Neos Therapeutics, Inc.
Annual Report 2015

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission File Number 001-36292NEOS THERAPEUTICS, INC.(Exact name of registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation ororganization) 2834(Primary Standard IndustrialClassification Code Number) 27-0395455(I.R.S. EmployerIdentification Number)2940 N. Highway 360Grand Prairie, TX 75050(972) 408-1300(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)Vipin Garg, President and Chief Executive OfficerNeos Therapeutics, Inc.2940 N. Highway 360Grand Prairie, TX 75050(972) 408-1300(Name, address, including zip code, and telephone number, including area code, of agent for service)Title of each class Name of each exchange on which registeredCommon stock, par value $0.001 per share The NASDAQ Global Market Securities registered pursuant to section 12(b) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. oYes ý No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No 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 shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405of 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 and post such files). ý Yes o No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "acceleratedfiler" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the fiscal year ended December 31, 2015ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in suchcalculation is an affiliate) computed by reference to the price at which the common stock was last sold on the NASDAQ Global Market on March 15, 2016 was $160.6 million. The registrant has provided thisinformation as of March 15, 2016 because its common stock was not publicly traded as of June 30, 2015 (the last business day of its most recently completed second fiscal quarter). As of March 15, 2016, there were 16,035,048 shares of the registrant's common stock, par value $0.001 per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the Registrant's 2016Annual Meeting of Stockholders. Such Definitive Proxy Statement will be filed with the Commission not later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2015. Large accelerated filer o Accelerated filer o Non-accelerated filer ý(do not check ifsmaller reporting company Smaller reporting company oTable of ContentsSpecial note regarding forward-looking statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they nevermaterialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make suchforward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Allstatements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identifyforward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects,""contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern ourexpectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statementsabout:•our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; •our ability to develop and commercialize Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future product or productcandidate; •the timing, cost or other aspects of the commercial launch and future sales of Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, orany other future product or product candidate; •our ability to increase our manufacturing and distribution capabilities for Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or anyother future product or product candidate; •the attention deficit hyperactivity disorder patient market size and market adoption of Adzenys XR-ODT and, if approved, Cotempla XR-ODT orNT-0201, by physicians and patients; •the therapeutic benefits, effectiveness and safety of Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other future productor product candidate; •our expectations regarding the commercial supply of our Adzenys XR-ODT and, if approved, Cotempla XR-ODT, NT-0201, or any other futureproducts, or our generic Tussionex; •our ability to receive, and the timing of any receipt of the U.S. Food and Drug Administration, or FDA, approvals, or other regulatory action in theUnited States and elsewhere, for Cotempla XR-ODT, NT-0201, and any other future product candidate; •our expectations regarding federal, state and foreign regulatory requirements; •deficiencies the FDA has identified in its Complete Response Letter and may identify with respect to Cotempla XR-ODT and whether we will beable to address the issues that may relate to those deficiencies; •the New Drug Application resubmission date for Cotempla XR-ODT and submission date for NT-0201; •our estimates regarding anticipated expenses, capital requirements and our needs for additional financing; •our product research and development activities, including the timing and progress of our clinical trials, and projected expenditures; •issuance of patents to us by the U.S. Patent and Trademark Office and other governmental patent agencies; •our ability to achieve profitability; and •our staffing needs.Table of Contents We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this AnnualReport on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financialcondition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and otherfactors described in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changingenvironment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact onthe forward-looking statements contained in this Annual Report on Form 10-K. The results, events and circumstances reflected in the forward-looking statementsmay not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. Weundertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of thisAnnual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve theplans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Ourforward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Furthermore, this Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industry publications andresearch, surveys and studies conducted by third parties. Industry publications and third party research, surveys and studies generally indicate that theirinformation has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information.Table of Contents NEOS THERAPEUTICS, INC.Annual Report on Form 10-KFor the Fiscal Year Ended December 31, 2015Table of Contents PART I Item 1. Business 1 Item 1A. Risk Factors 32 Item 1B. Unresolved Staff Comments 70 Item 2. Properties 70 Item 3. Legal Proceedings 70 Item 4. Mine Safety Disclosures 70 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 70 Item 6. Selected Financial Data 73 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 75 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 98 Item 8. Financial Statements and Supplementary Data 99 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 99 Item 9A. Controls and Procedures 99 Item 9B. Other Information 99 PART III Item 10. Directors, Executive Officers and Corporate Governance 100 Item 11. Executive Compensation 100 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 100 Item 13. Certain Relationships and Related Transactions, and Director Independence 100 Item 14. Principal Accounting Fees and Services 100 PART IV Item 15. Exhibits, Financial Statement Schedules 101 Signatures Table of Contents PART I ITEM 1. Business Overview We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our proprietary modified-release drugdelivery technology platform, which we have already used to develop our one product and two product candidates for the treatment of attention deficithyperactivity disorder, or ADHD. Our product candidates are extended-release, or XR, medications in patient-friendly, orally disintegrating tablets, or ODT, orliquid suspension dosage forms. We received approval from the U.S. Food and Drug Administration, or FDA, for Adzenys XR-ODT, our amphetamine XR-ODT,on January 27, 2016. We expect to resubmit a new drug application, or NDA, for Cotempla XR-ODT, our methylphenidate XR-ODT, in the fourth quarter of2016, following the completion of a bioequivalence bridging study. In addition, we plan to submit an NDA for NT-0201, our amphetamine XR liquid suspension,in the fourth quarter of 2016. We believe our product and, if approved, our product candidates will address an unmet need by providing more patient- andcaregiver-friendly dosing options not previously available to patients in the $10.7 billion market for ADHD-indicated medications. Our branded product and product candidates incorporate two of the most commonly prescribed medications for the treatment of ADHD, methylphenidate andamphetamine. Our proprietary modified-release drug delivery platform has enabled us to create novel, extended-release ODT and liquid suspension dosage formsof these medications. We believe Adzenys XR-ODT is the first amphetamine XR-ODT, and if approved, Cotempla XR-ODT will be the first methylphenidate XR-ODT for the treatment of ADHD. We expect our patent estate, which we developed internally and which includes composition-of-matter, method-of-manufactureand method-of-use patents and patent applications, some of which are not scheduled to expire until 2032, will provide additional protection for our brandedproduct and two product candidates. In 2014 alone, 63.1 million prescriptions for medications with ADHD labeling, and principally in extended-release formulations, were written in the UnitedStates. The vast majority of currently available dosage forms for ADHD are tablets and capsules. Despite once-daily dosing of these extended-release formulations,we believe there is a significant opportunity to improve compliance rates. Up to 54% of the pediatric population and 40% of the adult population have reporteddifficulties with swallowing tablets and capsules. We believe that the inability, difficulty or reluctance of many patients to swallow intact tablets and capsulescontributes to diminished compliance rates. Such limitations highlight the need for more convenient dosing options such as ODT or liquids. To our knowledge, nocompany has succeeded to date in commercializing an XR-ODT formulation of any ADHD medication, even though ODT are among the most preferred dosageforms of pharmaceutical products. We believe, therefore, there is a significant market opportunity to provide the two most prescribed medications for ADHD,methylphenidate and amphetamine, in two more convenient and patient-friendly dosage forms, ODT and liquid suspension, which we developed using ourproprietary technology platform. If we are successful in obtaining regulatory approval for any of our two product candidates, we plan to focus on commercialization in the United States usingour own commercial infrastructure. We plan to initially build a specialty sales force of approximately 125 representatives targeting the highest-volume prescribersof ADHD medication. We intend to manufacture our ADHD products in our current Good Manufacturing Practice, or cGMP, and U.S. Drug EnforcementAdministration, or DEA, -registered manufacturing facilities, thereby obtaining our products at cost without manufacturer's margins and better controlling supply,quality and timing. We currently use these facilities to manufacture our generic equivalent to the branded product, Tussionex, an XR liquid1Table of Contentssuspension of hydrocodone and chlorpheniramine indicated for the relief of cough and upper respiratory symptoms of cold. We believe we can apply our XR-ODT and XR liquid suspension technologies that underlie our branded product and product candidates and our genericTussionex to other active pharmaceutical ingredients, or APIs. Our longer-term strategy is to utilize these technologies for the development and approval ofadditional XR-ODT or XR liquid suspension drug candidates, while leveraging our manufacturing and commercialization experience to reduce costs andeffectively reach patients. Patients with central nervous system, or CNS, conditions, such as stroke, Parkinson's disease and Alzheimer's disease often havedifficulty swallowing their medication and would benefit from ODT and liquid suspension dosage forms. We have completed feasibility studies on several productcandidates thus far. We plan to complete feasibility work on approximately a dozen potential product candidates by mid-2016 and then select two to threecandidates for further clinical development. We intend to utilize the regulatory pathway provided by Section 505(b)(2) of the Federal Food, Drug, and CosmeticAct, or the 505(b)(2) regulatory approval pathway, for our product candidates using only APIs from approved drug products and incorporating our proprietarydrug delivery platform to create branded product candidates. This streamlined development and approval pathway should allow us to initiate clinical trials inapproximately 18 months after drug discovery and submit an NDA in as few as 36 months. Our total revenues increased to $3.8 million for the year ended December 31, 2015, from $0.8 million for the year ended December 31, 2014 and $1.0 millionfor the year-ended December 31, 2013, all of which was generated in the United States.OUR STRATEGY Our goal is to be a leading pharmaceutical company focused on the development, manufacture and commercialization of pharmaceutical products that utilizeour proprietary modified-release drug delivery technology platform. Key elements of our business strategy to achieve this goal are to:•Establish commercialization capabilities in the United States for Adzenys XR-ODT and any of our product candidates that are FDAapproved. We believe that we can effectively commercialize Adzenys XR-ODT and our branded ADHD product candidates, if approved in the United States, with aspecialty sales force of approximately 125 representatives. We intend to target the highest volume prescribers to address the unmet need for more patient- andcaregiver-friendly dosage forms of the two most prescribed medications in the $10.7 billion market for ADHD-indicated medications. We plan to commercializeour products outside of the United States after receiving the required approvals in those countries through partnerships and collaborations.•Obtain FDA approval for our two branded product candidates in ADHD. We plan to resubmit an NDA for Cotempla XR-ODT, our methylphenidate XR-ODT, in the fourth quarter of 2016, and submit an NDA for NT-0201, ouramphetamine XR liquid suspension, in the fourth quarter of 2016.•Manufacture our proprietary products in our cGMP, FDA-inspected and DEA-registered manufacturing facilities. We believe our manufacturing facilities and years of manufacturing experience are a competitive advantage. We intend to leverage the economic efficienciesafforded by manufacturing our ADHD products in our cGMP and DEA-registered manufacturing facilities. We believe that we will have sufficient capacity tosupply commercial quantities for all of our ADHD product candidates, if approved.2Table of Contents•Leverage our proprietary technology platform to develop additional branded product candidates in CNS and other therapeutic areas withunmet need. We intend to expand our branded product portfolio by identifying existing pharmaceutical products that could be improved upon by utilizing our proprietarymodified-release drug delivery technology platform. We plan to focus our development efforts on approved drug products for which we believe we can securecomposition-of-matter patent protection and utilize the 505(b)(2) regulatory approval pathway. We plan to explore product opportunities in several therapeuticareas, including CNS and pain indications.