to 2 years

170,246

2 years to 3 years

181,872

3 years to 4 years

170,433

Greater than 4 years

—

Total

$
692,716

~~The Company has not experienced any other-than-temporary losses on its marketable securities.~~

~~4. Inventories~~

~~Inventories consist of the following, in thousands of dollars:~~

March 31,

December 31,

2019

2018

(unaudited)

Raw materials

$
5,377

$
5,742

Work in process

5,661

7,275

Finished goods

15,480

12,642

Total

$
26,518

$
25,659

traders.

5.~~Property and Equipment~~

~~Property and equipment consists of the following, in thousands of dollars:~~

March 31,

December 31,

2019

2018

(unaudited)

Lab equipment and furniture

$
9,056

$
8,995

Leasehold improvements

3,014

2,731

Software

2,197

2,181

Computer equipment

1,313

1,313

Construction-in-progress

238

94

15,818

15,314

Less accumulated depreciation and amortization

(11,592
)
(11,219
)
Total

$
4,226

$
4,095

~~Depreciation and amortization expense on property and equipment was approximately $0.4 million for both three month periods ended March 31, 2019 and 2018.~~

~~The Company performs its annual impairment assessment in the fourth quarter, or earlier if impairment indicators exist. As of March 31, 2019, there were no identified indicators of impairment.~~

~~6. Intangible Assets~~

Intangible assets consist of patent defense costs, which are legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR. The Company amortizes those costs over the useful life of the respective patents.

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

Weighted-

March 31,

December 31,

Average Life

2019

2018

(unaudited)

Capitalized patent defense costs

3.75 - 8.00 years

$
44,725

$
44,724

Less accumulated amortization

(14,662
)
(13,356
)
Total

$
30,063

$
31,368

~~Amortization expense on intangible assets was approximately $1.3 million for both three month periods ended March 31, 2019 and 2018.~~

~~The Company performs its annual impairment assessment in the fourth quarter, or earlier, if impairment indicators exist. As of March 31, 2019, there were no identified indicators of impairment.~~

~~7. Accrued Expenses and Other Current Liabilities~~

~~Accrued expenses~~ ~~and other current liabilities consist of the following, in thousands of dollars:~~

March 31,

December 31,

2019

2018

(unaudited)

Accrued clinical trial and clinical supply costs

$
15,420

$
14,034

Accrued compensation

11,545

13,546

Accrued professional fees

3,336

3,706

Accrued interest expense

—

650

Accrued product costs

751

38

Lease liabilities, current

3,250

—

Other accrued expenses

2,305

4,561

Total

$
36,607

$
36,535

~~8. Accrued Product Returns and Rebates~~

~~Accrued product returns and rebates consist of the following, in thousands of dollars:~~

March 31,

December 31,

2019

2018

(unaudited)

Accrued rebates

$
66,090

$
85,003

Accrued product returns

22,110

22,060

Total

$
88,200

$
107,063

9. Convertible Senior Notes Due 2023

The 0.625% Convertible Senior Notes Due 2023 (2023 Notes), which were issued in March 2018, bear interest at an annual rate of 0.625%, payable semi-annually in arrears on April 1 and October 1 of each year. The 2023 Notes will mature on April 1, 2023, unless earlier converted or repurchased by the Company. The Notes are being amortized to interest expense at an effective interest rate of 5.41% over the contractual term of the 2023 Notes. The Company may not redeem the 2023 Notes at its option before maturity.

The total principal amount of 2023 Notes is $402.5 million.

The 2023 Notes were issued pursuant to an Indenture between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default upon which the 2023 Notes may be due and payable immediately. The Indenture does not contain any financial or operating covenants or restrictions on the payment of dividends, the issuance of other indebtedness, or the issuance or repurchase of securities by the Company.

The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at its election, based on the applicable conversion rate. The initial conversion rate is 16.8545 shares per $1,000 principal amount of the 2023 Notes, which represents an initial conversion price of approximately $59.33 per share, and is subject to adjustment as specified in the Indenture. In the event of conversion, if converted in cash, the holders would forgo all future interest payments, any unpaid accrued interest, and the possibility of further stock price appreciation.

Table of Contents

If a “make-whole fundamental change,” as defined in the Indenture, occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. If a “fundamental change,” as defined in the Indenture occurs, then

noteholders may require the Company to repurchase their 2023 Notes at a cash repurchase price equal to the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest, if any.

Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate privately negotiated convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) with each of the call spread counterparties. The Company issued 402,500 convertible note hedge options. In the event that shares or cash are deliverable to holders of the 2023 Notes upon conversion at limits defined in the Indenture, counterparties to the convertible note hedges will be required to deliver up to approximately 6.8 million shares of the Company’s common stock, or to pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the 2023 Notes, based on a conversion price of $59.33 per share.

Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate privately negotiated warrant transactions (collectively, the Warrant Transactions) with each of the call spread counterparties. The Company issued a total of 6,783,939 warrants. The warrants entitle the holder to ~~one~~1 share per ~~warrant at the strike price through 2023.~~warrant. The strike price of the Warrant Transactions will initially be $80.9063 per share of the Company’s common stock, ~~(subject~~and is subject to ~~adjustment).~~

adjustment.

The Convertible Note Hedge Transactions are expected to ~~generally~~ reduce the potential dilution ~~with respect to~~of the Company’s common stock upon conversion of the 2023 Notes, and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2023 Notes, as the case may be. The Warrant Transactions are intended to partially offset the cost to the Company of the purchased Convertible Note Hedge Transactions; however, the Warrant Transactions could have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the Warrant Transactions, exceeds the strike price of the warrants.

The liability component of the 2023 Notes consists of the following, (dollars in ~~thousands of dollars:~~

March 31,

December 31,

2019

2018

(unaudited)

Principal amount of the 2023 Notes

$
402,500

$
402,500

Debt discount

(76,434
)
(76,434
)
Deferred financing costs

(8,452
)
(8,452
)
Accretion of debt discount and deferred financing costs

15,696

11,848

Total carrying value

$
333,310

$
329,462

Nothousands):


	March 31, 2020		December 31, 2019
	(unaudited)
2023 Notes	$	402,500	$	402,500
Unamortized debt discount and deferred financing costs	(53,268)		(57,330)
Total carrying value	$	349,232	$	345,170

NaN 2023 Notes were converted as of March 31, ~~2019.~~

~~10. Other Expenses~~

~~Other expenses consist of the following, in thousands of dollars:~~

Three Months ended March 31,

2019

2018

(unaudited)

Interest income

$
4,681

$
1,206

Interest expense

(4,710
)
(717
)
Interest expense-nonrecourse liability related to sale of future royalties

(1,160
)
(701
)

Total

$
(1,189
)
$
(212
)

Interest expense includes non-cash interest expense relates to amortization of deferred financing costs and debt discount in the amount of $3.8 million and $0.6 million for the three month periods ended March2020 or December 31, ~~2019 and 2018, respectively.~~

~~11.~~2019.

6. Share-Based Payments

Share-based compensation expense is as follows (dollars in ~~thousands~~thousands):


	Three Months ended March 31,
	2020		2019
	(unaudited)
Research and development	$	681	$	574
Selling, general and administrative	3,307		2,713
Total	$	3,988	$	3,287

Table of ~~dollars:~~

Three Months ended March 31,

2019

2018

(unaudited)

Research and development

$
574

$
418

Selling, general and administrative

2,713

2,217

Total

$
3,287

$
2,635

Contents

Stock Option and Stock Appreciation Rights

The following table summarizes stock ~~options~~option and ~~SAR~~stock appreciation rights (SAR) activities:

Number of
Options

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term (in years)

Outstanding, December 31, 2018

3,916,963

$
19.98

7.10

Granted (unaudited)

831,835

$
36.75

Exercised (unaudited)

(57,665
)
$
13.57

Forfeited (unaudited)

(10,437
)
$
30.69

Outstanding, March 31, 2019 (unaudited)

4,680,696

$
23.01

7.40

As of December 31, 2018:

Vested and expected to vest

3,916,963

$
19.98

7.10

Exercisable

1,889,947

$
12.47

5.96

As of March 31, 2019:

Vested and expected to vest (unaudited)

4,680,696

$
23.01

7.40

Exercisable (unaudited)

2,605,591

$
15.33

6.22

~~12.~~

Number of
Options Weighted-
Average
Exercise Price
(per share) Weighted-
Average
Remaining
Contractual
Term (in years)
Outstanding, December 31, 2019 4,606,559 $ 23.05 6.66
Granted 1,105,925 $ 23.99
Exercised (3,811) $ 8.33
Forfeited (25,275) $ 28.12
Outstanding, March 31, 2020 (unaudited) 5,683,398 $ 23.22 7.08
As of December 31, 2019:
Vested and expected to vest 4,606,559 $ 23.05 6.66
Exercisable 2,598,112 $ 15.68 5.48
As of March 31, 2020:
Vested and expected to vest 5,683,398 $ 23.22 7.08
Exercisable 3,394,315 $ 18.71 5.75

Restricted Stock Units

During the three months ended March 31, 2020, the Company granted 26,055 RSUs with a weighted average grant date fair value per share of $23.99, which generally vest one year from the date of grant.

Performance Stock Units

Performance-Based Awards

During the three months ended March 31, 2020, the Company granted 15,625 performance-based awards, with a weighted average grant date fair value per share of $23.99, which require certain performance targets to be achieved in order for these awards to vest. Vesting is subject to continued service requirements through the date that the achievement of the performance target is certified.

Market-Based Awards

During the three months ended March 31, 2020, the Company granted 15,625 market-based awards, with a weighted average grant date fair value per share of $23.41, which are subject to market-based performance targets in order for these awards to vest.

7. Earnings per Share

Basic earnings per share (EPS) is calculated using the weighted-average number of common shares outstanding. Diluted ~~earnings per share~~EPS is calculated using the weighted-average number of common shares outstanding, including the dilutive effect of the Company’s stock option grants, ~~stock appreciation rights (SAR),~~SARs, RSUs, PSUs, warrants, employee stock purchase plan (ESPP) awards and the 2023 Notes, as determined per the treasury stock method.

Effect of Convertible Notes and Related Convertible Note Hedges and Warrants

In connection with the issuance of the 2023 Notes, the Company entered into Convertible Note Hedge and Warrant Transactions as described further in Note 5, Convertible Senior Notes Due 2023. The ~~following common stock equivalents~~expected collective impact of the Convertible Note Hedge and Warrant Transactions is to reduce the potential dilution that may occur between the conversion price of $59.33 per share and the strike price of the warrants of $80.9063 per share.

Table of Contents

The 2023 Notes and related Convertible Note Hedge and Warrant Transactions are excluded in the calculation of diluted EPS because inclusion would be anti-dilutive. Specifically, the denominator of the diluted EPS calculation excludes the additional shares related to the 2023 Notes and warrants, because the average price of the Company's common stock was less than the conversion price of the 2023 Notes of $59.33 per share, as well as less than the strike price of the warrants of $80.9063 per share. Prior to actual conversion, the Convertible Note Hedge Transactions are not considered in calculating diluted earnings per share, as their impact would be anti-dilutive.

