Supernus Pharma (SUPN) Announces Delay to 10-Q Filing; Notes Royalty Monetization Transaction Issue
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Supernus Pharma (NASDAQ: SUPN) disclosed the following in a U.S. SEC filing on Monday
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
Supernus Pharmaceuticals, Inc. (the “Company”) was unable to timely file its Quarterly Report on Form 10-Q (the “Quarterly Report”) for the three months ended September 30, 2016 without unreasonable effort or expense. Additional time is needed to address an issue that has arisen concerning the accounting treatment of the $30 million royalty monetization transaction entered into by the Company, which was recorded as revenue in July 2014.
In July 2014, the Company entered into and classified the royalty monetization transaction as revenue based on the conclusion it reached with its auditors that the transaction met the revenue recognition guidance under ASC 605, “Revenue Recognition.” In August 2016, the Company was informed by its former independent registered public accounting firm, Ernst and Young LLP (“E&Y”), that a royalty monetization transaction for another client was currently being reviewed by the Securities and Exchange Commission’s (the “SEC”) Office of the Chief Accountant (the “OCA”).
After conferring with E&Y and the Company’s current independent registered public accounting firm, KPMG LLP, the Company submitted to the OCA a request for post-accounting review of the transaction. On November 9, 2016, the OCA completed its review and informed the Company that the royalty monetization transaction should have been recorded as a debt obligation in 2014. As a result, on November 10, 2016, the Company’s Audit Committee concluded that the Company’s financial statements for the years ended December 31, 2014 and December 31, 2015, and the interim quarterly reports in those years beginning with the third quarter of 2014, and the interim quarterly reports for the first and second quarters in 2016 (the “Non-Reliance Periods”), and related reports of the Company’s independent registered public accounting firms thereon, should no longer be relied upon and will be restated.
At this time, all the changes necessary to restate the financial statements for these periods are not complete. Notwithstanding, the likely changes can be summarized as follows:
- The $30 million proceeds of the transaction will now be recorded in the third quarter of 2014 as non-recourse debt rather than revenue.
- Revenue and operating income in the third quarter of 2014 will be reduced by approximately $30 million.
- Royalties received by the counterparty to the royalty monetization transaction will now be recognized by the Company as non-cash royalty revenue and the $30 million of non-recourse debt will be reduced by the same amount, less the non-cash implied interest expense to be recognized.
The Company does not expect the restatement to impact the Company’s net product sales or operating expenses for the periods ended December 31, 2014 and 2015. Accordingly,
- FY 2014 Net Product Sales will remain $89.6 million.
- FY 2015 Net Product Sales will remain $143.5 million
- Net product sales for the three and nine months ended September 30, 2016 are $55.6 million and $149.0 million, respectively.
The Company believes that, taking into consideration the anticipated effects of the restatement (approximately $1 million and approximately $4 million for the three and nine month periods ended September 30, 2016, respectively), operating income for the three and nine month periods ended September 30, 2016 was approximately $20.0 million and $38.9 million, respectively. Excluding the anticipated effect of the restatement, operating income for the three and nine month periods ended September 30, 2016 was $19.0 million and $34.9 million, respectively.
As of September 30, 2016, the Company had $147.4 million in cash, cash equivalents, marketable securities and long-term marketable securities as compared to the $117.2 million at December 31, 2015. The restatement has no impact on the Company’s cash position. It is important to note that the Company has no obligation to repay the $30 million of debt associated with the royalty monetization transaction; rather, the debt will be amortized as royalty payments are received by the counterparty to the royalty monetization transaction.
For full year 2016, the Company is adjusting guidance for net product sales, research and development (“R&D”) expenses and operating income as set forth below:
- Net product sales in the range of $205 million to $210 million, compared to the previously expected range of $200 million to $210 million. (The Street sees $208.2 million.)
- R&D expenses in the range of $40 million to $44 million, compared to the previously expected range of $50 million to $55 million.
- Taking into consideration the anticipated effects of the restatement (approximately $4 million to $6 million) for the full year 2016, operating income would range from $46 million to $51 million. Excluding the anticipated effect of the restatement, operating income would range from $42 million to $47 million, compared to the previously expected range of $32 million to $37 million.
On November 10, 2016, the Company filed Form 12b-25 to disclose that it was unable to timely file its Quarterly Report. The Company currently intends to file its Quarterly Report and the reports for the Non-Reliance Periods by the end of 2016, but there can be no assurance that this will be the case.
In light of the restatement, the Company will also undertake an assessment to determine the specific circumstances that caused this material weakness in internal control over financial reporting and disclosure controls and procedures. The Company will disclose such matters in the applicable amended filings.
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