•Continue to expand our robust intellectual property portfolio covering our novel modified-release drug delivery technology platform andinnovative products. We have built a three-tier patent estate consisting of composition-of-matter, method-of-manufacture and method-of-use patents and patent applications. Weintend to extend our patent portfolio as we continue to expand upon our drug delivery technologies and identify and develop additional branded product candidates.If issued and listed in the FDA's publication of approved drug products with therapeutic equivalence evaluations, or the Orange Book, we believe that these patentswill provide additional market protection for our FDA-approved products.ADHDMarket and current treatment options ADHD is a neurobehavioral disorder characterized by a persistent pattern of inattention and/or hyperactivity/impulsivity that interferes with functioningand/or development. ADHD can have a profound impact on an individual's life, causing disruption at school, work, home and in relationships. It is one of the mostcommon developmental disorders in children and often persists into adulthood. In 2011, an estimated 11% of children in the United States ages 4 to 17 hadpreviously received an ADHD diagnosis. A 2006 study estimated 4.4% of adults in the United States experience ADHD symptoms. Current ADHD treatmentguidelines recommend a multi-faceted approach that uses medications in conjunction with behavioral interventions. In 2014, 63.1 million prescriptions for medications with ADHD labeling were written in the United States and generated $10.7 billion in sales. Approximately90% of these prescriptions were for stimulant medications, such as methylphenidate and amphetamine, which have been the standard of care for several decades.Methylphenidate and amphetamine prescriptions generated $3.3 billion and $5.8 billion in sales, respectively, in 2014 in the United States. A few non-stimulantmedications are also available, but evidence of their efficacy for treating ADHD symptoms is less compelling. The market for ADHD medications outside of theUnited States is less developed, but we believe will continue to grow as recognition and awareness of the disorder increase.Limitations of existing treatment options Extended-release, or long acting, dosage forms of stimulant medications are the standard of care for treating ADHD, making up approximately 67% of ADHDprescriptions. Most of these extended-release dosage forms allow for once-daily dosing in the morning, which eliminates the need to re-dose during the day.However, even with once-daily dosing, there is great potential for improvement. The vast majority of currently available dosage forms for ADHD are tablets andcapsules. We believe that the inability, difficulty or reluctance of many patients to swallow intact tablets and capsules contributes to diminished compliance rates. Up to 54% of the pediatric population has difficulty swallowing tablets and capsules, and this can be especially problematic in children with ADHD. Formany of these patients, swallowing difficulties can persist into adolescence and adulthood, with 40% of adults reporting pill-swallowing difficulties that3Table of Contentsresult in skipping doses or discontinuing their medication altogether. In addition, ADHD medications are typically administered in the morning, which is often thebusiest and most chaotic period for families. Some extended-release products do offer alternative dosing options, such as opening the capsule to sprinkle contents over food, but labeling for these productsgenerally includes a caveat that such manipulation may impair the efficacy and/or safety of the product. These alternatives may also be difficult or inconvenient forthe caregiver and disruptive to an already difficult and chaotic morning routine. Thus, a significant need remains for more patient- and caregiver-friendly dosageforms of ADHD medications in once-daily dosing forms.Market receptivity to novel dosage forms for the treatment of ADHD The most prescribed extended-release medications for ADHD, Concerta® and Adderall XR® (and each of their generic equivalents), are long-acting versionsof previously short-acting methylphenidate and amphetamine medications, respectively. While these products address the need for once-daily dosing, Concerta andAdderall XR are only available as tablets and capsules, respectively, and may be difficult for some patients to swallow. This limitation led to the development of a transdermal methylphenidate patch, Daytrana®. While the methylphenidate transdermal patch offered a non-oraldelivery method, it created additional issues related to dose variability, patch placement and premature patch removal. Adverse events such as skin irritation andaccidental exposure from discarded patches also deterred Daytrana's utilization. Despite these shortcomings, Daytrana maintains approximately a 3% share of theoverall methylphenidate extended-release market and generated approximately $107.0 million in gross sales in 2014. In January 2013, an extended-release liquid formulation of methylphenidate, Quillivant XRTM, was launched by Pfizer, providing a new dosing option. Sincelaunch, Quillivant XR has exceeded 500,000 prescriptions, generating $79.7 million and $30.8 million in gross sales in 2014 and the first quarter of 2015,respectively, and capturing a 3.3% share of the extended-release methylphenidate market in the first quarter of 2015. The market acceptance of these novel formulations, despite their limitations, further demonstrates the significant unmet need and opportunity for novel,patient- and caregiver-friendly dosage forms in the treatment of ADHD. We believe that XR-ODT and XR liquid suspension would be preferred and clinicallybeneficial dosage forms for the treatment of ADHD patients with swallowing aversion. In a survey commissioned by us, when asked to project their next 100dextroamphetamine/amphetamine prescriptions, a sample of 51 pediatricians and psychiatrists said they would prescribe a once-daily controlled-release ODTdextroamphetamine/amphetamine four times as often as they would prescribe a once-daily controlled-release liquid dextroamphetamine/amphetamine (13.3 vs. 3.4out of their next 100 ADHD patients receiving dextroamphetamine/amphetamine). In a study of adult patients with a CNS disorder, 61% of patients chose anODT, in comparison with 27% who chose a conventional tablet and 12% who were indifferent. However, to our knowledge, no company has succeeded to date incommercializing an XR-ODT formulation of any ADHD medication. We believe there is a significant market opportunity to provide the two most prescribedmedications for ADHD, methylphenidate and amphetamine, in two patient-friendly dosage forms, ODT and liquid suspension.Our product and product candidates address an unmet need for ADHD patients Our proprietary modified-release drug delivery technology platform has enabled us to create XR-ODT and XR liquid suspension formulations ofmethylphenidate and amphetamine. We have4Table of Contentsachieved this by combining two key drug delivery attributes in each of our product and two product candidates:•An extended-release profile, which allows for once daily dosing; and •An ODT or liquid suspension dosage form, which allows for easier administration and ingestion. We have developed an XR-ODT product, an XR-ODT product candidate and an XR liquid suspension product candidate, each of which addresses an unmetneed. Adzenys XR-ODT and, if approved, Cotempla XR-ODT, may be the first XR-ODT products for the treatment of ADHD. We believe that our XR-ODTproducts have unique attributes to improve compliance and, if approved, could offer significant advantages over other solid oral dosage forms that can helpsimplify the morning routine in households with ADHD-diagnosed children. These advantages include:•Ease of administration and ingestion because they disintegrate rapidly in the mouth and may be taken without water; •Taste-masking of bitter ADHD medications, with flavoring options; •Prevention of "cheeking", the practice of hiding medication in the mouth and later spitting it out rather than swallowing it; and •Convenient single-unit blister-packaging, which is both portable and discrete. Our product candidate, NT-0201, is a ready-to-use, XR liquid suspension that does not require reconstitution or refrigeration, and offers an attractive dosingoption for younger children who prefer to ingest liquid medicine. We believe that an XR-ODT, such as Adzenys XR-ODT and Cotempla XR-ODT, and an XR liquid suspension, such as NT-0201, may solve the swallowingissue that undermines compliance with tablet and capsule medication regimens.OUR PRODUCT CANDIDATES AND CURRENTLY MARKETED PRODUCT Utilizing our proprietary modified-release drug delivery technology platform, we are developing our three branded product candidates and currentlymanufacture and market our generic Tussionex. We are developing each of our product candidates to seek FDA approval in accordance with Section 505(b)(2).The table below summarizes our pipeline of product candidates and currently marketed product. The 505(b)(2) regulatory approval pathway allows for a potentially streamlined and targeted clinical development program. During the development process,we communicated with the FDA on several occasions and received feedback on our clinical development plans for Adzenys XR-ODT and our two productcandidates. In general, our clinical development program for our branded product and two product candidates comprised single-dose clinical pharmacology studies,each designed to evaluate the bioequivalence and bioavailability of these dosage forms under different test conditions. Each5Product Active Drug and Indication Formulation StatusAdzenys XR-ODT Amphetamine for ADHD XR-ODT ApprovedCotempla XR-ODT Methylphenidate for ADHD XR-ODT Expect to resubmitNDA in Q4 2016NT-0201 Amphetamine for ADHD XR Liquid Suspension Expect to submit NDAin Q4 2016Generic Tussionex Hydrocodone and chlorpheniramine for cough and upperrespiratory symptoms of a cold XR Liquid Suspension Approved andmarketedTable of Contentsproduct candidate was studied in adult volunteers and children with ADHD. In addition, a clinical efficacy and safety trial in children with ADHD was conductedfor Cotempla XR-ODT, our methylphenidate XR-ODT. During each phase of the clinical trials, safety and tolerability were systematically assessed. A summary ofeach program is presented below. For the purposes of our clinical trials, unless otherwise indicated, we refer to children as individuals ages 6 to 12, adolescents asindividuals ages 13 to 17, and adults as individuals 18 and older.Adzenys XR-ODT: Amphetamine XR-ODT for the treatment of ADHD We received approval from the U.S. Food and Drug Administration, or FDA, for Adzenys XR-ODT, our amphetamine XR-ODT, on January 27, 2016. Webelieve Adzenys XR-ODT is the first amphetamine XR-ODT for the treatment of ADHD. Our NDA for Adzenys XR-ODT relies on the efficacy and safety datathat formed the basis of FDA approval for the listed drug, Adderall XR, 30 mg, together with bioequivalence, bioavailability and aggregate safety data from ourAdzenys XR-ODT clinical program. Adzenys XR-ODT contains amphetamine loaded onto a mixture of immediate-release and polymer-coated delayed-release resin particles, which areformulated and compressed into an ODT along with other typical tableting excipients using our patented RDIM technology. The result is amphetamine with an invivo extended-release profile delivered through a tablet that quickly disintegrates in the mouth without the need for water. We plan to offer Adzenys XR-ODT in30-day supply, child-resistant blister packs. We have composition-of-matter patents for Adzenys XR-ODT that are scheduled to expire in 2026 and 2032. Weexpect these patents to be listed in the Orange Book, which we believe will provide additional protection for Adzenys XR-ODT. Additionally, we have received aNotice of Allowance for one additional US patent application covering the product.Adzenys XR-ODT clinical program The clinical program for Adzenys XR-ODT consisted of five Phase 1 single-dose human pharmacokinetic studies under fasted and/or fed conditions. Four ofthe five single-dose clinical studies were submitted to the FDA with the original NDA in December 2012. The fifth study was conducted using commercial-scalematerial, and was included in our resubmission to the FDA. The four original studies were a Phase 1 bioequivalence study versus Adderall XR, 30 mg, in healthyadult volunteers under fasted conditions; a Phase 1 bioavailability study in healthy adult volunteers under both fed and fasted conditions; a Phase 1 study todetermine the impact of alcohol on the bioavailability of Adzenys XR-ODT; and a bioavailability study in children with ADHD under fasted conditions. The data from the pilot-scale bioequivalence study versus Adderall XR, 30 mg, is shown in Figure 4 and shows that Adzenys XR-ODT is bioequivalent to thelisted drug, Adderall XR, 30 mg, under fasted conditions.6Table of Contents Figure 4: Bioequivalence Study of Adzenys XR-ODT versus Adderall XR, 30 mg,in Healthy Adult Volunteers under Fasted Conditions Other key observations from our original clinical program for Adzenys XR-ODT included:•No alcohol dose-dumping: The extended-release properties of Adzenys XR-ODT were maintained in the presence of varying concentrations ofalcohol, indicating that Adzenys XR-ODT is a "rugged" formulation that does not cause premature and intentional release of the drug product, ordose-dump, in the presence of alcohol. •Similar exposure rate: Consistent with the listed drug, there was a higher mean amphetamine exposure in children, which decreased with increasingage. •Safety and Tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety signals. The aggregate datasuggested that Adzenys XR-ODT has a similar safety profile to that of the listed drug and is well-tolerated. Following the Complete Response Letter, we received feedback from the FDA on the design of an additional bioequivalence and bioavailability study ofAdzenys XR-ODT produced at commercial scale to support the NDA resubmission. This study was designed to compare the pharmacokinetic profile of thecommercial-scale product to the listed drug in adult volunteers under fasted conditions; compare the pilot-scale manufacturing batches to the commercial-scalebatches; and