In addition to the above described effect of the 2023 Notes and the related Convertible Note Hedge and Warrant Transactions, the Company also excluded the common stock equivalents of the following outstanding stock-based awards in the calculation of diluted EPS, because their inclusion would be ~~anti-dilutive, as applied to the earnings from continuing operations, and as applicable to common stockholders, for the three month periods ended March 31, 2019 and 2018:~~

Three Months ended March 31,

2019

2018

(unaudited)

Warrants to purchase common stock

7,966,488

1,752,793

Convertible notes

239,272

22,634

Convertible notes hedges

240

23

Stock options, SAR and ESPP awards

608,948

208,661

anti-dilutive:


	Three Months ended March 31,
	2020	2019
	(unaudited)



Stock options, RSUs, PSUs	3,034,099	608,948

The following table sets forth the computation of basic and diluted net earnings per share for the three ~~month periods~~months ended March 31, 2020 and 2019 ~~and 2018,~~(dollars in thousands, ~~of dollars,~~ except share and per share ~~amounts:~~

Three Months ended March 31,

2019

2018

(unaudited)

Numerator, in thousands:

Net earnings used for calculation of basic and diluted EPS

$
18,340

$
26,352

Denominator:

Weighted average shares outstanding, basic

52,336,443

51,536,474

Effect of dilutive potential common shares:

Stock options and SAR

1,648,942

2,251,872

Total dilutive potential common shares

1,648,942

2,251,872

Weighted average shares outstanding, diluted

53,985,385

53,788,346

Earnings per share, basic

$
0.35

$
0.51

Earnings per share, diluted

$
0.34

$
0.49

~~13.~~amounts):

Three Months ended March 31,
2020 2019
(unaudited)
Numerator, dollars in thousands:
Net earnings $ 21,518 $ 18,340
Denominator:
Weighted average shares outstanding, basic 52,534,787 52,336,443
Effect of dilutive securities:
Stock options, PSU, RSU and SAR 1,046,264 1,648,942
Weighted average shares outstanding, diluted 53,581,051 53,985,385
Earnings per share, basic $ 0.41 $ 0.35
Earnings per share, diluted $ 0.40 $ 0.34

8. Income ~~Taxes~~

Tax Expense

The following table provides ~~a comparative summary of~~information regarding the Company’s ~~income tax expense and effective tax rate for the three month periods ended~~ ~~March 31, 2019 and 2018, in thousands of dollars:~~

Three Months ended March 31,

2019

2018

(unaudited)

Income tax expense

$
5,899

$
4,830

Effective tax rate

24.34
%
15.49
%

~~The~~ income tax expense for the three ~~month period ended~~ ~~March 31, 2019 was attributable to U.S. federal and state income taxes.~~

~~For the three month period~~months ended March 31, 2020 and 2019, ~~the Company recorded $5.9 million of income tax expense, an increase from $4.8 million as compared to the same period of 2018.~~ (dollars in thousands):


	Three Months ended March 31,
	2020			2019
	(unaudited)
Income tax expense	$	7,516		$	5,899
Effective tax rate	25.9		%	24.3		%

The ~~increase~~increases in income tax expense and in the effective tax rate for the three ~~month period~~months ended March 31, ~~2019,~~2020, as compared to the same period in ~~2018, was~~the prior year, are primarily attributable to higher income before taxes, increase in the ~~larger excess~~number of states in which we owe taxes and an increase in non-deductible expenses.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending and tax ~~benefits realized~~breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of the COVID-19 pandemic. While the CARES Act provides sweeping tax changes in ~~2018 related~~response to ~~exercises~~the COVID-19 pandemic, some of ~~employee stock options.~~

~~The Company recorded income tax benefits related~~the more significant provisions which are expected to ~~exercises~~impact the

Table of ~~employee stock options~~Contents

Company’s financial statements include removal of ~~approximately $0.3 million~~certain limitations on utilization of net operating losses and ~~$2.0 million for~~increasing the ~~three month periods ended~~ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

As of March 31, ~~2019~~2020, the Company expects that these provisions will not have a material impact as the Company does not have net operating losses that would fall under these provisions and ~~2018, respectively.~~

~~14. Leases~~

does not expect interest expense to be limited. The Company determines if an arrangement is a lease at inception. Some leases include options to terminate or to extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

The Company has lease arrangements that contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance, labor charges, etc.) and accounts for these components as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

~~Operating leases are included in~~ ~~Lease assets~~, ~~Accrued expenses and other current liabilities~~~~, and~~ ~~Lease liabilities, long term~~ ~~on the condensed consolidated balance sheets. Operating lease assets and lease liabilities are recognized at the commencement date, based on the present value~~ultimate impact of the ~~future minimum lease payments over~~CARES Act may differ from this estimate due to changes in interpretations and assumptions, guidance that may be issued and actions the ~~lease term. Lease expense for operating leases~~Company may take in response to the CARES Act. The CARES Act is ~~recognized as an operating cost.~~highly detailed and the Company will continue to assess the impact that various provisions will have on its business.

9. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of future payments.

The Company has operating leases for its ~~current~~new headquarters office at 9715 Key West Ave, Rockville, MD; its former headquarters office and lab space at 1550 East Gude Drive in Rockville, MD; and for ~~the~~its fleet vehicles. The Company’s existing leases for its ~~current~~former headquarters office and lab space run through April 2020. ~~The Company applies a portfolio approach for~~With respect to the fleet vehicle leases, ~~to effectively account for the operating lease assets and liabilities,~~ given the volume of individual leases involved in the overall ~~arrangement.~~

arrangement, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.

New Headquarters Lease

The Company entered into a new lease agreement, effective January 31, 2019, with Advent Key West, LLC (Landlord), for its new headquarters office in Rockville, MD (Premises). The term of the new headquarters lease commenced on February 1, 2019 (the Commencement Date) and will continue until April 30, 2034, unless earlier terminated in accordance with the terms of the lease. The lease includes options to extend the lease for up to 10 ~~years.~~years, beyond 2034. Fixed rent with respect to the Premises ~~begins~~began on the Commencement ~~Date; however,~~Date. However, the Landlord agreed to a rent abatement from the Commencement Date through April 30, 2020.

The initial fixed rental rate is approximately $195,000 per month for the first 12 ~~months. The rate~~months, and will automatically increase by 2% on each anniversary of the Commencement Date. Under the terms of the Lease, the Company provided a security deposit of approximately $195,000, and ~~will~~ be required to pay all utility charges for the Premises, ~~and~~in addition to its pro rata share of any operating expenses and real estate taxes.

The lease also provides for a tenant improvement allowance of approximately $10.2 million in the aggregate. ~~Any unspent tenant improvement allowance as~~As of ~~January~~December 31, ~~2020 will be forfeited. The full amount of~~2019, the tenant improvement allowance was ~~initially~~fully utilized and recorded in ~~Prepaid expenses~~as leasehold improvements within Property and ~~other current assets~~ inequipment on the condensed consolidated balance sheets.

Table of Contents

~~Lease assets, lease-related assets and~~

Supplemental balance sheet information related to leases is as follows (dollars in thousands):


	March 31, 2020			December 31, 2019
	(unaudited)
Assets
Lease assets	$	21,911		$	21,279

Liabilities
Accrued expenses and other current liabilities
Lease liabilities, current	$	3,456		$	2,825
Non-current
Lease liabilities, long term	30,804			30,440
Total lease liabilities	$	34,260		$	33,265

Weighted-average remaining lease term (years)	12.1			12.5
Weighted-average discount rate	4.3		%	4.4		%

Operating lease ~~liabilities~~costs are as follows (dollars in ~~thousands of dollars:~~

March 31,

2019

(unaudited)

Assets

Balance Sheet Classification

Operating leases

Lease assets

$
20,049

Tenant receivable

Prepaid expenses and other current assets

10,151

Total lease and lease-related assets

$
30,200

Liabilities

Current

Operating leases

Accrued expenses and other current liabilities

$
3,250

Non-current

Operating leases

Lease liabilities, long term

27,824

Total lease liabilities

$
31,074

~~Lease costs for the three month period ended March 31, 2019~~thousands):


	Three Months ended March 31,
	2020		2019
	(unaudited)
Fixed lease cost	$	1,497	$	1,032
Variable lease cost	627		465
Total operating lease cost	$	2,124	$	1,497

Supplemental cash flow information related to leases is as follows (dollars in ~~thousands of dollars:~~

Three Months ended

March 31, 2019

(unaudited)

Operating leases cost

Fixed lease cost

$
1,032

Variable lease cost

465

Total operating leases cost

$
1,497

~~Weighted average lease term and discount rate for the three month period ended March 31, 2019 are as follows:~~

	~~Three Months ended~~
	~~March 31, 2019~~
	~~(unaudited)~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~13.53~~

~~Weighted-average discount rate~~
~~Operating leases~~	~~4.37~~	%

thousands):


	Three Months ended March 31,
	2020		2019
	(unaudited)
Cash paid for operating leases	$	1,261	$	1,313
Lease assets and tenant receivables obtained for new operating leases	$	1,715	$	17,136

Future minimum lease payments under ~~non-cancellable~~noncancellable operating leases, as of March 31, ~~2019~~2020, are as follows (dollars in thousands, ~~of dollars:~~

unaudited):


2020 (remaining)	$	3,672
2021	4,760
2022	4,226
2023	2,537
2024	2,587
Thereafter	26,784
Total future minimum lease payments	$	44,566
Less: Imputed interest ⁽¹⁾	(10,306)
Present value of lease liabilities	$	34,260

Operating leases

Year ending December 31:

2019 (remaining)

$
2,512

2020

2,938

2021

2,527

2022

2,486

2023

2,536

Thereafter

29,371

Total future minimum lease payments

$
42,370

Less: Imputed interest (1)

11,296

Present value of lease liabilities

$
31,074

⁽¹⁾Calculated using the interest rate for each lease.

~~Dislcosure Related to Periods Prior to Adoption~~

Table of ~~the New Lease Standard~~

~~Rent expense for the leased facilities~~Contents

10. Accounts Receivable

As of March 31, 2020 and ~~leased vehicles for the years ended~~ December 31, ~~2018, 2017 and 2016 was~~2019, the Company recorded allowances of approximately ~~$3.6 million, $2.7~~$10.3 million and ~~$2.7~~$11.0 million, ~~respectively.~~

~~Future minimum lease payments under non-cancelable operating leases as of December 31, 2018 are as follows, in thousands of dollars:~~

Year ending December 31:

2019

$
3,400

2020

2,287

Thereafter

1,840

Total

$
7,527

~~15.~~ ~~Accounts Receivable~~

~~The Company recorded an allowance of approximately $7.8 million and $11.5 million~~respectively, for ~~expected sales discounts and allowances related to~~ prompt pay discounts and contractual service fees ~~for service arrangements with~~paid to the Company’s ~~customers, who are primarily pharmaceutical wholesalers and distributors, as~~customers.

11. Inventories

Inventories consist of the following (dollars in thousands):


	March 31, 2020		December 31, 2019
	(unaudited)
Raw materials	$	4,331	$	4,582
Work in process	8,221		11,428
Finished goods	11,866		10,618
Total	$	24,418	$	26,628

As of March 31, ~~2019~~2020 and December 31, ~~2018, respectively.~~

~~16.~~ ~~Disaggregated Revenues~~

~~The following table summarizes~~2019, the ~~disaggregation of revenues by nature,~~ ~~in thousands of dollars:~~

Three Months ended March 31,

2019

2018

(unaudited)

Net product sales

Trokendi XR

$
63,693

$
70,555

Oxtellar XR

19,406

18,565

Total net product sales

83,099

89,120

Royalty revenues

2,375

1,309

Total revenues

$
85,474

$
90,429

~~The majority~~Company did not capitalize any pre-launch inventory costs.

12. Property and Equipment

Property and equipment consists of the ~~Company’s product sales are with pharmaceutical wholesalers~~following (dollars in thousands):


	March 31, 2020		December 31, 2019
	(unaudited)
Lab equipment and furniture	$	11,538	$	11,053
Leasehold improvements	14,974		14,217
Software	2,225		2,225
Computer equipment	2,013		1,839
Construction-in-progress	431		433
	31,181		29,767
Less accumulated depreciation and amortization	(13,170)		(12,699)
Total	$	18,011	$	17,068

Depreciation and ~~distributors who, in turn, sell the products to chain~~amortization expense on property and ~~independent pharmacies, hospitals~~equipment was approximately $0.5 million and ~~other customers. Three pharmaceutical wholesalers/distributors collectively accounted for more than 90% of the Company’s total net product sales and accounts receivables as of and~~$0.4 million for the three ~~month periods~~months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, there were no identified indicators of impairment.

13. Intangible Assets

Intangible assets consist of patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and ~~2018.~~

Trokendi XR. The Company ~~recognized non-cash royalty revenue~~amortizes these costs over the useful life of ~~$1.6~~the respective patents.

Table of Contents

The following sets forth the gross carrying amount and related accumulated amortization of the intangible assets (dollars in thousands):


	Weighted- Average Life (Years)	March 31, 2020		December 31, 2019
	(unaudited)
Capitalized patent defense costs	2.76 - 7.01 years	$	43,375	$	43,375
Less accumulated amortization		(19,796)		(18,535)
Total		$	23,579	$	24,840

U.S. patents covering Oxtellar XR and Trokendi XR will expire no earlier than 2027. As regards Trokendi XR, the Company entered into settlement agreements that allow third parties to enter the market by January 1, 2023, or earlier under certain circumstances. Amortization expense on intangible assets was approximately $1.3 million ~~and $1.3~~ for ~~the~~both three month periods ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, there were no identified indicators of impairment.

14. Accrued Expenses and ~~2018, respectively.~~Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (dollars in thousands):


	March 31, 2020		December 31, 2019
	(unaudited)
Accrued clinical trial costs⁽¹⁾	$	11,224	$	13,285
Accrued compensation	9,549		11,223
Accrued professional fees	4,706		3,936
Lease liabilities, current	3,456		2,825
Other accrued expenses	4,068		5,861
Total	$	33,003	$	37,130

~~No milestone revenue was recorded~~

⁽¹⁾ Includes preclinical and all clinical trial-related costs.