evaluate the oral bioavailability of Adzenys XR-ODT under fed and fasted conditions in adult volunteers. The bioequivalence data for the commercial-scale product demonstrated that Adzenys XR-ODT has a similar pharmacokinetic profile to the listed drug underfasted conditions, meeting bioequivalence criteria for key exposure parameters (AUC5-t, Cmax, AUClast, and AUCinf). The lower 90% confidence interval for earlyexposure (AUC0-5) of Adzenys XR-ODT produced at commercial scale fell just below the 80% lower criterion when compared to the listed drug. However, theconcentration-time profiles for Adzenys XR-ODT produced at commercial scale and pilot scale are virtually identical, as shown in Figure 5, indicating that scale-up of the Adzenys XR-ODT process did not affect the rate and extent of absorption of amphetamine.7Table of Contents Figure 5: Comparison of Adzenys XR-ODT Pilot Scale versus Adzenys XR-ODT Commercial Scale Our settlement agreement with Shire, the producer of Adderall XR, precludes the possibility of a 30-month stay of approval under the Hatch-Waxman Act. We have committed to the FDA to conduct the following three trials as a post-marketing requirement after approval of the Adzenys XR-ODT NDA: 1) asingle-dose, open-label, randomized pharmacokinetic study of Adzenys XR-ODT (amphetamine extended-release orally disintegrating tablets), in male and femalechildren (4 to less than 6 years of age) with ADHD; 2) a randomized, double-blind, placebo-controlled, flexible-dose titration study of Adzenys XR-ODT(amphetamine extended-release orally disintegrating tablets), in children ages 4 to 5 years diagnosed with ADHD; and 3) a one year Pediatric Open-Label SafetyStudy of patients age 4 to 5 years (at the time of entry into the first or second study, or at the time of enrollment if directly enrolled into this study) diagnosed withADHD treated with Adzenys XR-ODT (amphetamine extended-release orally disintegrating tablets).Cotempla XR-ODT: Methylphenidate XR-ODT for the treatment of ADHD We believe our most advanced methylphenidate product candidate, Cotempla XR-ODT, if approved, will be the first methylphenidate XR-ODT for thetreatment of ADHD, providing onset-of-effect within one hour and a 12-hour duration. We submitted a 505(b)(2) NDA for Cotempla XR-ODT on January 9,2015. On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our NDA for Cotempla XR-ODT, it had identifieddeficiencies that precluded discussion of labeling and post marketing requirements or commitments at that time. On November 10, 2015, we announced that wereceived a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trialmaterial and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. TheFDA did not raise any safety or efficacy issues with the clinical data previously provided beyond the need for an adequate bridge between the clinical trial materialand the to-be-marketed drug product. Our Cotempla XR-ODT NDA relies on the efficacy and safety data that formed the basis of FDA approval for the listed drug,Metadate CD®, together with bioavailability/bioequivalence data and efficacy/safety data from our Cotempla XR-ODT clinical program. The FDA conducted acGMP and pre-approval inspection related to our NDA for8Table of ContentsCotempla XR-ODT from May 27 to June 4, 2015. At the end of the inspection, the agency issued a Form FDA 483 with one observation finding that appropriatecontrols are not exercised over one of our computer systems in order to assure that changes in records are instituted only by authorized personnel. On June 19,2015, we responded to the FDA and we implemented corrective action related to this observation, and the FDA closed the inspection. Additionally, the FDA hasconcluded that the trade name Cotempla XR-ODT for our methylphenidate XR-ODT product candidate is provisionally acceptable. Cotempla XR-ODT contains methylphenidate loaded onto a mixture of immediate-release and polymer-coated delayed-release resin particles, which areformulated and compressed into an ODT along with other typical tableting excipients using our patented rapidly disintegrating ionic masking, or RDIM,technology. The result is methylphenidate with an in vivo extended-release profile delivered through a tablet that quickly disintegrates in the mouth. We plan tooffer Cotempla XR-ODT in 30-day supply, child-resistant blister packs. We have been granted two U.S. patents , each of which covers our Cotempla XR-ODTcomposition-of-matter and which we expect will provide Cotempla XR-ODT intellectual property protection until 2032. If any of our composition-of-matterpatents are also listed in the Orange Book, we believe this will provide additional market protection for Cotempla XR-ODT.Cotempla XR-ODT Clinical Program The clinical program for Cotempla XR-ODT consists of four Phase 1 clinical pharmacology studies and a Phase 3 clinical efficacy and safety trial. Three ofthe clinical pharmacology studies have been completed. They were single-dose pharmacokinetic studies conducted under fasted and/or fed conditions: a Phase 1bioequivalence study versus Metadate CD in healthy adult volunteers under fasted conditions; a Phase 1 bioavailability study in healthy adult volunteers under bothfed and fasted conditions; and a Phase 1 bioavailability study in children and adolescents with ADHD under fasted conditions. We plan to conduct a fourth clinicalpharmacology study,designed to be a Phase 1 bioequivalence study to demonstrate equivalence between our clinical trial formulation and our to-be-marketedformulation in healthy adult volunteers under fed and fasted conditions, and it is scheduled to begin in the first half of 2016. We believe that this will complete theclinical program for Cotempla XR-ODT and we expect to complete the bioequivalence bridging study for Cotempla XR-ODT in the third quarter of 2016. The data from our bioequivalence study versus Metadate CD is presented in Figure 1, and shows that Cotempla XR-ODT has a similar plasma concentration-time profile to the listed product, Metadate CD, with a peak exposure that is about 25% higher. The potential efficacy benefits of this increased maximumexposure, as well as any impact on safety parameters, were evaluated in a clinical efficacy and safety trial.9Table of Contents Figure 1: Bioequivalence Study of Cotempla XR-ODT versus Metadate CD, 60 mg, in Healthy AdultVolunteers under Fasted Conditions Other key observations from the Cotempla XR-ODT clinical pharmacology program included:•No formulation-related food effect: The pharmacokinetic profile of Cotempla XR-ODT was similar under fed and fasted conditions. •Similar exposure rate: There was higher mean methylphenidate exposure in children, which decreased with increasing age. •Safety and tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety signals. The aggregate datasuggested that Cotempla XR-ODT has a similar safety profile to that of the listed drug and is well-tolerated.Cotempla XR-ODT Phase 3 classroom efficacy and safety trial The efficacy, safety and tolerability of Cotempla XR-ODT were evaluated in a multicenter, double-blind, placebo-controlled laboratory classroom trial in 87children with ADHD. The laboratory classroom was a controlled study environment designed to model the community school classroom setting while allowingdetailed assessments of behavior over time by trained observers. The primary efficacy variable was the Swanson, Kotkin, Agler, M-Flynn and Pelham, or SKAMP,Combined Score, a validated rating of attention and behavior, averaged over the test day, with higher scores indicating a higher degree of functional impairment.Time to onset and duration of effect were also evaluated as key secondary endpoints. Additional secondary efficacy endpoints included the Permanent ProductMeasure of Performance, or PERMP, a ten-minute, level-adjusted math test that measures the child's ability to focus on written schoolwork by determining thenumber of problems attempted and the number answered correctly. Cotempla XR-ODT met the primary and key secondary efficacy endpoints, showing statistically significant improvement versus placebo on the SKAMP(p<0.0001). Statistical significance expresses the probability that the results of a particular study could have occurred purely by chance. Results are said to bestatistically significant when the p-value obtained is less than the pre-established significance level,10Table of Contentswhich in this case was p<0.05 for the primary efficacy endpoint. The SKAMP-Combined score averaged over the classroom testing day was 25.3 for the placebogroup and 14.3 in the Cotempla XR-ODT group indicating greater symptom severity in the placebo group. The least squares mean difference was –11.04. Figure 2shows SKAMP-Combined Scores for Cotempla XR-ODT versus placebo over the classroom day from our Phase 3 efficacy trial. Time to onset was observedwithin one hour, with a 12-hour duration of effect. Figure 2: Change from Baseline in Mean SKAMP Score During the Test Day Statistically significant improvement versus placebo was also observed on both attempted and correct PERMP scales (p<0.0001). Figure 3 shows PERMPscores for Cotempla XR-ODT versus placebo from our Phase 3 classroom efficacy trial. Taken together, the data demonstrate clinically meaningful differences onboth the rater-evaluated assessment of attentiveness and behavior and the objective measure of sustained attention.11Table of Contents Figure 3: Mean Profiles for PERMP Measurements During the Test Day All of the other secondary endpoints were also statistically significant, indicating a robust effect of the drug, as well as internal consistency in the studyresults. There was no impact on safety parameters as Cotempla XR-ODT was well-tolerated with no unexpected adverse events, serious adverse events, deaths orother safety signals. Our 505(b)(2) application for Cotempla XR-ODT referenced the FDA's previous findings of safety and effectiveness for Metadate CD. The NDA submissionincluded a Paragraph IV certification notification to UCB, Inc., or UCB, the NDA holder of Metadate CD, in accordance with the Drug Price Competition andPatent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act. UCB has acknowledged that they will not initiate a suit against us, and the 45-day period following Paragraph IV notification has since passed which precludes the possibility of a 30-month stay of approval under the Hatch-Waxman Act.NT-0201: Amphetamine XR liquid suspension for the treatment of ADHD We plan to conduct a bridging study of our clinical trial material and our to-be-marketed drug material, which we expect will complete the required clinicaldevelopment program for NT-0201 and expect to submit an NDA for in the fourth quarter of 2016. With a 10-month Prescription Drug User Fee Act, or PDUFA,review period, we would expect a PDUFA date in the second half of 2017. We are pursuing a Section 505(b)(2) regulatory strategy, which allows us to rely in parton the FDA's findings of safety and efficacy of the listed drug, Adderall XR, together with bioavailability/bioequivalence data for NT-0201 from our own clinicalprogram. We have completed a clinical trial demonstrating that NT-0201 was bioequivalent to Adderall XR, 30 mg. NT-0201 contains amphetamine loaded onto a mixture of immediate-release and polymer coated delayed-release resin particles, and using our patenteddynamic time release suspension, or DTRS, technology, we are able to create an amphetamine XR liquid suspension. NT-0201 is designed to be shelf stable for24 months, without requiring refrigeration or reconstitution. We have composition-of-matter patents for NT-0201 that are scheduled to expire in 2032.Additionally, we have received a Notice of Allowance for an additional US patent application that covers this product. If12Table of ContentsNT-0201 receives FDA approval, we expect to list these patents in the Orange Book, which we believe will provide additional market protection for NT-0201.NT-0201 clinical program The clinical program for NT-0201 consists of four Phase 1 single-dose human pharmacokinetic studies under fasted and/or fed conditions. Three of thesestudies are complete: a Phase 1 bioequivalence study versus Adderall XR (30mg) in healthy adult volunteers under fasted conditions; a Phase 1 bioavailability andbioequivalence study in healthy adult volunteers under both fed and fasted conditions; and a Phase 1 bioavailability study in a pediatric population under fastedconditions. The fourth clinical pharmacology study, a Phase 1 bioequivalence study demonstrating equivalence between our clinical trial formulation and our to-be-marketed formulation in healthy adult volunteers under fed and fasted conditions, is scheduled to begin in second quarter 2016. The data from our bioequivalence study versus Adderall XR is shown in Figure 6 and shows that NT-0201 is bioequivalent to the listed drug, Adderall XR, 30mg, under fasted conditions. Figure 6: Bioequivalence Study of NT-0201 versus Adderall XR, 30 mg, inHealthy Adult Volunteers under Fasted Conditions Other key observations from our clinical program for NT-0201 included:•No significant food effects: When administered under fasted and fed conditions, no significant food effects were observed for NT-0201, and theobserved food effects of NT-0201 were less than those for the listed drug. •Similar exposure rate: Consistent with the listed drug, there was a higher mean amphetamine exposure in children, which decreased with increasingage. •Safety and Tolerability: There were no unexpected adverse events, serious adverse events, deaths or other safety signals. The aggregate datasuggested that NT-0201 has a similar safety profile to that of the listed drug and is well-tolerated.13Table of Contents Upon completion of the final clinical pharmacology study, we plan to submit a 505(b)(2) NDA in the fourth quarter of 2016. We intend to include aParagraph IV certification in the NDA submission, and that will require a Paragraph IV certification notification to the producer of Adderall XR, ShirePharmaceuticals, in accordance with the Hatch-Waxman Act. If Shire initiates a suit against us within 45 days of receiving the notice, the FDA will stay finalapproval for NT-0201 for 30 months absent a settlement agreement or court decision that Shire's Orange Book-listed patents are not infringed, or are invalid orunenforceable.Generic Tussionex We manufacture and market a generic equivalent to the branded product Tussionex. Our generic Tussionex is a hydrocodone polistirex and chlorpheniraminepolistirex XR liquid suspension that is a Schedule II narcotic, antitussive and antihistamine combination. This product is indicated for the relief of cough and upperrespiratory symptoms associated with allergies or colds in adults and children six years of age and older. In 2014, approximately 2.1 million prescriptions ofTussionex and related generic products were sold. Since its launch in September 2013, we have manufactured and utilized our DTRS technology in the production of our generic Tussionex at our facilities inGrand Prairie, Texas. In August 2014, we acquired all commercialization and profit rights to this formulation of the generic Tussionex product from CornerstoneBioPharma, Inc. and Coating Place, Inc. We have an exclusive supply agreement, or Supply Agreement, with Coating Place, Inc., or CPI, which expires in August2021, pursuant to which CPI (i) is the exclusive supplier of the active ingredient complexes in our generic Tussionex and (ii) has agreed to not supply anyone elseengaged in the production of generic Tussionex with such active ingredient complexes. Under the terms of the Supply Agreement, we must deliver a 24-monthrolling forecast, or Forecast, of our expected product requirements to CPI on a quarterly basis; however, only the first calendar quarter commencing on or after the90th day after the delivery of a Forecast constitutes a binding purchase commitment with respect to the products listed in such Forecast. In October 2014, we re-launched the product under our own label. We sell our product to drug wholesalers in the United States. We have also established indirect contracts with drug,food and mass retailers that order and receive our product through wholesalers. We have obtained required state licenses, set up distribution channels andestablished trade relations in order to commercialize our generic Tussionex. We intend to utilize this infrastructure should any of our ADHD product candidates beapproved.Commercialization We plan to commercialize Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201, in the United States using our own commercialinfrastructure. In the United States, approximately 10,000 physicians prescribe approximately 40% of all ADHD prescriptions. We plan to initially build aspecialty sales force of approximately 125 sales representatives primarily targeting the highest-volume prescribers of ADHD medication. We intend to divide thesales force into 16 regions, each managed by a regional sales manager. Furthermore, since our target physicians tend to prescribe both methylphenidate andamphetamine, we intend to leverage our sales force by promoting all three of our ADHD products, after they are approved, to the same audience. We plan to focus our commercialization efforts on delivering the right message for each of our three ADHD products. Data indicates that ADHD-indicatedextended-release methylphenidate and extended-release amphetamine products are widely prescribed. Based on this, our messaging can focus on anticipatedbenefits of our XR-ODT and XR liquid suspension dosage forms. We plan to use multi-channel tactics to reach physicians, payers, patients and patient caregiverswith the right frequency to drive behavior. In addition to personal promotion, we intend to reach physicians through medical education, direct marketing, journaladvertising and electronic health record communication.14Table of Contents Advocacy groups, patients and caregivers are extremely active and vocal in the ADHD space. The period from initial diagnosis to symptom control isdifficult, and caregivers actively seek and pass on useful information. We plan for our direct-to-patient and direct-to-consumer plan to tap into this social groupthrough focused education and advertising, as well as by employing appropriate social media listening and engagement to inform these consumers. We expect to launch Adzenys XR-ODT, our amphetamine XR-ODT, in the second quarter of 2016. This launch schedule will allow our sales representativestime to establish themselves in their territories and complete several call cycles prior to the important "back-to-school" period from the beginning of July throughSeptember. If approved, we expect to follow with the launch of Cotempla XR-ODT, our methylphenidate XR-ODT, in the third quarter of 2017. This would allow oursales force time to prepare for a second wave of new prescriptions in the fourth quarter of the year, as follow up from the "back-to-school" dosing period begins andparent-teacher conferences drive new patients to doctors' offices. If approved, our plan is to also launch NT-0201, our amphetamine XR liquid suspension, in thefourth quarter of 2017.Our proprietary technology platform We believe that we can apply the XR-ODT and XR liquid suspension technologies that underlie our product, product candidates and generic Tussionex toother active pharmaceutical ingredients, or APIs. This would allow us to offer more patient- and caregiver-friendly dosage forms, potentially improvingcompliance rates due to difficulty swallowing and providing other clinical advantages. We have the ability to produce drug-loaded micro-particles with complexrelease profiles, which allows us to develop ODT or liquid suspension formulations that mimic or improve existing therapies not otherwise available in XR-ODTor XR liquid suspension form. Our proprietary modified-release drug delivery technology platform, as illustrated below in Figure 7, allows us to produce drug-loaded micro-particlesthrough an ion exchange process that creates new salt forms of existing drug compounds that have been proven safe and effective. By applying a uniformmodified-release coating to these drug-loaded micro-particles and avoiding agglomeration, or clumping, we are able to create particle structures that can withstandcompression and osmotic forces without rupturing, sloughing or leaking. This allows us to compress the modified-release micro-particles into ODT or suspendthem in a liquid formulation without destroying their integrity or causing dose-dumping. By applying different types of coatings, we can modify the drug releasecharacteristics of a micro-particle. Additionally, by mixing combinations of these micro-particles, each of which has its own release profile, we are able to producecomplex drug release profiles. These micro-particles are further blended with excipients to form a final drug product, which we incorporate into a patient-friendlydosage form such as an ODT or liquid suspension. We are also able to utilize this technology to achieve tamper-resistant formulations and taste-masking.15Table of Contents Figure 7: Our Proprietary Modified-Release Drug Delivery Technology Platform We believe our technology platform is able to deliver a proprietary portfolio of commercially available drugs in highly desirable dosage forms.Our XR-ODT Technology: Rapidly Disintegrating Ionic Masking Our Rapidly Disintegrating Ionic Masking, or RDIM, technology utilizes an orally disintegrating, modified-release, taste-masked pharmaceutical compositionthat can withstand compression forces associated with standard tableting technology, allowing for a drug to be incorporated into the ODT dosage form using ionresin technology. This technology not only provides extended-release and controlled-release properties, it masks the unpleasant taste of the active drug. Flavor andcoloring can also be added to the compression blend to further enhance the pharmaceutical elegance of the finished XR-ODT. The finished product is thenpackaged in blister packs making them extremely portable, child resistant and stable for 24 months. Our RDIM technology is protected by a U.S. patent that isscheduled to expire in 2026. Although ODT are one of the most preferred solid oral dosage forms in the market, there is currently no approved XR-ODT product for the treatment ofADHD. We expect to have the first XR-ODT dosage form on the market using our patented XR-ODT technology.Our XR Liquid Suspension Technology: Dynamic Time Release Suspension Our Dynamic Time Release Suspension, or DTRS, technology encompasses a set of process technologies and know-how to manufacture and test modified-release liquid suspension products that are shelf-stable. By matching the specific gravity, osmotic and ionic characteristics of the drug resin particle to that of thesuspension, we are able to obtain shelf-stable liquids with a 24-month shelf life that do not require reconstitution or refrigeration. XR liquid suspension provides a patient-friendly dosage form for patients who find swallowing an intact tablet or capsule to be difficult, or for whom moreprecise dose-titration may be preferred or required. Our DTRS technology not only provides for an extended-release, ready-to-use Liquid Suspension but alsoprovides excellent taste-masking of the drug itself. Our DTRS technology is protected by a series of patents and patent applications.Our Tamper Resistant Technology: Kinetically Controlled Tamper Protection Ion resin drug products inherently deter some forms of abuse, such as inhalation, smoking and injection; however, the most common form of abuse for manydrugs is to induce dose-dumping by16Table of Contentscrushing, chewing or extraction. Our Kinetically Controlled Tamper Protection, or KCTP, technology is designed to prevent abuse by altering the kinetics of thedrug product and can be used in conjunction with both our XR-ODT and XR liquid suspension dosage forms. KCTP is designed to discourage common methods oftampering associated with certain classes of medications which can be abused and misused. KCTP utilizes an additional ion resin particle with an aversive agentbound to it. The aversive resin complex is then coated so that it passes through the body without material release. If an attempt is made to tamper with the XR-ODT or XR liquid suspension to cause dose-dumping, the aversive agent will also be released and block or disrupt the properties of the active drug product. We believe that our KCTP technology may be especially useful for opioid-based pain products or other DEA scheduled drug products for which abuse anddose dumping are known problems. Our KCTP technology is the subject of a patent application and, if granted, this patent will provide protection until 2032.Our product pipeline potential Beyond our initial focus on ADHD, our strategy is to apply our proprietary drug delivery technology platform for the development of additional drugcandidates where patients may benefit from either XR-ODT or XR liquid suspension dosage forms of existing extended-release medications. Difficulty andinability to swallow tablets and capsules are not limited to ADHD medications. Patients with CNS conditions, such as stroke, Parkinson's disease and Alzheimer's,often have difficulty swallowing their medication and would benefit from ODT and liquid suspension dosage forms. In addition, our technology can be applied to existing drugs that are currently not optimized for their kinetic delivery. We believe that our technology iscapable of overcoming some of the common issues in oral drug delivery, such as high peak to trough ratios, blood level spikes that induce unwanted side effects,wide variations in fed-fasted effect, suboptimal onset of action, suboptimal duration of effect, dose-dumping and single point failures of the delivery system, whileproviding an oral dosage form that is preferred by patients, caregivers and physicians. We have an active development pipeline that includes product candidates in complementary therapeutic areas such as psychiatry and neurology, along withadditional novel treatment options for ADHD. We have completed feasibility studies on several of these product candidates thus far. We believe several of theseproduct candidates will be synergistic to our existing commercial infrastructure and the others would allow us to expand into adjacent therapeutic categories. Weplan to complete feasibility work on several potential product candidates by mid-2016 and then select two to three candidates for further clinical development. Weintend to initiate investigational new drug application, or IND, -enabling studies for one of our pipeline candidates during the second half of 2016. Our screening criteria for future potential product candidates to initially assess technical feasibility include whether the target drug compound can be ionizedand bound to a resin micro-particle. We are assessing drug loading efficiency and coating polymers and conducting initial coating work to determine whether thedesired release profile can be achieved for a particular drug resin micro-particle. We are also assessing regulatory criteria to minimize regulatory approval risk. We intend to continue to use the 505(b)(2) regulatory approval pathway in aneffort to mitigate approval risk, and also simplify the clinical development program. We intend to address clinical study design, study endpoints and labelingadvantages early in the development process so that we can tailor a given clinical program that produces a product candidate with attributes that allow for theoptimal strategic positioning, if approved. Finally, we are evaluating criteria when systematically choosing a potential product candidate for our pipeline. We have looked for product candidates that webelieve have a market potential in excess of $50.0 million, a concentrated specialty physician prescribing base, in the case of complementary17Table of Contentscandidates, and a patent landscape that can be navigated and protected through the lifespan of our potential product candidate. We have designed our development process to be targeted and relatively efficient. If we are able to effectively execute our development process, we may beable to initiate clinical trials in approximately 18 months, and submit our NDA in as few as 36 months, after identifying a potential product candidate. We believewe have identified several product candidates that fit our screening criteria and that are attractive candidates for our branded product portfolio.OUR MANUFACTURING CAPABILITIESOverview We lease one manufacturing site in Grand Prairie, Texas that handles the development, production, quality control testing and packaging of our products. Thisfacility has 77,112 square feet of manufacturing and laboratory space, and contains dedicated cGMP manufacturing suites for both XR-ODT and XR liquidsuspension. We hold DEA manufacturing and analytical licenses, and maintain storage and use of Schedule II through IV controlled substances. The manufactureof our products is subject to extensive cGMP regulations, which impose various procedural and documentation requirements and govern all areas of recordkeeping, production processes and controls, personnel and quality control. We have operated and maintained these facilities dating back to when we operated as acontract manufacturer by our predecessor corporation, PharmaFab, Inc., or PharmaFab. In April 2007, the FDA announced entry of a Consent Decree of Permanent Injunction, or the Consent Decree, against PharmaFab, one of its subsidiaries andtwo of its officials, including Mark Tengler, who was, at the time, PharmaFab's president, or jointly, the Defendants. The Consent Decree arose out of severalperceived cGMP deficiencies related to the manufacture of unapproved