15. Accrued Product Returns and Rebates

Accrued product returns and rebates consist of the following (dollars in thousands):


	March 31, 2020		December 31, 2019
	(unaudited)
Accrued product rebates	$	94,612	$	88,811
Accrued product returns	24,841		18,818
Total	$	119,453	$	107,629

16. Other Income (Expense)

Other income (expense) consist of the following (dollars in thousands):


	Three Months ended March 31,
	2020		2019
	(unaudited)
Interest income	$	5,777	$	4,681
Interest expense	(4,693)		(4,710)
Interest expense on nonrecourse liability related to sale of future royalties	(1,062)		(1,160)

Total	$	22	$	(1,189)

Interest expense includes noncash interest expense related to amortization of deferred financing costs and amortization of the debt discount on the 2023 Notes of $4.1 million and $3.8 million for the three ~~month periods~~months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

~~For the~~ three month period ended March 31, 2019, revenues recognized from performance obligations related to prior periods (e.g., due to changes in transaction price) were not material in the aggregate to Net Product Sales and Royalty Revenues.

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17. Commitments and Contingencies

Product Licenses

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s neurology and psychiatry portfolio. Under these license agreements, the Company may be required to pay certain amounts upon the achievement of ~~certain~~defined milestones. ~~The~~If these products are ultimately commercialized, the Company is also obligated to pay royalties to third parties, as percentage of net product sales, for each respective product under a license ~~agreement, if these products are ultimately commercialized.~~

agreement.

Royalty Agreement

In the third quarter of 2014, the Company received a $30.0 million ~~payment~~ pursuant to a Royalty Interest Acquisition Agreement related to the purchase by HC Royalty of certain of the Company’s rights under the Company’s agreement with United Therapeutics, related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. ~~The Company will retain full~~Full ownership of the royalty rights will revert to the Company if and when a certain cumulative payment threshold is reached, per the terms of the ~~agreement.~~agreement (see Note 2, Note 3 and Note 16).

18. Subsequent Events

Joint Development and Option Agreement with Navitor

On April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 in treatment-resistant depression. In addition, Navitor has granted the Company an exclusive option to license or acquire NV-5138 in all world territories, excluding Greater China, prior to initiation of a Phase III clinical program.

In consideration of the rights granted under the Development Agreement, the Company will acquire Series D Preferred Shares of Navitor for $15 million, representing approximately 13% ownership in Navitor. In addition, the Company will pay to Navitor a one time, non-refundable and non-creditable option issue fee of $10 million. Total payments, exclusive of royalty payments on net sales of NV-5138 and development costs under the Development Agreement, have the potential to reach $410 million to $475 million, which include the upfront cash payment of $25 million described above, an additional license or acquisition fee depending on whether the Company ultimately licenses or acquires NV-5138, and subsequent clinical, regulatory and sales milestone payments. The Company ~~recorded~~will bear all development costs incurred by either the Company or Navitor up to a ~~non-recourse liability related~~maximum of $50 million. The Development Agreement provides Navitor an option to request that the Company pay certain development costs in excess of $50 million once expenses reach this threshold and grants the Company a right of first refusal to negotiate for rights to develop and commercialize any composition of matter that has a similar mechanism of action as NV-5138.

CNS Portfolio Acquisition from US WorldMeds

On April 28, 2020, the Company entered into a definitive Sales and Purchase Agreement with US WorldMeds Partners, LLC, pursuant to which the Company will purchase all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), comprising the entire issued share capital of USWM Enterprises, for total consideration of $530 million, consisting of an upfront cash payment of $300 million and additional cash payments of up to $230 million upon the achievement of certain commercial milestones. With the acquisition, the Company will add 3 established, marketed products and 1 product candidate in late-stage development to its CNS portfolio. The transaction is expected to close in the second quarter of 2020, subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and ~~amortizes this amount as non-cash royalty revenue.~~other customary conditions.

Paragraph IV Filing for Oxtellar XR

On May 14, 2020, the Company received a Paragraph IV Notice Letter from Apotex Inc. and Apotex Corp advising Supernus of the submission by Apotex of an Abbreviated New Drug Application to the U.S. Food and Drug Administration (FDA) seeking approval for oxcarbazepine extended-release tablets. The Company ~~also recognizes non-cash interest expense related~~is currently reviewing the details of this Notice Letter and intends to ~~this liability and accrues at an effective interest rate. That rate is determined based on projections~~vigorously enforce its intellectual property rights relating to Oxtellar XR.

Table of ~~HC Royalty’s rate of return (see Notes 10 and 16).~~

Contents

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition of Supernus Pharmaceuticals, Inc. (the Company, we, us, or our). The interim financial statements included in this report and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, ~~2018~~2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on ~~March 1, 2019.~~

February 28, 2020.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company’s belief or current expectations of management, such as statements including the words “budgeted,” “anticipate,” “project,” “forecast,” “estimate,” “expect,” “may,” “believe,” “potential,” and similar statements or expressions, which are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in our business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K and elsewhere in this report as well as in other reports and documents we file with the Securities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Solely for convenience, in this Quarterly Report on Form 10-Q, the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto.

Table of Contents

Overview

We are a pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) ~~diseases~~diseases. We have a portfolio of commercial products and product candidates.

On April 28, 2020, the Company entered into a Sales and ~~psychiatry.~~

~~We market two~~Purchase Agreement to acquire the CNS portfolio of US WorldMeds Partners, LLC. With the acquisition, the Company will add three established, marketed products ~~Oxtellar XR~~ and ~~Trokendi XR,~~a product candidate in late-stage development to its portfolio.

COVID-19 Impact

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business operations, and has assessed the impact of the COVID-19 pandemic on our condensed consolidated financial statements. Although the COVID-19 pandemic has not significantly impacted our condensed consolidated financial statements as of March 31, 2020 and during the three month period then ended, it may have future impact, especially if the severity worsens, duration lengthens, or the nature of the impacts changes.

The full impact of the COVID-19 pandemic is highly uncertain and subject to change. Such effects may vary significantly across different aspects of our business operations. The Company cannot yet know the full extent of potential delays, impacts on its business, financial conditions, the healthcare systems, or the economy. These effects could have material impact on the Company’s liquidity, capital resources, operations and business. See “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information on risk factors that could impact our business and results.

The risks and uncertainties resulting from the COVID-19 pandemic may affect our future earnings, cash flows and financial condition. These effects include: adverse impact on research and development activities as a result of temporarily halting additional enrollment in the ~~United States (U.S.). We~~SPN-812 adult trial; adverse impact on selling and marketing efforts as a result of temporarily halting in-person interactions by our sales force with healthcare providers; adverse impact on net product sales as a result of decreased new prescriptions due to fewer patient visits to physician’s offices to begin or to maintain treatment; potential changes in payer segment mix; and increased use of co-pay programs due to rising unemployment. Financial effects could include impairment of intangible and long-lived assets, increased reserves for sales deductions that could impact our net product sales; and adjustments for market volatility for items subject to fair value measurement, such as marketable securities.

For the three months ended March 31 2020, with the exception of effects already cited, we were able to largely maintain our normal operations. Because the COVID-19 pandemic has not materially impacted our operations or demand for our products, ~~through~~it has also not negatively impacted our ~~own sales force and seek strategic collaborations with other pharmaceutical companies~~liquidity position in a material way. We expect to ~~commercialize~~continue to generate cash flows to meet our ~~products outside of the U.S. via license agreements.~~

~~In addition, we are developing multiple proprietary product candidates in the CNS market to address significant unmet medical~~short-term liquidity needs and ~~market opportunities.~~

have access to liquidity.

Table of Contents

Products and Product Candidates

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

* Prophylaxis of migraine headache in adults and adolescents.

** ~~Initial program is for Impulsive Aggression (IA) in patients with ADHD, with plans~~ SPN-820 = NV-5138 (Navitor Partnership)

We devote significant resources to ~~add other indications, such as IA in patients with autism, PTSD, bipolar disorder, Alzheimer’s~~research and ~~other forms~~development of ~~dementia.~~

product candidates and proprietary drug technologies. We expect to incur significant expenses as we: invest in research and development related to the continued development of each of our product candidates through ~~FDA~~U.S. Food and Drug Administration (FDA) approval or until the program terminates; expand product indications for approved products; invest in sales and marketing resources for existing and new products; enter into agreements to purchase products, product candidates or other ~~companies~~companies; and invest in support ~~for~~of our business, technology, regulatory and ~~legal matters.~~

intellectual property portfolio.

Our Neurology Portfolio

Our neurology portfolio includes ~~the following~~ two commercial products and one product candidate for the treatment of neurological diseases.

Commercial Products

Trokendi XR is a once-daily extended release topiramate product for the prophylaxis of migraine headache and for the treatment of epilepsy.

We believe a once-daily dosing regimen improves compliance, making it more probable that patients take their medication and maintain sufficient levels of medication in their bloodstream. Trokendi XR's unique smooth pharmacokinetic profile results in lower peak plasma concentrations, higher trough plasma concentrations, and slower plasma uptake rates. This results in smoother and more consistent plasma concentrations than immediate release topiramate formulations. We believe that such a profile mitigates blood level fluctuations that are frequently associated with many side effects, thereby reducing the likelihood of breakthrough seizures or migraine headaches that patients can suffer when taking immediate release products. Side effects associated with immediate release products may lead patients to skip doses, which could place them at higher risk for breakthrough seizures or migraine headaches.

Oxtellar XR is a once-daily extended release oxcarbazepine product that was initially approved for ~~the~~ adjunctive treatment of partial onset seizures of epilepsy. ~~During the first quarter~~With its novel pharmacokinetic profile showing lower peak plasma concentrations, a slower rate of ~~2019,~~plasma input, and smoother and more consistent blood levels as compared to immediate release products, we ~~launched~~believe Oxtellar XR improves the tolerability of oxcarbazepine and thereby reduces side effects. In addition, Oxtellar XR once-per-day dosing is designed to improve patient compliance compared to the current immediate release products that must be taken multiple times per day.

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Product Prescriptions

The following table provides data regarding our prescriptions, as reported by IQVIA, during the periods indicated, including percentage changes in volume:


	Three Months ended March 31,			Change
	2020	2019	Volume	Percent
Prescriptions
Trokendi XR	160,315	160,940	(625)	—%
Oxtellar XR	43,089	38,580	4,509	12%
Total prescriptions	203,404	199,520	3,884	2%

Product Candidate

SPN-817 (huperzine A)

SPN-817 will have new chemical entity status (NCE) in the U.S. market. We expect to develop intellectual property (IP) protecting this product candidate through our own research and development efforts, as well as through in-licensed IP. SPN-817 represents a novel mechanism of action for an anticonvulsant. Development will initially focus on the ~~recently approved monotherapy~~drug's anticonvulsant activity, which has been shown in preclinical models for treatment of partial ~~onset seizures of epilepsy in adults and in children 6 to 17 years of age.~~

These two commercial products differ from immediate release formulations by offering once-daily dosing and unique pharmacokinetic profiles, which we believe can have very positive clinical effects for many patients. We believe a once-daily dosing regimen improves adherence, making it more probable that patients maintain sufficient levels of medication in their bloodstreams to protect against seizures and ~~migraines. In addition, we believe that~~Dravet Syndrome. SPN-817 is in clinical development, and has received an Orphan Drug designation for Dravet Syndrome from the unique smooth and steady pharmacokinetic profiles of our once-daily formulations reduce the peak to trough blood level fluctuations, which are typically associated with immediate release products and which may result in increased adverse events (AEs), more side effects and decreased efficacy.

~~Product Prescriptions~~

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through 2019 and in subsequent years. Data from IQVIA shows that 199,520 total prescriptions were filled for both of these drugs during the three month periods ended March 31, 2019, which is 11% higher than the 179,711 prescriptions reported for the same period in 2018.

Total prescriptions for Trokendi XR increased by 15,945 or 11% in the first quarter of 2019 as compared to the same quarter period in 2018. Total prescriptions for Oxtellar XR increased by 3,864 or 11% in the first quarter of 2019 as compared to the same quarter in 2018.

~~Product Candidate~~

~~SPN-817 (huperzine A)~~

SPN-817 will utilize a novel synthetic form of huperzine A, whose mechanism of action (MOA) includes potent acetyl cholinesterase inhibition with pharmacological activities in CNS conditions such as epilepsy.