drugs or Drug Efficacy Study Implementation, or DESI, drugs that we no longermanufacture. Pursuant to the Consent Decree, the Defendants were permanently restrained and enjoined from directly or indirectly manufacturing, processing,packing, labeling, holding or distributing any prescription drugs that are not the subject of an NDA or an abbreviated NDA. Among other things, the ConsentDecree also granted the FDA the ability to, without prior notice, inspect PharmaFab's place of business and take any other measures necessary to monitor andensure continuing compliance with the terms of the Consent Decree. The FDA has inspected the Grand Prairie facility several times since the Consent Decree wasentered, and we have been able to manufacture and ship our generic Tussionex and drug products for our clinical trials. We have also concluded the requiredannual audit program as prescribed by the Consent Decree. For our most recent annual audit by a cGMP expert in November 2014, the cGMP expert concludedour corrective actions satisfactorily addressed the observations noted by the cGMP expert in its audit report. However, on May 22, 2015, the FDA's Dallas DistrictOffice identified three ongoing cGMP deviations based on our response to the audit report related to batch failure investigations, quality control unit procedures,and in-process specifications. We implemented corrective actions and submitted additional information in our response to the FDA pursuant to the ConsentDecree. To date, the consent decree has had no material impact on our current business operations or our ability to pursue approval of our product candidates. To date, we are producing Adzenys XR-ODT in commercial size batches, which also proves our scale-up capability, and have produced Cotempla XR-ODTand NT-0201 for use in our clinical trials and stability studies. We are in the process of scaling up Cotempla XR-ODT for full commercial-size batches. Wecurrently produce commercial size batches of our generic Tussionex. We believe that our current facilities have the manufacturing capacity for potentialcommercialization of Adzenys XR-ODT, Cotempla XR-ODT and NT-0201 in quantities sufficient to meet what we believe will be our commercial needs, and toaccommodate the manufacturing of materials for future clinical trials of other potential product candidates that we may identify for our product pipeline. Webelieve that18Table of Contentsmaintaining our internal manufacturing capabilities enables us to obtain our products at-cost without manufacturer's margins and to better control supply qualityand timing.Drug substances We currently purchase the APIs used in Adzenys XR-ODT and NT-0201 (amphetamine), and Cotempla XR-ODT (methylphenidate), anionic resins,excipients and other materials from third-party providers, on a purchase order basis from manufacturers based outside and within the United States. We anticipateentering into commercial supply agreements with many of these manufacturers at a later date. Both amphetamine and methylphenidate are classified as controlled substances under U.S. federal law. Adzenys XR-ODT, Cotempla XR-ODT and NT-0201are classified by the DEA as Schedule II controlled substances, meaning that these drug products have a high potential for abuse and dependence among drugs thatare recognized as having an accepted medical use. Consequently, the procurement, manufacturing, shipping, dispensing and storing of our product candidates willbe subject to a high degree of regulation, as described in more detail under the caption "Governmental Regulation—DEA Regulation" included elsewhere in thisAnnual Report on Form 10-K.INTELLECTUAL PROPERTYProprietary protection Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our drug candidates, manufacturing and processdiscoveries and other know-how, to operate without infringing the proprietary rights of others, and to prevent others from infringing on our proprietary rights. Wehave been building and continue to build our intellectual property portfolio relating to our ADHD drug candidates, our generic Tussionex and our technologyplatform. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and certain foreign patent applications related to ourproprietary technology, inventions and improvements that are important to the development and implementation of our business. We also intend to rely on tradesecrets, know-how, continuing technological innovation, and potential in-licensing opportunities to develop and maintain our proprietary position. We cannot besure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor canwe be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology.Patent rights Our intellectual property portfolio consists of 10 patents and 10 patent applications in the United States, and 6 patents and 2 patent applications in foreigncountries and regions. Our intellectual property strategy emphasizes specific drug products, product groups, and technology platforms. Our patents and patentapplications covering specific drug products include claims to the drug products and to methods of using those products. Our patents and patent applicationscovering technology platforms include claims to methods of making products as well as claims to the products made by those methods. Our XR-ODT product Adzenys XR-ODT patent portfolio includes three granted U.S. patents and five pending U.S. non-provisional applications. The issuedpatents contain pharmaceutical composition-of-matter claims covering controlled-release direct compression ODT with drug-resin particles. The composition-of-matter patents are scheduled to expire in 2026 and 2032. In addition, we have received a Notice of Allowance for one U.S. non-provisional application, which alsocontains claims directed to, among other things, compositions of matter for Adzenys XR-ODT, which if such claims are ultimately issued, would expire in 2032.19Table of Contents Our XR-ODT product candidate Cotempla XR-ODT patent portfolio includes three granted U.S. patents, including pharmaceutical composition-of-matterclaims covering controlled-release direct compression ODT with drug-resin particles and, among other things, composition of matter for Cotempla XR-ODT.These patents are scheduled to expire in 2026 and 2032, respectively. This portfolio also includes four other pending U.S. non-provisional applications. Our XR liquid suspension product candidate NT-0201 patent portfolio contains five granted U.S. patents and six other pending U.S. non-provisionalapplications. These patents contain claims directed to, among other things, compositions of matter, as well as methods of preparing liquid controlled-releaseformulations and for predicting bioequivalence for liquid suspension. The longest-term composition-of-matter patent is scheduled to expire in 2032, and themethod patents are scheduled to expire in 2029 and 2031, respectively. Our generic Tussionex is covered by four of our granted U.S. patents which include claims directed to, among other things, a composition-of-matter, as wellas methods-of-making, and for predicting bioequivalence for liquid suspension. Our generic Tussionex is also covered by two other pending non-provisionalapplications. The composition-of-matter patent is scheduled to expire in 2031. We expect protection under granted patents and/or patents granted on pendingapplications to extend until 2031. Upon receiving FDA approval for any of these products, we intend to list both applicable platform patents and relevant specific drug patents in the OrangeBook. We own all of the above patents and pending applications. Adzenys XR-ODT and Cotempla XR-ODT are not currently protected by patents outside of the United States and our generic Tussionex and NT-0201 arecurrently protected by method patents only in the United States, Australia, Canada, China, Mexico and South Africa. As such, competitors may be free to sellproducts that incorporate the same or similar technologies that are used in our products in countries in which the relevant product does not have patent protection. Patent life determination depends on the date of filing of the application and other factors as promulgated under the patent laws. In most countries, includingthe United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country.Trade secret and other protection In addition to patented intellectual property, we also rely on trade secrets and proprietary know-how to protect our technology and maintain our competitiveposition, especially when we do not believe that patent protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants andadvisors to execute a confidentiality and inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. Theagreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by theindividual during the course of the individual's relationship with us except in limited circumstances. These agreements generally also provide that we shall own allinventions conceived by the individual in the course of rendering services to us.Other intellectual property rights We seek trademark protection in the United States when appropriate. We have filed for trademark protection for the Neos Therapeutics mark, which we usewith our pharmaceutical research and development as well as products, as well as trade names that could be used with our potential products. We currently haveregistered trademarks for Neos Therapeutics in the United States as well as for our DTRS technology.20Table of Contents From time to time, we may find it necessary or prudent to obtain licenses from third party intellectual property holders.RESEARCH AND DEVELOPMENT For the years ended December 31, 2015, December 31, 2014 and December 31, 2013, our research and development expenses were $11.9 million,$10.6 million and $10.0 million, respectively.COMPETITION Our industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition andpotential competition from a number of sources, including pharmaceutical and biotechnology companies, generic drug companies, drug delivery companies andacademic and research institutions. We believe the key competitive factors that will affect the development and commercial success of our product candidatesinclude ease of administration and convenience of dosing, therapeutic efficacy, safety and tolerability profiles and cost. Many of our potential competitors havesubstantially greater financial, technical and human resources than we do, as well as more experience in the development of product candidates, obtaining FDA andother regulatory approvals of products, and the commercialization of those products. Consequently, our competitors may develop modified-release products for thetreatment of ADHD or for other indications we may pursue in the future, and such competitors' products may be more effective, better tolerated and less costlythan our product candidates. Our competitors may also be more successful in manufacturing and marketing their products than we are. We will also facecompetition in recruiting and retaining qualified personnel and establishing clinical trial sites and patient enrollment in clinical trials. Adzenys XR-ODT and our two branded product candidates also face competition from commercially available generic and branded medications currentlyproduced by companies that are promoting products in the ADHD market, including Shire (Vyvanse, Adderall XR, Intuniv), Janssen (Concerta), Eli Lilly(Strattera), Pfizer (Quillivant XR and QuilliChew ER), Concordia (Kapvay), Noven (Daytrana), Novartis (Focalin XR and Ritalin LA), Tris Pharmaceuticals(Dyanavel XR), Rhodes Pharmaceuticals (Aptensio XR) and related generics. We are also aware of efforts by several pharmaceutical companies with ADHDmedications in clinical development, including Shire, Noven, Alcobra, Highland Therapeutics, Sunovion and Neurovance. Tris Pharmaceuticals is also working inthis space to reformulate existing methylphenidate and amphetamine medications. The FDA recently issued revised guidance for bioequivalence testing of extended-release methylphenidate, which makes it more difficult to seek approval onthe basis of bioequivalence for new generic products. We believe this will result in limited competition for the generic Concerta market and a new branded,extended-release methylphenidate drug with 12-hour duration of effect, such as Cotempla XR-ODT, if approved, would benefit from the lack of competition. Inlight of these developments, we believe that along with Concerta and Aptensio XR, Cotempla XR-ODT is positioned to be one of only three branded solid oraldosage formulations of extended-release methylphenidate with 12-hour coverage, and its ODT formulation would offer a unique and patient- and caregiver-friendly dosage form. While two additional generic manufacturers launched generic versions of Concerta, Mallinckrodt in 2011 and KUDCO in 2013, both havelost their AB-rating, are now BX-rated, and may no longer be substituted for Concerta. This results in a market with a higher barrier to entry.GOVERNMENT REGULATION Government authorities in the United States at the federal, state and local levels and in other countries regulate, among other things, the research,development, testing, manufacture, quality control,21Table of Contentsapproval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export andimport of drug products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained,organized into a format specific for each regulatory authority, submitted for review and ultimately approved by the applicable regulatory authority.U.S. drug development In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. Drugs are alsosubject to other federal, state and local statutes and regulations. The process of obtaining regulatory approval and maintaining subsequent compliance withapplicable federal, state and local statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicableU.S. requirements at any time during product development, the approval process or after approval may subject an applicant to administrative or judicial sanctions.These sanctions could include, among other actions, the FDA's refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled orwarning letters, voluntary product recalls or market withdrawals, product seizures, total or partial suspension of production or distribution injunctions, fines,consent decrees, refusals of government contracts, restitution, disgorgement or civil and criminal penalties. Any agency or judicial enforcement action could have amaterial adverse effect on us. For a description of a consent decree our predecessor corporation entered into with the FDA and to which we remain subject, see"Our manufacturing capabilities—Overview" and "Risk factors—Risks related to commercialization." If we fail to manufacture Adzenys XR-ODT, or if approved,Cotempla XR-ODT or NT-0201 in sufficient quantities and at acceptable quality and pricing levels, or fail to obtain adequate DEA quotas for controlledsubstances, or to fully comply with cGMP regulations, we may face delays in the commercialization of this product candidate or be unable to meet market demand,and may be unable to generate potential revenues. Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States. We intend tosubmit our NDAs under the 505(b)(2) regulatory approval pathway. Development and approval of drugs generally involves the following:•Submission to the FDA of an IND, which must become effective before clinical trials involving humans may begin; •Approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial site before a trial may be initiated at thatsite; •Performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations and other good clinical practices,or GCPs; •Submission of an NDA to the FDA; •The FDA's decision within 60 days of its receipt of an NDA to accept it for filing and review; •Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is produced to assesscompliance with cGMPs and assure that the facilities, methods and controls are adequate to preserve the drug's identity, strength, quality and purity; •Possible FDA audit of the clinical trial sites that generated the data in support of the NDA; and •FDA review and approval of the NDA. The nonclinical testing, clinical trials and review process requires substantial time, effort and financial resources, and we cannot be certain that any approvalsfor our product candidates will be22Table of Contentsgranted on a timely basis, if at all. The data required to support an NDA are generated in two distinct developmental stages: nonclinical and clinical. Thenonclinical development stage generally involves synthesizing the active component, developing the formulation and control procedures and determining themanufacturing process, as well as carrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which may supportsubsequent clinical testing in humans. In the case of documentation to support a 505(b)(2) NDA, this nonclinical data may be referenced in literature or the FDA'sprevious findings of safety and efficacy for a listed drug. The sponsor must submit the results of the nonclinical studies, together with manufacturing information,analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request for authorization fromthe FDA to administer an investigational drug product to humans, and must become effective before clinical trials may begin. An IND automatically becomeseffective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and placesthe IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result,submission of an IND may not result in the FDA allowing clinical trials to commence. The clinical stage of development involves the administration of the product candidate to healthy volunteers and patients under the supervision of qualifiedinvestigators, generally physicians not employed by or under the sponsor's control, in accordance with GCPs, which include the requirement that all researchsubjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, theobjectives of the trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Eachprotocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed andapproved by an independent IRB for each institution where the trial will be conducted to ensure that the risks to individuals participating in the clinical trials areminimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each subject or his orher legal representative and must monitor the clinical trial until completed.Clinical trials Clinical trials are generally conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap.•Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses ofthe product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacology, side effect tolerability and safety ofthe drug. •Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At thesame time, safety and further pharmacokinetic and pharmacodynamics information is collected, possible adverse effects and safety risks areidentified and a preliminary evaluation of efficacy is conducted. •Phase 3 clinical trials generally involve large numbers of patients at multiple sites and are designed to provide the data necessary to demonstrate theproduct candidate's safety and effectiveness for its intended use, establish its overall benefit/risk relationship, and provide an adequate basis forapproval. By following the 505(b)(2) regulatory approval pathway, the applicant may reduce some of the burdens of developing a full clinical program by relying oninvestigations not conducted by the applicant and for which the applicant has not obtained a right of reference, such as prior investigations23Table of Contentsinvolving the listed drug. In such cases, some clinical trials may not be required or may be otherwise limited. Post-approval trials, sometimes referred to as Phase 4, may be conducted after initial marketing approval. These trials are used to gain additional experiencefrom the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as acondition of approval of an NDA. Before approval, progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA, andwritten IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events, findings from other studiessuggesting a significant risk to humans exposed to the same or similar drugs, findings from animal or in vitro testing suggesting a significant risk to humans, andany clinically important rate increase of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure. Phase 1, Phase 2 andPhase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial atany time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend orterminate approval of a clinical trial at its institution if the trial is not being conducted in accordance with the IRB's requirements or the use of the drug raises anysafety concerns. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the sponsor, known as a data safetymonitoring board or committee. Depending on its charter, this group may determine whether a trial may move forward at designated check points based on accessto certain data from the trial. There are also requirements governing the reporting of ongoing clinical trials and completed trial results to public registries. Sponsors of certain clinical trialsof FDA-regulated products are required to register and disclose specified clinical trial information, which is publicly available at www.clinicaltrials.gov.Information related to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical trial is then made publicas part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can bedelayed until the new product or new indication being studied has been approved. However, there are evolving rules and increasing requirements for publication ofall trial-related information, and it is possible that data and other information from trials involving drugs that never garner approval could require disclosure in thefuture. Concurrent with clinical trials, companies usually develop additional information about the chemistry and physical characteristics of the drug as well asfinalize a process for manufacturing it in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable ofconsistently producing quality batches of the product candidate, and, among other things, a drug manufacturer must develop methods for testing the identity,strength, quality and purity of the final drug product. Appropriate packaging must be selected and tested, and stability studies must be conducted to demonstratethat the product candidate does not undergo unacceptable deterioration over its shelf life.NDA and FDA review process The results of nonclinical studies and clinical trials, together with other detailed information, including extensive information on manufacturing and drugcomposition and proposed labeling, are submitted to the FDA in the form of an NDA requesting approval to market the drug for one or more specified indications.The FDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use and whether the product is beingmanufactured in accordance with cGMPs to assure and preserve the product's identity, strength, quality and purity. FDA approval of an NDA must be obtainedbefore a drug may be legally marketed in the United States.24Table of Contents Under the PDUFA as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to theFDA's fee schedule, effective through September 30, 2016, the user fee for an application requiring clinical data, such as an NDA, is $2,374,200. Clinical data, asinterpreted by the FDA to assess fees under PDUFA, include (1) study reports or literature reports of what are explicitly or implicitly represented by the applicantto be adequate and well-controlled trials for safety or effectiveness or (2) reports of comparative activity (other than bioequivalence and bioavailability studies),immunogenicity, or efficacy, where those reports are necessary to support a claim of comparable clinical effect. The term does not include bioequivalence andbioavailability studies submitted in support of an NDA. NDAs for which clinical data are not required to demonstrate safety and effectiveness are reduced to half ofthe amount of the prescribed user fee, or $1,187,100 for 2016. PDUFA also imposes an annual product fee for human drugs ($114,450 per product) and an annualestablishment fee ($585,200 per establishment) on facilities used to manufacture prescription drugs. Fee waivers or reductions are available in certaincircumstances, including waiver of the application fee for the first application filed by a small business. The FDA reviews submitted NDAs before it accepts them for filing, and may request additional information rather than accepting the applications. The FDAmust make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depth review ofthe NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has ten months from the filing date in which to complete its initial review ofa standard NDA and respond to the applicant, and six months from the filing date for an NDA designated for priority review. The FDA does not always meet itsPDUFA goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for additional information orclarification. Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether theycomply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMPrequirements and adequate to assure consistent production of the product to specifications. The FDA may also audit data from clinical trials to ensure compliancewith GCP requirements. Additionally, the FDA may refer applications for novel drug products or drug products which present difficult questions of safety orefficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation regarding whether theapplication should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers themcarefully when making decisions. NDAs submitted under Section 505(b)(2) are typically not referred to an Advisory Panel for consideration unless new safetyinformation is revealed in the review cycle. The FDA likely will re-analyze the clinical trial data, which could result in extensive discussions between the FDA andthe applicant during the review process. The review and evaluation of an NDA by the FDA is extensive and time consuming and may take longer than originallyplanned to complete, and we may not receive a timely approval, if at all. After the FDA evaluates an NDA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of thedrug with prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and theapplication will not be approved in its present form. A Complete Response Letter usually describes the specific deficiencies in the NDA identified by the FDA,and may require additional clinical data, such as an additional pivotal Phase 3 clinical trial, and other significant and time-consuming requirements related toclinical trials, nonclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may resubmit the NDA, addressing all of thedeficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide that the NDA does notsatisfy the criteria for approval. Data obtained25Table of Contentsfrom clinical trials are not always conclusive, and the FDA may interpret data differently than the sponsor interprets the same data. There is no assurance that the FDA will approve a product candidate for marketing, and the sponsor may encounter significant difficulties or costs during thereview process. If a product receives marketing approval, the approval may be significantly limited to specific diseases and dosages or the indications for use mayotherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings orprecautions be included in the product labeling, or it may condition approval on changes to the proposed labeling. The FDA also may condition approval on thedevelopment of adequate controls and specifications for manufacturing and a commitment to conduct post-marketing testing and surveillance to monitor thepotential effects of approved products. For example, the FDA may require Phase 4 trials designed to further assess a drug's safety and efficacy. The FDA may also place other conditions on approval including the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe useof the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without anapproved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricteddistribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercialpromotion, distribution, prescription or dispensing of products. Marketing approval may be withdrawn for non-compliance with regulatory requirements or ifproblems occur following initial marketing.Section 505(b)(2) regulatory approval pathway Section 505(b)(2) of the FDCA provides an alternate regulatory pathway for approval of a new drug by allowing the FDA to rely on data not developed by theapplicant. Specifically, Section 505(b)(2) permits the submission of an NDA where one or more of the investigations relied upon by the applicant for approval wasnot conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon published literature and/or theFDA's findings of safety and effectiveness for an approved drug already on the market. Approval or submission of a 505(b)(2) application, like those forabbreviated new drugs, or ANDAs, may be delayed because of patent and/or exclusivity rights that apply to the previously approved drug. A 505(b)(2) application may be submitted for a new chemical entity, or NCE, when some part of the data necessary for approval is derived from studies notconducted by or for the applicant and when the applicant has not obtained a right of reference. Such data are typically derived from published studies, rather thanFDA's previous findings of safety and effectiveness of a previously approved drug. For changes to a previously approved drug however, an applicant may rely onthe FDA's finding of safety and effectiveness of the approved drug, coupled with information needed to support the change from the approved drug, such as newstudies conducted by the