FDA.

SPN-817 Development Program

We plan on studying SPN-817 initially in severe ~~pediatric~~ epilepsy disorders. A Phase I proof-of-concept trial is currently underway outside of the ~~U.S~~U.S. in adult patients with refractory complex partial seizures, ~~to study~~studying the ~~efficacy,~~ safety and pharmacokinetic profile of a new extended release formulation of non-synthetic huperzine A. The Company initiated preclinical Investigational New Drug (IND) enabling activities in the U.S.

We will focus on completing and optimizing the synthesis process of the synthetic drug and developing a novel dosage ~~form prior to conducting additional clinical trials.~~form. Given the potency of huperzine A, a novel extended release oral dosage form is critical to the success of this program, because initial studies with the immediate release formulations of ~~nonsynthetic~~non-synthetic huperzine A have shown dose-limiting, serious side effects.

Our Psychiatry Portfolio

Our psychiatry portfolio includes ~~the following four~~two product candidates, SPN-812 and SPN-820, for the treatment of psychiatric disorders.

Product ~~Candidates~~

Candidate

SPN-812 (extended release viloxazine hydrochloride)

SPN-812 is a ~~structurally distinct, bicyclic,~~ serotonin norepinephrine modulating agent ~~with New Chemical Entity (NCE) status in the U.S. We~~(SNMA), which we are developing ~~SPN-812~~ as a novel non-stimulant for the treatment ~~for ADHD in pediatric and adolescent patients.~~of ADHD. We believe ~~that~~ SPN-812 could be ~~a better alternative than~~well-differentiated as compared to other non-stimulant ~~and stimulant therapies~~treatments due to its ~~unique~~different pharmacological and pharmacokinetic profile. The active ingredient in SPN-812, viloxazine hydrochloride, has an extensive safety record in Europe, where it was previously marketed for many years as an ~~antidepressant.~~

~~SPN-812 Development Program~~

Our Phase III program consists of four three-arm, placebo-controlled trials: P301 and P303 trials in patients 6 to 11 years old and P302 and P304 trials in patients 12-17 years old. The Phase III program for SPN-812antidepressant, albeit at much higher dosage levels. Viloxazine hydrochloride is complete. In December 2018, we announced positive topline results from the pediatric trials (P301 and P303) and the first adolescent trial (P302). In March 2019, we announced topline results from the second adolescent trial (P304), confirming the positive results seena structurally distinct, bicyclic, SNMA with NCE status in the ~~previous three Phase III trials.~~

U.S.

The P304 study is a randomized, double-blind, placebo controlled, multicenter, parallel group clinical trial in adolescents 12 to 17 years of age diagnosed with ADHD. Each treatment was administered orally once a day over seven weeks, including one week of titration for 400 mg dosing and two weeks of titration for 600 mg dosing. SPN-812 400 mg dose reached statistical significance compared to placebo, consistent with our previous Phase III studies. While SPN-812 600 mg dose narrowly missed statistical significance, it is not needed forFDA accepted the ~~submission~~review of the NDA for SPN-812 for the treatment of children and ~~adolescents. The 600 mg dose was included to check for~~adolescents with ADHD in January 2020 and assigned a ~~potentially higher level~~PDUFA target action date of ~~efficacy, to help in identifying the maximum effective dose, and to help in designing our trials for the adult population.~~

~~The Company continues to be focused on compiling the New Drug Application (NDA) for submission to the U.S. Food and Drug Administration (FDA) in the second half of this year.~~November 8, 2020. We ~~expect~~plan to launch ~~SPN-812, assuming~~it, pending FDA approval, in the ~~second half~~fourth quarter of 2020.

~~Patients completing~~ We expect SPN-812, if approved, to have five-year market exclusivity due to its NCE status in the ~~Phase III trials were permitted to continue treatment under our open label extension trial. That trial is expected to continue through 2020.~~

~~Further,~~U.S. Furthermore, we are ~~continuing to develop and expand our intellectual property (IP) portfolio~~pursuing IP covering the novel synthesis process for the active ingredient in SPN-812, its novel use in ~~treatment of~~ ADHD and its novel extended release ~~delivery.~~

~~SPN-810 (molindone hydrochloride)~~

product profile.

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SPN-812 Development Program

We ~~are developing SPN-810 as a novel treatment~~continue to prepare for ~~IA in patients who have ADHD,~~the commercial launch of SPN-812 at the end of 2020. The Company remains engaged with the ~~potential to be~~FDA regarding the ~~first product available to address this serious, unmet medical need. Molindone hydrochloride was previously marketed in the United States~~NDA for SPN-812 for the treatment of ~~schizophrenia under the trade name Moban at much higher strengths and different dosage forms than we are using in our development program. If we are successful in developing SPN-810 as~~ADHD.

We initiated a novel treatment for IA in patients who have ADHD, we may then develop the product as a candidate for treating other indications, e.g., patients with IA in autism, PTSD, bipolar disorder, Alzheimer’s and other forms of dementia.

~~SPN-810 Development Program~~

~~Our~~ Phase III program ~~consists of two clinical studies~~ in ~~patients 6 to 11 years old (P301 and P302) and one~~adults in ~~patients 12 to 17 years old (P503). Data from~~ the ~~first Phase III trial (P301) and second trial (P302) are expected in second half~~third quarter of 2019. The SPN-812 adult trial reached approximately 75% of the targeted enrollment before additional enrollment was put on hold in March 2020 due to the impact of COVID-19. We ~~expect patient enrollment in~~are employing virtual efforts to ensure that currently enrolled subjects can progress to completion of treatment. This trial was ahead of schedule prior to the ~~adolescent trial (P503) to continue through 2020.~~

~~We expect to submit the NDA for SPN-810~~COVID-19 pandemic, with a potential data release in the second half of ~~2020,~~this year. Depending on when the Company can restart enrollment and ~~to launch it, assuming FDA approval, in~~complete the ~~second half of 2021.~~

~~Patients completing the Phase III trials can continue treatment under our open label extension trial. Enrollment~~study, data from the ~~P301 and P302 trials~~trial may be pushed out into the open label extension trial continues at 90% or higher. On average, a patient in the open label extension study stays on SPN-810 for approximately 10 months, which we believe is an encouraging sign of both tolerability and efficacy.

~~We continue to develop and expand our IP portfolio covering the novel synthesis process for the active ingredient in SPN-810, its novel use in IA and its novel extended release delivery.~~

~~SPN-809 (viloxazine hydrochloride)~~

~~SPN-809 is a novel once-daily product candidate for the treatment of depression. SPN-809 incorporates the same active ingredient as SPN-812.~~

~~Because SPN-809 contains the same active ingredient as SPN-812, we expect that many of our activities related to the development of SPN-812 will also benefit the development of SPN-809.~~

~~SPN-604 (extended release oxcarbazepine for treatment of bipolar disorder)~~

We continue to progress our plans to initiate pivotal Phase III studies for the treatment of bipolar disorder in the second half of 2019. If approved, this would represent the first approval for treatment of bipolar patients with oxcarbazepine in the U.S.

2021.

Patents

Our extended release oxcarbazepine patent portfolio currently includes twelve U.S. patents, nine of which cover Oxtellar XR. We own all of the issued patents and the pending patent applications. We have also obtained two patents each for extended release oxcarbazepine in Europe and Australia, and one patent each in Canada, Japan, China and Mexico. In addition, we have a pending U.S. patent application that covers various extended release formulations containing oxcarbazepine. The nine issued U.S. patents covering Oxtellar XR will expire no earlier than 2027.

We currently have ~~nine~~ten U.S. patents that cover Trokendi XR. We ~~own all of the issued patents and pending patent applications. We~~ have one patent issued ~~each in Mexico, Australia, Japan and Canada~~ for extended release ~~topiramate.~~topiramate in each of the following countries: Mexico; Australia; Japan; and Canada. We ~~also~~ have two patents issued in ~~Europe for extended release topiramate.~~Europe. The ~~nine~~ten issued U.S. patents covering Trokendi XR will expire no earlier than 2027. We own all of the issued patents.

The Company has entered into settlement agreements with third parties, permitting sale of a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances.

Our extended release oxcarbazepine patent portfolio ~~also contains~~currently includes twelve U.S. patents, nine of which cover Oxtellar XR. The nine issued U.S. patents covering Oxtellar XR will expire no earlier than 2027. We have two issued patents for extended release oxcarbazepine in both Europe and Australia, and one patent ~~applications relating to~~issued in each of the following countries: Canada; Japan; China and Mexico. In addition, we have a pending U.S. patent application that covers various extended release formulations containing oxcarbazepine. We own all of the issued patents and the pending U.S. patent application.

For our pipeline ~~products.~~ product, SPN-812, we have three families of pending U.S. non-provisional and foreign counterpart patent applications. Patents, if issued, could expire from 2029 to 2033. We have one patent issued each in Europe and Canada, covering a method of treating ADHD using viloxazine hydrochloride. In another family, covering the novel synthesis process of active ingredient, we have four patents issued in the U.S., five patents issued in Mexico, two patents issued in Japan, and one patent issued each in Europe, Canada and Australia. We have four patents issued in the U.S. covering modified release formulations of viloxazine hydrochloride, two patents issued in Japan and Australia and one patent issued in Mexico. We own all of the issued patents and the pending patent applications.

We continue to build our intellectual property portfolio to provide additional protection for our technologies, ~~measurement scales,~~ products and product candidates.

To protect our competitive position, it may be necessary to enforce our patent rights through litigation against infringing third parties. See Part II, Item 1—1—Legal Proceedings for additional information.

Critical Accounting Policies and the Use of Estimates

The significant accounting policies and ~~bases~~basis of presentation for our condensed consolidated financial statements are described in Part I, Item 1, Financial Statements, Note 2, Summary of Significant Accounting Policies, in the Notes to the Condensed Consolidated Financial Statements. Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ~~(GAAP)~~(U.S. GAAP), requiring us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose material contingent assets and liabilities. Actual results could differ materially from ~~those~~our estimates.

We believe the following accounting policies and estimates to be critical:

Revenue Recognition

Revenue from product sales is recognized when physical control of our products is transferred to our customers, who are primarily pharmaceutical wholesalers and distributors. Product sales are recorded net of various forms of variable consideration, ~~including~~including: estimated ~~rebates, discounts, and allowances,~~rebates; sales discounts; and an estimated liability for future product returns (collectively, “sales deductions”). We adjust our estimates at the earlier of when the most likely amount of consideration we expect to receive changes, or when the consideration becomes fixed. For a complete description of our revenue recognition policy, see Part I, Item 1, Financial Statements, Note 2, Revenue from Product Sales, in the Notes to Condensed Consolidated Financial Statements.

In addition, see Results of Operations, Sales deductions and related accruals for more information.

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Research and Development Expenses and Related Accrued ~~Clinical~~Research and Development Expenses

Research and development expenditures are expensed as incurred. ~~Research~~We estimate preclinical and ~~development costs primarily consist of: employee-related~~clinical trial expenses ~~including salaries and benefits; share-based compensation expense; expenses incurred under agreements~~based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs)~~; fees paid to investigators who are participating in our clinical trials; consultants~~ and other ~~vendors~~service providers that ~~assist in~~conduct activities on the ~~conduct~~Company’s behalf. If the actual timing of the ~~Company’s clinical trials;~~performance of services or the ~~cost~~level of acquiring and manufacturing clinical trial materials, including materials used in process validation (i.e., to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially); facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestoneeffort varies from our estimate, we adjust our accrued expenses or our deferred advance payments ~~related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals. Assets acquired that are used for~~accordingly. For a complete description of our research and development expense, preclinical trial, and ~~that have no future alternative use are expensed as in-process research~~clinical trial accrual policies, see Part I, Item 1, Financial Statements, Note 2, Summary of Significant Accounting Policies—Research and ~~development.~~

~~Clinical~~Development Expense and Related Accrued Research and Development Expenses, in the Notes to Condensed Consolidated Financial Statements.

Preclinical and clinical trials are inherently complex and often involve multiple service providers. Because billing for services often lags by a ~~substantial period of time,~~month or several months, we are often ~~are~~ required to estimate, and therefore accrue, a significant portion of ~~our clinical~~the incurred expenses. This process involves reviewing open contracts and communicating with our subject matter expert personnel, as well as with the appropriate service provider personnel, to identify services that have been performed on our behalf but for which no invoice has been received. This includes services provided by CROs, as well as services provided by clinical investigators and other service providers. We accrue the cost for unbilled services performed, ~~both~~whether partially ~~and~~or fully ~~completed, and the associated cost incurred.~~

completed.