applicant or published data. When based on an approved drug, the 505(b)(2) drug may be approved for all of the indications permitted forthe approved drug, as well as any other indication supported by additional data. Section 505(b)(2) applications also may be entitled to marketing exclusivity if supported by appropriate data and information. As discussed in more detailbelow, three-year new data exclusivity may be granted to the 505(b)(2) application if one or more clinical investigations conducted in support of the application,other than bioavailability/bioequivalence studies, were essential to the approval and conducted or sponsored by the applicant. Five years of marketing exclusivitymay be granted if the application is for an NCE, and pediatric exclusivity is likewise available.26Table of ContentsOrange Book listing and Paragraph IV certification For NDA submissions, including those under Section 505(b)(2), applicants are required to list with the FDA certain patents with claims that cover theapplicant's product. Upon approval, each of the patents listed in the application is published in Approved Drug Products with Therapeutic Equivalence Evaluations,commonly referred to as the Orange Book. Any applicant who subsequently files an ANDA or 505(b)(2) NDA that references a drug listed in the Orange Bookmust certify to the FDA that (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent hasexpired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product forwhich the application is submitted. This last certification is known as a Paragraph IV certification. If an applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the holder of theNDA for the approved drug and the patent owner once the application has been accepted for filing by the FDA. The NDA holder or patent owner may then initiatea patent infringement lawsuit in response to notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of aParagraph IV certification prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of 30 months from the date of the lawsuit, theapplicant's successful defense of the suit, or expiration of the patent. Pursuant to our settlement agreement with Shire, we stipulated that Shire's two Orange Book-listed patents covering Adderall XR were valid, enforceable andinfringed by our 505(b)(2) NDA covering Adzenys XR-ODT and Adzenys XR-ODT itself. The agreement with Shire applies solely with respect to Adzenys XR-ODT.Pediatric information Under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and efficacy of the drug for theclaimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation in which the product is safeand effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers. The Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012, amended the FDCA to require that asponsor who is planning to submit an NDA for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administrationsubmit an initial Pediatric Study Plan, or PSP, within 60 days of an end-of-Phase 2 meeting or, if there is no such meeting, as early as practicable before theinitiation of the Phase 3 or Phase 2/3 trial. The initial PSP must include an outline of the pediatric trial(s) that the sponsor plans to conduct, including objectivesand design, age groups, relevant endpoints and statistical approach, or a justification for not including such information and any request for a deferral of pediatricassessments or a full or partial waiver of the requirement to provide data from pediatric trials. The FDA and the sponsor must reach an agreement on the PSP, butthe sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected fromnonclinical studies, early phase clinical trials and other clinical development programs.Post-marketing requirements Following approval, the company and the new product are subject to continuing regulation by the FDA, which include monitoring and recordkeepingactivities, reporting of adverse experiences and complying with promotion and advertising requirements, which include prohibitions on the promotion27Table of Contentsof the drugs for unapproved, or "off-label" uses. Although physicians may prescribe legally available drugs for off-label treatments, manufacturers may notpromote such non-FDA approved uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use on an on-goingbasis. Further, if there are any modifications to the drug, including changes to indications, labeling, or manufacturing processes or facilities, the applicant may berequired to submit and obtain FDA approval of a supplemental NDA or new NDA, which may require the applicant to develop additional data or conductadditional nonclinical studies or clinical trials. The FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMPs. These regulations require, amongother things, quality control and quality assurance, the maintenance of records and documentation and the obligation to investigate and correct any deviations fromcGMPs. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with theFDA and certain state agencies, and are subject to periodic, unannounced inspections by the FDA and certain state agencies for compliance with cGMPs and otherlaws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance withcGMPs. The discovery of violative conditions, including failure to conform to cGMPs, could result in enforcement actions, and the discovery of problems with aproduct after approval may result in restrictions on a product, manufacturer or holder of an approved NDA, including voluntary recalls and product seizures. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences,including adverse publicity, judicial or administrative enforcement, untitled or warning letters from the FDA, mandated corrections to advertising orcommunications to doctors and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to aproduct's approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk managementmeasures. New government requirements, including those resulting from new legislation, may be established, or the FDA's policies may change, which coulddelay or prevent regulatory approval of our products under development.U.S. marketing exclusivity The FDCA provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, for a drug product that contains a previouslyapproved NCE if new clinical investigations, other than bioavailability/bioequivalence studies, were essential to the application's approval (e.g., for newindications, dosages or strengths of an existing drug). This three-year exclusivity for new data covers only the modification for which the drug received approval onthe basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication.Furthermore, this exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conductor obtain a right of reference to all of the nonclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy. Pediatric exclusivity is another type of regulatory market exclusivity in the United States, which, if granted, adds six months to existing exclusivity periodsand patent terms. This six-month exclusivity, which runs from the end of other exclusivity protections or patent term, may be granted based on the voluntarycompletion of a pediatric trial in accordance with an FDA-issued "Written Request." The FDA issues a written request for pediatric clinical trials before approvalof an NDA only where it determines that information relating to the use of a drug in a pediatric population, or part of the pediatric population, may produce healthbenefits in that population.28Table of ContentsDEA regulation Because our products and product candidates are subject to the Controlled Substances Act, or CSA, we must comply with various requirements set forth bythat legislation, as amended, its implementing regulations and as enforced by the DEA. The CSA imposes various registration, record-keeping and reportingrequirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls, prescription and order form requirements andrestrictions on prescription refills for certain kinds of pharmaceutical products. A principal factor for determining the particular requirements of the CSA applicableto a product, if any, is its actual or potential abuse profile. A product may be listed as a Schedule I, II, III, IV or V controlled substance, with Schedule I presentingthe highest perceived risk of abuse and Schedule V presenting the least. For example, Schedule I controlled substances have no currently accepted medical use intreatment in the United States and a lack of accepted safety for use under medical supervision. The active ingredients in our product, hydrocodone, and productcandidates, amphetamine and methylphenidate, are Schedule II controlled substances and under various restrictions, including, but not limited to, mandatorywritten prescriptions and the prohibition of refills. Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. The registration isspecific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for import and manufacturing, andeach registration will specify which schedules of controlled substances are authorized. Similarly, separate registrations are also required for separate facilities. The DEA typically inspects a facility to review its security measures prior to issuing a registration and on a periodic basis. Security requirements vary bycontrolled substance schedule, with the most stringent requirements applying to Schedule I and Schedule II controlled substances. Required security measuresinclude background checks on employees and physical control of inventory through measures such as vaults and inventory reconciliations. Records must bemaintained for the handling of all controlled substances, and periodic reports made to the DEA, for example distribution reports for Schedule I and II controlledsubstances. Reports must also be made for thefts or losses of any controlled substance, and to obtain authorization to destroy any controlled substance. In addition, a DEA quota system controls and limits the availability and production of controlled substances in Schedule I or II. Distributions of anySchedule I or II controlled substance must also be accompanied by special order forms, with copies provided to the DEA. Because our products are, and ourproduct candidates are expected to be, regulated as Schedule II controlled substances, they will be subject to the DEA's production and procurement quota scheme.The DEA establishes annually an aggregate quota for how much of a controlled substance may be produced in total in the United States based on the DEA'sestimate of the quantity needed to meet legitimate scientific and medicinal needs. The limited aggregate amount that the DEA allows to be produced in the UnitedStates each year is allocated among individual companies, which must submit applications annually to the DEA for individual production and procurement quotas.We must receive an annual quota from the DEA in order to produce or procure any Schedule I or Schedule II controlled substance for use in manufacturing of ourproduct and product candidates. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during theyear, although the DEA has substantial discretion in whether or not to make such adjustments. To enforce these requirements, the DEA conducts periodic inspections of registered establishments that handle controlled substances. Failure to maintaincompliance with applicable requirements, particularly as manifested in loss or diversion, can result in administrative, civil or criminal enforcement action. TheDEA may seek civil penalties, refuse to renew necessary registrations or initiate administrative proceedings to revoke those registrations. In some circumstances,violations could result in criminal proceedings.29Table of Contents In addition to federal scheduling, some drugs may be subject to state-controlled substance regulation and thus more extensive requirements than thosedetermined by the DEA and FDA.Pharmaceutical coverage, pricing and reimbursement Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health programs,commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement for drug products exists.Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products will be made on a payor by payorbasis. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support forthe use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, inaddition to their safety and efficacy. In order to obtain coverage and reimbursement for any product that might be approved, we may need to conduct expensivepharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of any products, in addition to the costs required to obtainregulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. If third-party payors do not consider a product to becost-effective compared to other available therapies, they may not cover the product after approval as a benefit under their plans or, if they do, the level of paymentmay not be sufficient to allow a company to sell its products at a profit. The U.S. government and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government-paidhealth care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for brand-named prescription drugs.For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA,contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs reimbursed by Medicaid programs,extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based onpharmaceutical companies' share of sales to federal health care programs. Adoption of government controls and measures, and tightening of restrictive policies injurisdictions with existing controls and measures, could limit payments for pharmaceuticals. As noted above, even if we are able to secure regulatory approval, sales of any of our products may suffer if the government and third-party payors fail toprovide adequate coverage and reimbursement. An increasing emphasis on cost containment measures in the United States has increased, and we expect thissentiment will continue to increase the pressure on drug pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorablecoverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies andreimbursement rates may be implemented in the future.Other healthcare laws and compliance requirements Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in additionto the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the U.S. Department ofJustice, the DEA, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the EnvironmentalProtection Agency and state and local governments.30Table of Contents We also are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws may impact, among other things, ourproposed sales, marketing and educational programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states inwhich we conduct our business. The laws that may affect our ability to operate include:•The federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering orpaying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either (1) the