Payments to service providers can either be based on hourly rates for service, or based on achievement of performance driven milestones. We work with each service provider to obtain an estimate for services provided but are unbilled as of the end of the calendar quarter, including estimates for payments to site investigators. When accruing clinical trial expenses, we estimate the time period over which services will be performed during the life of the entire clinical program, the total cost of the program, and the level of effort to be expended in each intervening period. ~~We work with each service provider to obtain an estimate for incurred but unbilled services as of the end of the calendar quarter, including estimates for payments to site investigators.~~

We work diligently to minimize, if not eliminate, estimates based solely on ~~company~~Company generated ~~calculations.~~calculations by relying primarily on estimates provided by our vendors. If we and/or the service provider underestimates or overestimates the ~~cost~~costs associated with a ~~trial or~~ service at any given point in time, adjustments to research and development expenses ~~may~~would be necessary in the following periods. Historically, our estimated accrued clinical expenses have closely approximated the actual expenses ~~incurred.~~

incurred, with minimal adjustments to expense in the subsequent periods.

Results of Operations

Comparison of the ~~three month periods~~Three Months ended March 31, ~~2019~~2020 and ~~2018~~

2019

Revenues

Revenues consist of net product sales of Trokendi XR and Oxtellar XR in the U.S., and royalty and licensing revenues from our collaborative licensing arrangements.

The following table provides information regarding our revenues during the periods indicated, ~~including percent changes (dollar amount~~(dollars in thousands):

Three Months ended March 31,

Increase

Percent

2019

2018

(Decrease)

Change (%)

Net product sales

Trokendi XR

$
63,693

$
70,555

$
(6,862
)
-10
%
Oxtellar XR

19,406

18,565

841

5
%
Total net product sales

83,099

89,120

(6,021
)
-7
%
Royalty revenues

2,375

1,309

1,066

81
%
Total revenues

$
85,474

$
90,429

$
(4,955
)
-5
%

Three Months ended
March 31, Change
2020 2019 Amount Percent
Net product sales
Trokendi XR $ 68,551 $ 63,693 $ 4,858 8%
Oxtellar XR 23,939 19,406 4,533 23%
Total net product sales $ 92,490 $ 83,099 $ 9,391 11%
Royalty revenues 2,486 2,375 111 5%
Total revenues $ 94,976 $ 85,474 $ 9,502 11%

Net product sales

Net product sales are ~~based on~~computed as gross revenue generated from our product shipments to our customers, which are primarily pharmaceutical wholesalers and distributors, less ~~estimates~~ various forms of variable consideration, including: estimated liability

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for ~~rebates,~~rebates; estimated liability for future product ~~returns~~returns; and estimated allowance for discounts. These are collectively considered "sales deductions."

Total Net Product Sales

The increase in net product sales ~~discounts.~~

for the three months ended March 31, 2020 as compared to the prior year, is primarily due to the favorable impact of the 8% price increase taken January 1, 2020, favorable unit prescription growth for Oxtellar XR and the adverse impact of the pipeline inventory reduction in 2019. These effects were partially offset by unfavorable changes in net sales deductions.

In the fourth quarter of 2018, wholesalers, distributors and pharmacies increased their inventory holdings, as compared to the prevailing inventory levels in the third quarter of 2018. We estimate that this caused net product sales to be approximately $10 million higher in the fourth quarter of 2018 than it would have been otherwise, had channel inventory levels remained consistent, quarter topreceding quarter.

This ~~process~~action was effectively reversed in the first quarter of 2019. ~~Specifically, based on analysis of sales and inventory data, inventory levels at wholesalers, distributors, and pharmacies declined to the prevailing levels of the third quarter of 2018.~~ As a result, both gross sales and net product sales ~~decreased~~ in the first quarter of 2019 ~~as compared both to~~were adversely impacted, with the ~~prior year as well as the prior quarter. The adverse~~ impact on net product sales ~~due to the reduction in channel inventory is estimated at~~of approximately $10 million.

~~Partially offsetting~~

As regards to sales deductions, patient reimbursement challenges and increased contracting pressure from managed care providers resulted in higher program participation rates, increased per patient costs for our co-pay programs and higher per patient rebate payments to managed care providers. As a result, this increased the ~~reduction in channel inventory was year over year growth in prescriptions of 11%, coupled with price increases. For the three month period ended March 31,~~provision for sales deductions and reduced net product ~~sales decreased by $6.0 million, from 2018 to 2019.~~

sales.

Trokendi XR

Trokendi XR net product sales ~~decreased $6.9~~increased by $4.9 million, or 10% for the three month period ended March 31, 2019 versus 2018. The primary driver was the aforementioned channel inventory reduction, which was partially offset by growth in prescriptions and the net impact of an 8% ~~price increase. Oxtellar XR net product sales grew by $0.8 million, or 5%~~, for the three ~~month period~~months ended March 31, ~~2019~~2020, as compared to ~~2018. Growth~~the same period in ~~prescription volumes and~~2019. This increase was driven by the ~~net~~favorable impact of an 8% price increase ~~were modestly~~in 2020. The adverse impact in sales deductions year over year was essentially offset by the negative impact in the first quarter of 2019 of the aforementioned channel inventory reduction.

Oxtellar XR

Oxtellar XR net product sales increased by $4.5 million, or 23%, for the three months ended March 31, 2020, as compared to the same period in 2019. The increase was primarily attributable to growth in prescription unit volume and the favorable impact from the 2020 price increase of 8%. These effects were partially offset by increased net product sales deductions due to higher per patient payments under both Medicaid and managed care programs, as well as higher co-payment program expenditures.

Sales deductions and related accruals

The Company records accrued product rebates and accrued product returns inAccrued product returns and rebatesas current liabilities ~~and records~~on our condensed consolidated balance sheets. We record sales discounts as an a valuation allowance against Accounts receivable ~~valuation allowance.~~

on the condensed consolidated balance sheets. These outstanding amounts are generally affected by changes in the level of gross product sales, changes in the provision for net product sales deductions and timing of payments/credits.

The following table provides a summary of activities with respect to sales deductions and related accruals ~~for~~during the ~~three month~~ periods ~~ended March 31, 2019 and 2018,~~indicated, (dollars in ~~thousands~~thousands):


	Accrued Product Returns and Rebates
	Product Rebates		Product Returns		Allowance for Sales Discounts		Total
Balance at December 31, 2019	$	88,811	$	18,818	$	11,013	$	118,642
Provision
Provision for sales in current year	87,114		2,681		15,524		105,319
Adjustments relating to prior year sales	3,716		7,951		147		11,814
Total provision	$	90,830	$	10,632	$	15,671	$	117,133
Less: Actual payments/credits	(85,029)		(4,609)		(16,398)		(106,036)
Balance at March 31, 2020	$	94,612	$	24,841	$	10,286	$	129,739

Table of ~~dollars:~~

Accrued Liabilities

Product

Allowance for

Rebates

Returns

Sales Discounts

Total

Balance at December 31, 2018

$
85,003

$
22,060

$
11,548

$
118,611

Provision

Provision for sales in current year

63,941

1,724

11,214

76,879

Adjustments relating to prior year sales

(844
)
(42
)
(43
)
(929
)
Total provision

$
63,097

$
1,682

$
11,171

$
75,950

Less: Actual payments/credits

(82,010
)
(1,632
)
(14,909
)
(98,551
)
Balance at March 31, 2019

$
66,090

$
22,110

$
7,810

$
96,010

Accrued Liabilities

Product

Allowance for

Rebates

Returns

Sales Discounts

Total

Balance at December 31, 2017

$
49,460

$
18,883

$
8,892

$
77,235

Provision

Provision for sales in current year

53,837

2,354

12,208

68,399

Adjustments relating to prior year sales

(1,681
)
29

(3
)
(1,655
)
Total provision

$
52,156

$
2,383

$
12,205

$
66,744

Less: Actual payments/credits

(49,086
)
(762
)
(11,739
)
(61,587
)
Balance at March 31, 2018

$
52,530

$
20,504

$
9,358

$
82,392

Contents


Balance at December 31, 2018	$	85,003	$	22,060	$	11,548	$	118,611
Provision
Provision for sales in current year	63,941		1,724		11,214		76,879
Adjustments relating to prior year sales	(844)		(42)		(43)		(929)
Total provision	$	63,097	$	1,682	$	11,171	$	75,950
Less: Actual payments/credits	(82,010)		(1,632)		(14,909)		(98,551)
Balance at March 31, 2019	$	66,090	$	22,110	$	7,810	$	96,010

The total provision for sales deductions ~~from~~on gross product sales ~~was~~increased by $41.2 million, from $76.0 million in 2019 to $117.1 million in 2020. Approximately 67% of this increase, or $27.7 million, was attributable to the year over year increase in the provision for product rebates, from $63.1 million in 2019 to $90.8 million in 2020.

The year over year increase in the provision for product rebates is primarily attributable to greater utilization of our patient co-payment programs, as well as higher per patient payments under both Medicaid and ~~$66.7~~managed care programs. Growth in prescriptions, and the impact of the 8% price increase taken in January 2020, also contributed to the increase in product rebates.

The $9.0 million increase in the provision for product returns, from $1.7 million to $10.6 million for the three ~~month periods~~months ended March 31, 2019 and ~~2018, respectively. The overall increase~~2020, respectively, was due primarily to unfavorable actual returns experience in the first quarter of 2020 for discontinued blister pack Trokendi XR configurations.

The Company ceased production and distribution of all blister pack configurations for Trokendi XR in 2017. Subsequent to ceasing blister pack production and distribution in 2017, the observed rate of product return for all blister pack configurations of Trokendi XR steadily declined over time. This return rate trend was firmly established over a multi-year period. However, in the first quarter of 2020, the return rate for the final blister pack lots of Trokendi XR produced in 2017 exhibited a return rate significantly higher than had been experienced with all previous lots. The lots for which a higher return rate was observed are the last lots which were produced and distributed.

As a result, the Company changed its estimate of the provision ~~was directly related to growth~~for product returns, based on the most recent experience. This change in ~~prescriptions, the growth~~estimate resulted in ~~Medicaid rebates consequent to taking price increases, and higher levels of patient co-pay assistance in response~~an increase to the ~~growth in high deductible health care plans. Adjustments related to prior year sales due to changes in estimate had a de minimis impact on~~provision for product returns of $8.0 million, decreased net product sales of $8.0 million and decreased net earnings of $5.9 million, or $0.11 per basic and per diluted share, for the ~~periods~~three months ended March 31, 2020.

The provision for sales discounts increased by $4.5 million, from $11.2 million to $15.7 million, for the three months ended March 31, 2019 and ~~2018.~~

2020. This increase was driven by prescription volume growth.

Royalty Revenues

Royalty ~~revenues~~revenue includes ~~royalty revenue~~royalties from the following products (dollars in thousands):


	Three Months ended March 31,						Change
	2020		2019		Amount		Percent
Mydayis ⁽¹⁾	$	919	$	800	$	119	15%
Orenitram ⁽²⁾	1,567		1,575		(8)		(1)%
Total	$	2,486	$	2,375	$	111	5%

⁽¹⁾Royalty from net product sales of Mydayis, a product of Shire Plc, ~~(now~~ a subsidiary of Takeda Pharmaceuticals Company Ltd.~~), and non-cash~~

⁽²⁾Noncash royalty revenue ~~consequent~~pursuant to ~~the~~our agreement with Healthcare Royalty Partners III, L.P. (HC Royalty) ~~arrangement.~~. HC Royalty receives royalty payments from United Therapeutics Corporation (United Therapeutics), based on net product sales of United Therapeutics’ product Orenitram.

Supernus records noncash royalty based on these product sales.

Royalty revenues ~~grew 81% in~~were essentially flat for the three ~~month period~~months ended March 31, ~~2019,~~2020, compared to the same period in ~~2018, primarily due to increased sales~~2019.

Table of ~~Mydayis and Orenitram. Non-cash royalty revenue for the three month period ended March 31, 2019 was $1.6 million, compared to $1.3 million for same period in 2018.~~

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Cost of ~~Product Sales~~

Goods Sold

The following table provides information regarding our cost of ~~product sales~~goods sold during the periods indicated ~~including percent changes (dollar amounts~~(dollars in thousands):

Three Months ended March 31,

Percent

2019

2018

Increase

Change (%)

Cost of product sales

$
3,684

$
3,278

$
406

12
%


	Three Months ended March 31,						Change
	2020		2019		Amount		Percent
Cost of goods sold	$	4,152	$	3,684	$	468	13%

Cost of ~~product sales~~goods sold during the three ~~month period~~months ended March 31, ~~2019~~2020 was $4.2 million, $0.5 million higher than the $3.7 million ~~slightly higher than $3.3 million~~incurred for the same period in ~~2018.~~2019. The increase iswas primarily attributable to ~~higher unit volume, partially offset by manufacturing efficiencies.~~

year over year increase in prescriptions, as well as the aforementioned reduction in channel level inventory which occurred in the first quarter of 2019.

Research and Development Expenses

The following table provides information regarding our research and development ~~expenses~~ (R&D) expenses during the periods indicated ~~including percent changes (dollar amounts~~(dollars in thousands):

Three Months ended March 31,

Percent

2019

2018

Decrease

Change (%)

Research and development

$
15,394

$
18,908

$
(3,514
)
-19
%


	Three Months ended March 31,						Change
	2020		2019		Amount		Percent
Research and development	$	18,937	$	15,394	$	3,543	23%

R&D expenses ~~decreased~~increased by $3.5 million ~~or 19%,~~ in the three ~~month period~~months ended March 31, ~~2019~~2020 as compared to the same period in ~~2018. This decrease is~~2019. The increase quarter over quarter was primarily driven by enrollment in the ~~completion of the four~~SPN-812 Phase III ~~clinical trials~~program for ~~SPN-812~~adults that was initiated in late ~~2018/early 2019, partially offset by the manufacture of validation and registration lots for SPN-812 to support our upcoming NDA filing.~~

2019.

Selling, General and Administrative Expenses

The following table provides information regarding our selling, general and administrative ~~expenses~~ (SG&A) expenses during the periods indicated ~~including percent changes (dollar amounts~~(dollars in thousands):

Three Months ended March 31,

Percent

2019

2018

Increase

Change (%)

Selling and marketing

$
30,749

$
26,676

$
4,073

15
%
General and administrative

10,219

10,173

46

0
%
Total

$
40,968

$
36,849

$
4,119

11
%

Three Months ended
March 31, Change
2020 2019 Amount Percent
Selling and marketing $ 29,041 $ 30,749 $ (1,708) (6)%
General and administrative 13,834 10,219 3,615 35%
Total $ 42,875 $ 40,968 $ 1,907 5%

Selling and Marketing. Selling and marketing expenses ~~increased~~decreased by ~~$4.1~~$1.7 million ~~or 15%,~~ in the three ~~month period~~months ended March 31, ~~2019~~2020 as compared to the same period in ~~2018. Approximately $3.8 million of the total increase is~~2019. The change was due to ~~increased~~decreased employee-related expenses ~~for promotional~~of $0.5 million and marketing ~~programs, speaker programs~~expense for commercial products of $2.3 million, partially offset by increased professional and consulting ~~services to support our commercial products, particularly the migraine indication~~spending for ~~Trokendi XR and the launch~~SPN-812 pre-launch activities of ~~monotherapy for partial seizures, in January 2019, for Oxtellar XR.~~

$1.0 million.

General and ~~administrative.~~Administrative. General and administrative expenses increased ~~slightly~~ by ~~$46,000, in~~$3.6 million for the three ~~month period~~months ended March 31, ~~2019,~~2020 as compared to the same period in ~~2018,~~2019. The change was primarily due to the $1.4 million increase in employee-related expenses due to increased ~~cost of facilities~~headcount and ~~insurance offset by a decrease~~higher share-based compensation expense, $1.3 million increase in ~~patent amortization expense.~~

higher occupancy-related costs, and $0.9 million increase in professional and consulting fees.

Other ~~Expenses~~

Income (Expense)

The following table provides the components of other ~~expenses~~income (expense) during the periods indicated ~~including percent changes (dollar amounts~~(dollars in thousands):

Three Months ended March 31,

Percent

2019

2018

Increase

Change (%)

Interest income

$
4,681

$
1,206

$
3,475

288
%
Interest expense

(4,710
)
(717
)
3,993

557
%
Interest expense-nonrecourse liability related to sale of future royalties

(1,160
)
(701
)
459

65
%
Total

$
(1,189
)
$
(212
)

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	Three Months ended March 31,						Change
	2020		2019		Amount		Percent
Interest income	$	5,777	$	4,681	$	1,096	23%
Interest expense	(4,693)		(4,710)		17		—%
Interest expense on nonrecourse liability related to sale of future royalties	(1,062)		(1,160)		98		(8)%
Total	$	22	$	(1,189)	$	1,211	(102)%

Interest income increased by ~~$3.5~~$1.1 million infor the three ~~month period~~months ended March 31, ~~2019~~2020, primarily due to gains from sales and maturity of marketable securities.

Interest expense for the three months ended March 31, 2020 remained essentially unchanged, compared to the same period in 2019.

Noncash interest expense related to our nonrecourse royalty liability for the three months ended March 31, 2020 remained unchanged as compared to the same period in 2018. This increase was primarily attributable to an increase in cash, cash equivalents and marketable security holdings resultant from the issuance of $402.5 million of 0.625% Convertible Senior Notes, due 2023 (2023 Notes) in March 2018.

Interest expense increased by approximately $4.0 million in the three month period ended March 31, 2019 as compared to the same period in 2018. The increase was primarily due to non-cash interest expense of $3.8 million related to the amortization of deferred financing costs and debt discount on the 2023 Notes recorded in the first quarter of 2019.

Non-cash interest expense related to our non-recourse royalty liability increased by $0.5 million in the three month period ended March 31, 2019 as compared to the same period in 2018, primarily due to changes in the projection of future royalties on sales of Orenitram, coupled with an increase in the liability amortization term as a result of a favorable settlement of patent litigation for United Therapeutics.

Income Tax Expense

The following table provides information regarding our income tax expense during the periods indicated ~~including percent changes (dollar amounts~~(dollars in thousands):

Three Months ended March 31,

Percent

2019

2018

Increase

Change (%)

Income tax expense

$
5,899

$
4,830

$
1,069

22
%
Effective tax rate

24.34
%
15.49
%


	Three Months ended March 31,			Change
	2020	2019	Amount	Percent
Income tax expense	$7,516	$5,899	$1,617	27%
Effective tax rate	25.9%	24.3%

The ~~increase~~increases in income tax expense and in the effective tax rate for the three ~~month period~~months ended March 31, ~~2019~~2020, as compared to the same ~~periods~~period in ~~2018 is~~the prior year, was primarily attributable to ~~larger excess tax benefits consequent~~higher income before taxes, increase in the number of states in which we owe taxes and an increase in non-deductible expenses.

Net Earnings

The following table provides information regarding our net earnings during the periods indicated (dollars in thousands):


	Three Months ended March 31,						Change
	2020		2019		Amount		Percent
Net earnings	$	21,518	$	18,340	$	3,178	17%

The increase in net earnings was primarily due to exercises of employee stock options in 2018. The Company recorded income tax benefits related to exercise of employee stock options of approximately $0.3 million and $2.0 million for the three month periods ended March 31, 2019 and 2018, respectively.

~~Liquidity and Capital Resources~~

~~Since~~increased revenue generated from our inception in 2005, we have devoted most of our cash resources to manufacturing, research and development, and selling, general and administrative activities related to the development and commercialization of ourtwo commercial products, Trokendi XR and Oxtellar ~~XR,~~XR.

Liquidity and ~~our product candidates. We are highly dependent on the commercial success of our two commercial products, which we launched in 2013.~~ Capital Resources

We have financed our operations primarily with cash generated from product sales, supplemented by cash generated by revenue from royalty and licensing arrangements as well as proceeds from the sale of equity and debt ~~securities, borrowings under debt facilities, royalty~~securities. Continued cash generation is highly dependent on the commercial success of our two commercial products, Trokendi XR and ~~licensing arrangements.~~

Oxtellar XR. We were cash flow positive and profitable from operations in 2019.

While we expect continued profitability for future years, we anticipate there may be significant variability from year to year in the level of our profits, particularly as we move forward with the anticipated commercial launch of SPN-812 late in 2020, assuming FDA approval.

We believe our ~~net~~existing cash and cash equivalents, marketable securities and cash received from product sales will be sufficient to finance ongoing operations, indevelop our new products and fund label expansions for existing products. To continue to grow our business over the ~~current year~~long-term, we plan to commit substantial resources to: product development and ~~subsequent years, including R&D expenses for our~~ clinical trials ~~increased expenses to support our commercial products~~of product candidates; product acquisition; and ~~pre-launch activities in anticipation of launching our product candidates. We also expect to incur increased R&D expenses for 2019 to support the development of SPN-810, SPN-812, SPN-817,~~in-licensing; and ~~SPN-604.~~

~~We expect our SG&A expenses to continue to increase for the foreseeable future, as we continue to invest in the commercialization of Trokendi XR and Oxtellar XR, and in~~ supportive functions such as compliance, finance, management of

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our intellectual property portfolio, ~~and~~ information technology systems and personnel. In each case, spending iswould be commensurate with the growth of ~~our~~the business.

We ~~are actively looking for~~may, from time to time, consider raising additional capital through: new collaborative arrangements; strategic alliances; additional equity and/or debt financings; or financing from other sources, especially in conjunction with opportunistic business development ~~opportunities.~~

initiatives. We will continue to actively manage our capital structure and to consider all financing opportunities that could strengthen our long-term financial profile. Any such capital raises may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

Financial Condition

Cash and cash equivalents, marketable securities, long term marketable securities, working capital, convertible notes and total stockholder’s equity, as of the periods presented below, are as follows (dollars in thousands):


	March 31		December 31		Change
	2020		2019		Amount		Percent

Cash and cash equivalents	$	225,767	$	181,381	$	44,386	24%
Marketable securities	175,104		165,692		9,412		6%
Long term marketable securities	534,712		591,773		(57,061)		(10)%
Total	$	935,583	$	938,846	$	(3,263)	—%

Working capital	388,713		312,057		76,656		25%

Convertible notes, net (2023 Notes)	349,232		345,170		4,062		1%

Total stockholder's equity	613,383		595,428		17,955		3%

The total cash and cash equivalents, marketable securities and long term marketable securities decreased by $3.3 million in the first three months of 2020, primarily due to decreases in the valuation of long term marketable securities resultant from market volatility.

Our working capital at March 31, ~~2019~~2020 was ~~$268.3~~$388.7 million, ~~a decrease~~an increase of ~~$63.8~~$76.7 million, as compared to ~~$332.1~~$312.1 million at December 31, ~~2018.~~2019. The ~~decrease~~increase was primarily due to ~~timing~~increased accounts receivable of ~~receivable collections~~$31.9 million and increased ~~investment in long term marketable securities. In addition, our long term~~cash, cash equivalents, and marketable securities ~~at March 31, 2019 were $522.6~~of $53.8 million ~~an increase~~offset by increases in current liabilities of ~~$103.8 million, as compared to $418.8 million at December 31, 2018. This increase was primarily attributable to the net cash proceeds generated from operations.~~

~~Our stockholders’ equity increased by $27.0~~$7.7 million during the three ~~month period~~months ended March 31, 2020.

As of March 31, 2020 and December 31, 2019, the outstanding principal on our 0.625% Convertible Senior Notes Due 2023 (2023 Notes) was $402.5 million. No 2023 Notes have been converted as of March 31, 2020. Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions), issuing 402,500 convertible note hedge options. The Convertible Note Hedge Transactions are expected to reduce the potential dilution of the Company's common stock upon conversion of the 2023 Notes. Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate warrant transactions, issuing a total of 6,783,939 warrants (the Warrant Transactions). See Part I, Item 1, Financial Statements, Note 5, Convertible Senior Notes Due 2023, in the Notes to the Condensed Consolidated Financial Statements, for further discussion of the 2023 Notes and our other indebtedness.

Stockholders’ equity increased by $18.0 million during the three months ended March 31, 2020, primarily as a result of net earnings of ~~$18.3~~$21.5 million coupled with ~~option exercises,~~ share-based compensation ~~and~~of $4.0 million. These increases were offset by unrealized ~~gains~~losses on marketable securities, net of ~~$4.6~~tax of $7.6 million. ~~These changes were partially offset by the purchase~~

Table of ~~convertible note hedges, as described below.~~

We achieved positive cash flow and achieved profitability from operations in the three month periods ended March 31, 2019 and 2018. While we expect continued profitability in the current year and in subsequent years as we continue to increase sales, we anticipate there may be significant variability from quarter to quarter in our level of profitability.

Contents

Summary of Cash Flows

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

Three Months ended March 31,

Increase

2019

2018

(Decrease)

Net cash provided by (used in):

Operating activities

Operating earnings

$
27,071

$
29,676

$
(2,605
)
Working capital

5,922

(2,543
)
8,465

Total operating activities

32,993

27,133

5,860

Investing activities

(103,246
)
(51,010
)
(52,236
)

Financing activities

783

367,713

(366,930
)

Net (decrease) increase in cash and cash equivalents

$
(69,470
)
$
343,836

$
(413,306
)

Three Months ended March 31, Change
2020 2019 Amount
Net cash provided by (used in):
Operating activities
Operating earnings $ 32,176 $ 27,071 $ 5,105
Working capital (23,260) 5,922 (29,182)
Total operating activities 8,916 32,993 (24,077)
Investing activities 35,438 (103,246) 138,684
Financing activities 32 783 (751)
Net change in cash and cash equivalents $ 44,386 $ (69,470) $ 113,856

Operating Activities

Net cash provided by operating activities is comprised of two components: cash provided by operating ~~earnings~~earnings; and cash provided by (used in) changes in working capital. The ~~decrease in~~ net cash provided by operating activities, is$8.9 million, was primarily driven by ~~a period over period decrease~~increased operating earnings, but reduced by increased working capital. Cash utilized in ~~revenue generated from sales~~working capital primarily reflects the timing impacts of ~~our two commercial products, Trokendi XR~~cash collections on receivables and ~~Oxtellar XR.~~

settlement of payables, as described below.

The changes in certain operating assets and liabilities are as follows (dollars in ~~thousands:~~

Three Months ended March 31,

2019

2018

Explanation of Change

(Increase) Decrease in:

Accounts receivable

$
23,013

$
(798
)
Timing of cash collections; decreased receivables due to higher fourth quarter of 2018 sales as a result of higher fourth quarter of 2018 channel inventory levels.

Inventories

(859
)
(2,771
)
Increased inventory volume to support increased product demand.

Prepaid expenses, other current assets and other non-current assets

(1,995
)
(404
)
Timing differences related to deposit for equipment purchase; progress of clinical trials.

Increase (Decrease) in:

Accounts payable and accrued other non-current liabilities

868

(4,572
)
Timing of vendor payments.

Accrued product returns and rebates

(18,863
)
4,691

Increased provision directly related to growth in prescriptions, the growth in Medicaid rebates consequent taking price increases and higher levels of patient co-pay assistance.

Income taxes payable

4,856

327

Timing of income tax payments.

Other

(1,098
)
984

Timing of compensation payments.

$
5,922

$
(2,543
)

thousands):

Three Months ended March 31,
2020 2019 Explanation of Change
(Increase) Decrease in:
Accounts receivable $ (31,823) $ 23,013 Receivables increase in 2020 is due to increase in prescription volume and timing of receivable collections. Receivables decreased in 2019 because of sequential decline in prescription volume, coupled with channel inventory reduction in first quarter 2019.
Inventories 2,210 (859) Decreased inventory due to increased product demand; timing of inventory production.
Prepaid expenses, other current assets and other assets (454) (1,995) Timing differences related to deposits for equipment purchases in 2019 and prepaid clinical trial costs.
Increase (Decrease) in:
Accounts payable and accrued expenses and noncurrent liabilities (10,651) 868 Timing of vendor payments.
Accrued product returns and rebates 11,824 (18,863) Timing of rebate payments; increased provision for rebates due to growth in prescriptions; growth in Medicaid and managed care rebates; higher expenditures for patient co-pay programs; higher provision for returns in 2020; impact of channel inventory reduction in first quarter 2019.
Income taxes payable 6,654 4,856 Increased current tax provision due to higher taxable income.
Other (1,020) (1,098) Decreased employee-related costs.
Total $ (23,260) $ 5,922

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Investing Activities

Net cash provided by investing activities was $35.4 million for the three months ended March 31, 2020 as compared to net cash used in investing activities ~~increased by $52.2~~of $103.2 million for the same period in 2019. The change is primarily due to higher levels of purchases of marketable securities in 2019. These purchases reflect investment of excess cash in long term marketable securities.

Financing Activities

Net cash provided by financing activities for the three ~~month period~~months ended March 31, ~~2019,~~2020 remained essentially unchanged as compared to the same period ~~2018. The increase was primarily due to net purchases of marketable securities.~~

~~Financing Activities~~

~~Net cash provided by financing activities decreased to $0.8 million for the three month periods ended March 31, 2019 versus $367.7 million provided~~ in ~~the same period in 2018. The decrease was primarily related to issuance of the 2023 Notes and the related convertible note hedges and warrants, in March 2018.~~

2019.

Contractual Obligations and Commitments

Refer to the “~~Contractual~~“Contractual Obligations and Commitments” section ~~within~~in “Part II, Item 7 — Management’s Discussion and Analysis of Liquidity and Capital Resources” of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for a discussion of our contractual obligations.

~~In addition, during~~

On April 21, 2020, the ~~first quarter of 2019, we~~Company entered into a ~~new lease agreement~~Development and Option Agreement (Development Agreement) with ~~Advent Key West, LLC~~Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for ~~our new headquarters~~NV-5138 in ~~Rockville, MD. Refer~~treatment-resistant depression. In addition, Navitor has granted the Company an exclusive option to ~~Note 14~~license or acquire NV-5138 in all world territories, excluding Greater China, prior to initiation of a Phase III clinical program. In consideration of the rights granted under the Development Agreement, the Company will make a one time, non-refundable and non-creditable cash payment of $25 million to Navitor in the ~~Notes~~second quarter of 2020, comprised of an option fee of $10 million and $15 million for preferred equity shares, representing approximately 13% ownership in Navitor. The Company will also bear all development costs incurred up to ~~Condensed Consolidated Financial Statements~~a maximum of $50 million.

On April 28, 2020, the Company entered into a definitive Sales and Purchase Agreement with US WorldMeds Partners, LLC, pursuant to which the Company will purchase all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), comprising the entire issued share capital of USWM Enterprises, for total consideration of $530 million, consisting of an upfront cash payment of $300 million and additional cash payments of up to $230 million upon the achievement of certain commercial milestones. With the acquisition, the Company will add three established, marketed products and a product candidate in ~~Part I, Item 1~~late-stage development to its CNS portfolio. The transaction is expected to close in the second quarter of ~~this Quarterly Report on Form 10-Q.~~

2020, subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities. These would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.

In addition, we do not engage in trading activities involving non-exchange traded contracts.

Recently Issued Accounting Pronouncements

~~On January 1, 2019, we adopted Accounting Standards Codification (ASC) Topic 842,~~ ~~Leases~~~~, or ASC 842.~~

For a discussion of new accounting pronouncements, see Note 2 in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to certain risks that may affect our results of operations, cash flows and fair value of assets and liabilities, including market risk, interest rate risk, credit risk and liquidity risk. The primary objective of our investment activities is to preserve our capital to fund operations and to facilitate business development activities. We also seek to maximize income from our investments without assuming significant interest rate risk, liquidity risk or ~~liquidity risk.~~ risk of default by investing in investment grade securities with maturities of four years or less. We do not enter into financial instruments for trading or speculative purposes.

Our exposure to market risk is confined to investments in cash, cash equivalents, marketable securities and long term marketable securities. As of March 31, 2020 and December 31, 2019, we had unrestricted cash, cash equivalents, marketable securities and long term marketable securities of ~~$815.5 million.~~ $935.6 million and $938.8 million, respectively. Our cash and cash equivalents consist primarily of cash held at banks, certificates of deposit and money market funds, all of which have short-term maturities.

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Our marketable securities consist of investments in commercial paper, investment grade corporate debt securities and U.S. government agency and municipal debt securities, all of which are reported at fair value. The fair value of our marketable securities is subject to change as a result of potential changes in market interest rates and liquidity conditions in the financial markets including volatility in trading prices resulting from the impact of the COVID-19 pandemic.

In addition, we generally hold our marketable securities to maturity within four years. Because of the relatively short period that we hold our investments and because we generally hold these securities to maturity, we do not believe that an increase in interest rates would have significant impact on the realizable value of our investments.

In connection with the 2023 Notes, we have separately entered into Convertible Note Hedge Transactions and Warrant Transactions to reduce the potential dilution of the Company’s common stock upon conversion of the 2023 ~~Notes and~~Notes. Issuance of warrants was intended to partially offset the cost to purchase the Convertible Note Hedge Transactions, respectively. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash, cash equivalents, marketable securities and long term marketable securities, and because we generally hold these securities to maturity, we do not believe that an increase in interest rates would have any significant impact on the realizable value of our investments. Transactions.

We do not have any currency or other derivative financial instruments other than ~~the~~ outstanding warrants to purchase common stock and the convertible note hedges.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities and accounts receivable. The counterparties are various corporations, governmental institutions and financial institutions of high credit standing. Substantially all of the Company's cash, cash equivalents and marketable securities are maintained in U.S. government agency debt and debt of well-known, investment grade corporations. Deposits held with banks may exceed the amount of governmental insurance provided on such deposits. Generally,

these deposits may be redeemed upon demand and, therefore, these bear minimal default risk.

Credit risk from our accounts receivable is related to our product sales. Three wholesale pharmaceutical distributors, AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, each individually accounted for more than 20% of our total net product sales and accounts receivable, respectively. They also collectively accounted for more than 90% of our total net product sales and accounts receivable.

We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. Weakness in economic conditions in the U.S., including the impact of the COVID-19 pandemic, can result in extended collection periods. We continue to monitor these conditions, including volatility of financial markets, and continually assess their possible impact on our business. To date, we have not experienced any significant losses with respect to the collection of our accounts receivable.

We may contract with CROs and investigational sites globally. Currently, we have only one ongoing trial, for SPN-817, outside the ~~United States.~~U.S. We do not hedge our foreign currency exchange rate risk. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, substantially all of our liabilities were denominated in the U.S. dollar.

Inflation generally affects us by increasing our cost of labor and ~~clinical trial costs.~~the cost of services provided by our vendors. We do not believe that inflation and changing prices over the three ~~month periods~~months ended March 31, ~~2019~~2020 and ~~2018~~2019 had a significant impact on our condensed consolidated results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and ~~forms, and that~~forms. Moreover, such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, ~~2019,~~2020, the end of the period covered by this report. Based on that evaluation, under the supervision and with the participation of our management, including our CEO and CFO, we concluded that our disclosure controls and procedures were effective as of March 31, ~~2019.~~

2020.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of the COVID-19 pandemic, certain employees of the Company began working remotely in March 2020, but these changes to the working environment have not had a material impact on our internal controls over financial reporting. We are continually monitoring and assessing the COVID-19 situation for possible impact on our internal controls, in order to minimize the impact on their design and operating effectiveness.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time and in the ordinary course of business, we may be subject to various claims, charges and litigation. We may be required to file infringement claims against third parties for the infringement of our patents. ~~As of March 31, 2019,~~

On May 14, 2020, the Company ~~has no outstanding litigation.~~

received a Paragraph IV Notice Letter from Apotex Inc. and Apotex Corp advising Supernus of the submission by Apotex of an Abbreviated New Drug Application to the U.S. Food and Drug Administration (FDA) seeking approval for oxcarbazepine extended-release tablets. The Company is currently reviewing the details of this Notice Letter and intends to vigorously enforce its intellectual property rights relating to Oxtellar XR.

Item 1A. Risk Factors

Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related ~~notes, and~~notes; the additional information in the other reports we file with the Securities and Exchange ~~Commission, along with~~Commission; and the risks described in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. These risks may result in material harm to our business and our financial condition and results of operations. ~~In such an eventuality,~~If a material, adverse event were to occur, the market price of our common stock may decline and you could lose part or all of your investment.

The risks described below reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019.

The Company’s financial condition and results of operations for fiscal year 2020 and beyond may be materially and adversely affected by the ongoing COVID-19 outbreak.

The Company is currently following the recommendations of local and federal health authorities to minimize exposure risk for its various stakeholders, including employees. The full extent of the impact of COVID-19 on our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions required to contain COVID-19, or treat its impact, among others.

Although the Company currently continues to have uninterrupted wholesale and retail distribution of its products, and the Company does not anticipate a shortage of its commercial products due to COVID-19 at this time, disruptions may occur for the Company’s customers or suppliers that may materially affect the Company’s ability to obtain supplies or components for its products, manufacture additional product, or deliver inventory in a timely manner. This would result in lost sales, additional costs, penalties, or damage to the Company’s reputation.

Workforce limitations and travel restrictions resulting from related government actions taken to contain spread of the disease may impact many aspects of our business. If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with the COVID-19 outbreak, our operations may be negatively impacted. As a result of government restrictions and social distancing guidelines in the United States, there is an increased reliance on working from home for our employees. For example, the Company’s sales force is currently functioning largely utilizing digital engagement tools, tactics and virtual detailing, which may be less effective than the Company’s ordinary course sales and marketing programs. In addition, patients may not be able to get their prescriptions, or visit their physicians which in turn could adversely impact the prescription volumes of our marketed products, Oxtellar XR and Trokendi XR. Similarly, investigative sites, subjects in clinical trials, and vendors that include our contract research organizations, may be

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subject to the same workforce limitations and travel restrictions. As a result, we may experience delays or disruptions in our preclinical studies, clinical studies, and non-clinical experiments due to unforeseen circumstances including but not limited to, interruption of key clinical trial activities, such as clinical trial site data monitoring, and interruption of clinical trial subject visits and study procedures.

The Company may also experience other unknown impacts from COVID-19 that cannot be predicted. While there has been no specific notice of delay from the federal authorities, potential interruptions, delay or changes to the operations of the U.S. Food and Drug Administration may impact the approval of SPN-812. We may also experience delays in receiving supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns, stoppages, disruptions in delivery systems.

The Company may also require an increased level of working capital if it experiences extended billing and collection cycles as a result of displaced employees at the Company, payors, revenue cycle management contractors, or otherwise. In addition, the disease outbreak could result in a widespread health crisis that could adversely affect the U.S. economy and financial markets, resulting in an economic downturn that could affect customers’ demand for our products and our ability to raise additional capital or obtain financing on favorable terms.

The Company may experience delays in receipt of financial information, which may preclude timely reporting of financial results to investors and to the U.S. Securities and Exchange Commission.

Accordingly, disruptions to the Company’s business as a result of COVID-19 could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects in the near-term and beyond 2020.

While the Company has developed a comprehensive COVID-19 contingency plan designed to potentially address the challenges and risks presented by this pandemic, there can be no assurance that such plan will be effective in mitigating the effects of the COVID-19 pandemic on our business operations and consequently the potential material adverse impact on our anticipated revenue, earnings and liquidity.

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

(a)Sales of Unregistered Securities.

During the three ~~month period~~months ended March 31, ~~2019,~~2020, the Company granted options to employees ~~and directors~~ to purchase an aggregate of ~~831,835~~1,105,925 shares of common stock at a weighted-average exercise price of ~~$36.75~~$23.99 per share. Once vested, the options are exercisable for a period of ten years from the grant date. In addition, the Company granted restricted stock units of 26,055 shares at a weighted-average fair value grant date of $23.99 per share and performance stock units of 31,250 shares at a weighted-average fair value grant date of $23.70 per share. These issuances ~~were~~are exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions not involving a public offering.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

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~~None~~

Item 6. Exhibits

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:

~~31.1~~
31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101.INS~~ 101						~~XBRL Instance Document.~~ The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL: (i) Cover Page, (ii) Consolidated Condensed Statements of Income, (iii) Consolidated Condensed Statements of Comprehensive Income, (iv) Consolidated Condensed Balance Sheets, (v) Consolidated Condensed Statements of Shareholders' Equity, (vi) Consolidated Condensed Statements of Cash Flows, and (vii) the Notes to Consolidated Condensed Financial Statements, tagged in summary and detail.

~~101.SCH~~ 104						The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL ~~Taxonomy Extension Schema Document.~~

~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document.~~ (included with the Exhibit 101 attachments).

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document.~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label/Linkbase Document.~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

~~EXHIBIT INDEX~~

~~Number~~		~~Description~~

~~31.1~~

EXHIBIT INDEX


Number						Description

31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101.INS~~ 101						~~XBRL Instance Document.~~ The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL: (i) Cover Page, (ii) Consolidated Condensed Statements of Income, (iii) Consolidated Condensed Statements of Comprehensive Income, (iv) Consolidated Condensed Balance Sheets, (v) Consolidated Condensed Statements of Shareholders' Equity, (vi) Consolidated Condensed Statements of Cash Flows, and (vii) the Notes to Consolidated Condensed Financial Statements, tagged in summary and detail.

~~101.SCH~~ 104						The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL ~~Taxonomy Extension Schema Document.~~ (included with the Exhibit 101 attachments).

~~101.CAL~~						~~XBRL Taxonomy Extension Calculation Linkbase Document.~~

~~101.DEF~~						~~XBRL Taxonomy Extension Definition Linkbase Document.~~

~~101.LAB~~						~~XBRL Taxonomy Extension Label/Linkbase Document.~~

~~101.PRE~~						~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			SUPERNUS PHARMACEUTICALS, INC.

DATED: May ~~10, 2019~~ 15, 2020			By:	/s/ Jack A. Khattar
				Jack A. Khattar
		President, Secretary and Chief Executive Officer

DATED: May 15, 2020			By:
~~DATED:~~ ~~May 10, 2019~~	~~By:~~	/s/ Gregory S. Patrick
				Gregory S. Patrick
		Senior Vice President and Chief Financial Officer

	March 31,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	122,778	$	192,248
Marketable securities	170,165		163,770
Accounts receivable, net	79,950		102,922
Inventories, net	26,518		25,659
Prepaid expenses and other current assets	20,556		8,888
Total current assets	419,967		493,487
Long term marketable securities	522,551		418,798
Property and equipment, net	4,226		4,095
Intangible assets, net	30,063		31,368
Lease assets	20,049		—
Deferred income taxes	27,967		29,683
Other assets	625		380

Total assets	$	1,025,448	$	977,811

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	7,240	$	3,195
Accrued product returns and rebates	88,200		107,063
Accrued expenses and other current liabilities	36,607		36,535
Income taxes payable	17,233		12,377
Non-recourse liability related to sale of future royalties, current portion	2,426		2,183
Total current liabilities	151,706		161,353
Convertible notes, net	333,310		329,462
Non-recourse liability related to sale of future royalties, long term	21,957		22,575
Lease liabilities, long term	27,824		—
Other non-current liabilities	10,633		11,398
Total liabilities	545,430		524,788

Stockholders’ equity
Common stock, $0.001 par value, 130,000,000 shares authorized 52,374,248 and 52,316,583 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively	52		52
Additional paid-in capital	373,707		369,637
Accumulated other comprehensive earnings (loss), net of tax	1,427		(3,158		)
Retained earnings	104,832		86,492
Total stockholders’ equity	480,018		453,023

Total liabilities and stockholders’ equity	$	1,025,448	$	977,811

	Three Months ended March 31,
	2019			2018
	(unaudited)

Revenues
Net product sales	$	83,099		$	89,120
Royalty revenues	2,375			1,309
Total revenues	85,474			90,429

Costs and expenses
Cost of product sales	3,684			3,278
Research and development	15,394			18,908
Selling, general and administrative	40,968			36,849

Total costs and expenses	60,046			59,035

Operating earnings	25,428			31,394

Other expenses, net	(1,189		)	(212		)

Earnings before income taxes	24,239			31,182

Income tax expense	5,899			4,830
Net earnings	$	18,340		$	26,352

Earnings per share
Basic	$	0.35		$	0.51
Diluted	$	0.34		$	0.49

Weighted-average shares outstanding
Basic	52,336,443			51,536,474
Diluted	53,985,385			53,788,346

	Common Stock			Additional		Accumulated Other Comprehensive			Retained		Total Stockholders’
	Shares	Amount		Paid-in Capital		Earnings (Loss)			Earnings		Equity

Balance, December 31, 2018	52,316,583	$	52	$	369,637	$	(3,158	)	$	86,492	$	453,023
Share-based compensation	—	—		3,287		—			—		3,287
Exercise of stock options	57,665	—		783		—			—		783
Net earnings	—	—		—		—			18,340		18,340
Unrealized gains on marketable securities, net of tax	—	—		—		4,585			—		4,585
Balance, March 31, 2019	52,374,248	$	52	$	373,707	$	1,427		$	104,832	$	480,018

			Fair Value Measurements at
			March 31, 2019
			(unaudited)
					Significant
	Total Fair		Quoted Prices		Other		Significant
	Value at		in Active Markets		Observable		Unobservable
	March 31,		for Identical Assests		Inputs		Inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	122,778	$	122,778	$	—	$	—
Marketable securities
Corporate debt securities	170,165		246		169,919		—
Long term marketable securities
Corporate debt securities	521,398		450		520,948		—
Government debt securities	1,153		—		1,153		—
Other non-current assets
Marketable securities - restricted (SERP)	375		1		374		—
Total assets at fair value	$	815,869	$	123,475	$	692,394	$	—


			Fair Value Measurements at
			December 31, 2018
					Significant
	Total Fair		Quoted Prices		Other		Significant
	Value at		in Active Markets		Observable		Unobservable
	December 31,		for Identical Assests		Inputs		Inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	192,248	$	192,248	$	—	$	—
Marketable securities
Corporate debt securities	163,770		245		163,525		—
Long term marketable securities
Corporate debt securities	415,650		445		415,205		—
Government debt securities	3,148		—		3,148		—
Other non-current assets
Marketable securities - restricted (SERP)	326		1		325		—
Total assets at fair value	$	775,142	$	192,939	$	582,203	$	—

	Weighted-	March 31,			December 31,
	Average Life	2019			2018
	(unaudited)

Capitalized patent defense costs	3.75 - 8.00 years	$	44,725		$	44,724
Less accumulated amortization		(14,662		)	(13,356		)
Total		$	30,063		$	31,368

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)

Outstanding, December 31, 2018	3,916,963		$	19.98	7.10
Granted (unaudited)	831,835		$	36.75
Exercised (unaudited)	(57,665	)	$	13.57
Forfeited (unaudited)	(10,437	)	$	30.69
Outstanding, March 31, 2019 (unaudited)	4,680,696		$	23.01	7.40

As of December 31, 2018:
Vested and expected to vest	3,916,963		$	19.98	7.10
Exercisable	1,889,947		$	12.47	5.96

As of March 31, 2019:
Vested and expected to vest (unaudited)	4,680,696		$	23.01	7.40
Exercisable (unaudited)	2,605,591		$	15.33	6.22


	Number of Options	Weighted- Average Exercise Price (per share)		Weighted- Average Remaining Contractual Term (in years)
Outstanding, December 31, 2019	4,606,559	$	23.05	6.66
Granted	1,105,925	$	23.99
Exercised	(3,811)	$	8.33
Forfeited	(25,275)	$	28.12
Outstanding, March 31, 2020 (unaudited)	5,683,398	$	23.22	7.08

As of December 31, 2019:
Vested and expected to vest	4,606,559	$	23.05	6.66
Exercisable	2,598,112	$	15.68	5.48

As of March 31, 2020:
Vested and expected to vest	5,683,398	$	23.22	7.08
Exercisable	3,394,315	$	18.71	5.75

	Three Months ended
	March 31, 2019
	(unaudited)

Operating leases cost
Fixed lease cost	$	1,032
Variable lease cost	465
Total operating leases cost	$	1,497

	Operating leases
Year ending December 31:
2019 (remaining)	$	2,512
2020	2,938
2021	2,527
2022	2,486
2023	2,536
Thereafter	29,371
Total future minimum lease payments	$	42,370
Less: Imputed interest (1)	11,296
Present value of lease liabilities	$	31,074

Year ending December 31:
2019	$	3,400
2020	2,287
Thereafter	1,840
Total	$	7,527

	Three Months ended March 31,				Increase			Percent
	2019		2018		(Decrease)			Change (%)

Net product sales
Trokendi XR	$	63,693	$	70,555	$	(6,862	)	-10	%
Oxtellar XR	19,406		18,565		841			5	%
Total net product sales	83,099		89,120		(6,021		)	-7	%
Royalty revenues	2,375		1,309		1,066			81	%
Total revenues	$	85,474	$	90,429	$	(4,955	)	-5	%

	Accrued Liabilities
				Product			Allowance for
	Rebates			Returns			Sales Discounts			Total

Balance at December 31, 2018	$	85,003		$	22,060		$	11,548		$	118,611
Provision
Provision for sales in current year	63,941			1,724			11,214			76,879
Adjustments relating to prior year sales	(844		)	(42		)	(43		)	(929		)
Total provision	$	63,097		$	1,682		$	11,171		$	75,950
Less: Actual payments/credits	(82,010		)	(1,632		)	(14,909		)	(98,551		)
Balance at March 31, 2019	$	66,090		$	22,110		$	7,810		$	96,010