referral of an individual to a personfor furnishing any item or service for which payment is available under a federal health care program, or (2) the purchase, lease, order orrecommendation thereof of any good, facility, service or item for which payment is available under a federal health care program; •The False Claims Act and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, orcausing to be presented, false or fraudulent claims for payment from the federal government or making or using, or causing to be made or used, afalse record or statement material to a false or fraudulent claim; •The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibitexecuting a scheme to defraud any healthcare benefit program, obtaining money or property of the health care benefit program through falserepresentations or knowingly and willingly falsifying, concealing or covering up a material fact, making false statements or using or making anyfalse or fraudulent document in connection with the delivery of, or payment for, health care benefits or services; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations,which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; •The provision under the ACA commonly referred to as the Sunshine Act, which requires applicable manufacturers of covered drugs, devices,biologics and medical supplies to track and annually report to CMS payments and other transfers of value provided to physicians and teachinghospitals and certain ownership and investment interests held by physicians or their immediate family members in applicable manufacturers andgroup purchasing organizations; and •State law equivalents of each of the above federal laws, such as the Anti-Kickback Statute and False Claims Act, and state laws concerning securityand privacy of health care information, which may differ in substance and application from state-to-state thereby complicating compliance efforts. The ACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute andthe applicable criminal healthcare fraud statutes contained within 42 U.S.C. Section 1320a-7b. Pursuant to the statutory amendment, a person or entity no longerneeds to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that thegovernment may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulentclaim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute,some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs. As noted above, the federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented, false orfraudulent claims for payment from federal programs, including Medicare and Medicaid. Although we would not submit claims directly to payors, manufacturerscan be held liable under these laws if they are deemed to "cause" the submission of31Table of Contentsfalse or fraudulent claims by, for example, providing inaccurate billing or coding information to customers. In addition, our future activities relating to thereporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other informationaffecting federal, state, and third-party reimbursement for our products, and the sale and marketing of our products are subject to scrutiny under this law. Forexample, pharmaceutical companies have been prosecuted under the federal False Claims Act in connection with their off-label promotion of drugs. Penalties forsuch violations could include three times the actual damages sustained by the government, mandatory civil penalties between $5,500 and $11,000 for each separatefalse claim, exclusion from participation in federal healthcare programs, and the potential implication of various federal criminal statutes. Private individuals alsohave the ability to bring actions under the federal False Claims Act, or qui tam actions, and certain states have enacted laws based on the federal False Claims Act.EMPLOYEES As of December 31, 2015, we employed 81 full-time employees.CORPORATE INFORMATION Our predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. and subsequently changed its name to Neostx, Inc. OnJune 15, 2009, we completed a reorganization pursuant to which substantially all of the capital stock of Neostx, Inc. was acquired by a newly formed Delawarecorporation, named Neos Therapeutics, Inc. The remaining capital stock of Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged withand into Neos Therapeutics, Inc. Our principal executive offices are located at 2940 N. Highway 360, Grand Prairie, Texas, 75050, and our telephone number is(972) 408-1300. We completed our initial public offering of common stock July 2015 and our common stock is listed on the NASDAQ Global Market under thesymbol "NEOS." Item 1A. Risk factors We operate in an industry that involves numerous risks and uncertainties. You should carefully consider the risks and uncertainties described below, togetherwith all of the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes appearing at the end ofthis Annual Report on Form 10-K, before making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition,results of operations and prospects could be harmed. In that event, the trading price of our common stock could decline, and you may lose part or all of yourinvestment.RISKS RELATED TO COMMERCIALIZATIONWe are heavily dependent on the success of Adzenys XR-ODT and our product candidates, Cotempla XR-ODT and NT-0201. We have never generated anyrevenues from the sales of Adzenys XR-ODT or any of our product candidates, and we may never achieve or maintain profitability. Our ability to become profitable depends upon our ability to generate revenues from sales of Adzenys XR ODT and, if approved, our product candidates. Wehave only generated revenues from the sale of our generic Tussionex and contract manufacturing, which contract manufacturing operations were discontinued in2013. We have not generated any revenues from product sales of Adzenys XR-ODT or our product candidates and have incurred significant operating losses. Our ability to generate product revenues is dependent on our ability to successfully commercialize Adzenys XR-ODT, our amphetamine extended-releaseorally disintegrating tablet, or XR-ODT, and, if approved, our product candidates, Cotempla XR-ODT, our methylphenidate XR-ODT, and NT-0201, ouramphetamine XR liquid suspension, for the treatment of attention deficit hyperactivity disorder, or32Table of ContentsADHD, and any other product candidates that we may identify and pursue. Our ability to successfully commercialize Adzenys XR-ODT and our productcandidates depends on, among other things, our ability to:•manufacture commercial quantities of Adzenys XR-ODT and, if approved, our product candidates at acceptable cost levels; •successfully establish sales and marketing capabilities to commercialize Adzenys XR-ODT and, if approved, our product candidates; and •obtain regulatory approvals for Cotempla XR-ODT and NT-0201. We anticipate incurring significant costs associated with commercialization of Adzenys XR-ODT and, if approved, our product candidates. It is possible thatwe will never have sufficient product sales revenues to achieve profitability.If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may beunable to generate any revenue. We have recently started building an organization for the sale, marketing and distribution of Adzenys XR-ODT and, if approved, Cotempla XR-ODT andNT-0201. As a result, we must finish building this organization, and/or enter into a marketing collaboration with a third party, in order to commercialize AdzenysXR-ODT and, if approved, Cotempla XR-ODT and NT-0201. Although we intend to establish a focused, specialty sales and marketing organization ofapproximately 125 representatives to promote any of our approved products in the United States, we have only just started building such an organization and donot yet have any such capabilities. The establishment and development of our own sales force in the United States to market Adzenys XR-ODT and, if approved,Cotempla XR-ODT and NT-0201 will be expensive and time consuming and could delay any product launch. We cannot be certain that we will be able tosuccessfully develop this capacity, and even if we do, the cost of establishing and maintaining such an organization may exceed the benefit of doing so. Our prior experience in the marketing, sale and distribution of pharmaceutical products is limited to our generic Tussionex, and we have no prior experiencein marketing, sale and distribution of branded pharmaceutical products. There are significant risks involved in building and managing a sales organization,including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel,effectively manage a geographically dispersed sales and marketing team and successfully negotiate with managed care and third-party payors. Any failure or delayin the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. We also intend to enter into strategic partnerships with third parties to commercialize Adzenys XR-ODT and our product candidates outside of the UnitedStates and intend to also enter into strategic partnerships with third parties for certain aspects of our commercialization efforts within the United States. We mayhave difficulty establishing relationships with third parties on terms that are acceptable to us, or in all of the regions where we wish to commercialize our products,or at all. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able togenerate sufficient product revenue and may not become profitable. We will be competing with many companies that currently have extensive and well-fundedmarketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to competesuccessfully against these more established companies.33 Table of ContentsOur business is subject to extensive regulatory requirements, and our approved product and any product candidates that obtain approval will be subject toongoing and continued regulatory review, which may result in significant expense and limit our ability to commercialize such products. Even after a product is approved, we will remain subject to ongoing U.S. Food and Drug Administration, or FDA, and other regulatory requirementsgoverning, among other things, the production, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, import, export, record-keeping and reporting of safety and other post-market information. The holder of an approved new drug application, or NDA, is obligated to monitor and reportadverse events, or AEs, and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplementalapplications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. In addition, the FDA may imposesignificant restrictions on the approved indicated uses for which the product may be marketed or on the conditions of approval. For example, a product's approvalmay contain requirements for potentially costly post-approval trials and surveillance to monitor the safety and efficacy of the product or the imposition of a RiskEvaluation and Mitigation Strategy, or REMS, program. Prescription drug advertising, marketing and promotion are subject to federal, state and foreign regulations, which include requirements for direct-to-consumer advertising, industry-sponsored scientific and educational activities and promotional activities involving the Internet and social media. In the UnitedStates, prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. The FDA closely regulates the post-approvalmarketing and promotion of drugs to ensure they are marketed only for their approved indications and in accordance with the provisions of the approved label. Anypromotion for uses or in patient populations not described in the approved labeling, known as "off-label" promotion, is impermissible and could subject us toenforcement actions and significant penalties for off-label marketing. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control andmanufacturing procedures conform to current Good Manufacturing Practices, or cGMPs. These cGMP regulations cover all aspects of manufacturing relating toour generic Tussionex, Adzenys XR-ODT, Cotempla XR-ODT and NT-0201. As such, we are subject to continual review and periodic inspections to assesscompliance with cGMP and must continue to expend time, money and resources in all areas of regulatory compliance, including manufacturing, production andquality control. As a result of the Consent Decree entered into by our predecessor, which is discussed below, we were required to have a cGMP expert conduct anannual audit and submit those audit reports and our responses to the FDA for a period of five years. Although for our most recent and last annual audit by thecGMP expert in November 2014, the expert concluded that our corrective actions satisfactorily addressed the observations noted in its report, on May 22, 2015, theFDA's Dallas District Office identified three ongoing cGMP deviations in our response to the audit related to batch failure investigations, quality control unitprocedures, and in-process specifications. We implemented corrective actions and submitted additional information in our response to the FDA. Moreover, the facilities used by us to manufacture Cotempla XR-ODT and NT-0201 will be subject to pre-approval inspections after we submit our NDAs tothe FDA. For example, the FDA conducted a cGMP and pre-approval inspection related to our NDA for Cotempla XR-ODT from May 27 to June 4, 2015. At theend of the inspection, the agency issued a Form FDA 483 with one observation finding that appropriate controls are not exercised over one of our computersystems in order to assure that changes in records are instituted only by authorized personnel. We implemented corrective action related to this observation andresponded to the FDA, and the FDA closed the inspection. If we cannot successfully manufacture material that conforms to our specifications and the strictregulatory requirements of the FDA, we will not be able to secure and/or maintain regulatory approval for our product candidates. If the FDA finds deficiencies atour manufacturing facility and does not approve34Table of Contentsour NDA for any of our product candidates or if it withdraws any such approval in the future, our ability to develop or market any of our product candidates will beimpacted. Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities forcompliance with cGMPs and adherence to commitments made in the NDA. If we or a regulatory agency discovers previously unknown problems with a product,such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictionsrelative to that product or the manufacturing facility, including notice to physicians, withdrawal of the product from the market or suspension of manufacturing.Manufacturers are also subject to annual drug product and facility user fees that may be substantial. If we are unable to generate sales of our product candidates,the user fee requirements could be difficult to pay. If we fail to comply with applicable regulatory requirements, the FDA may, for example:•issue untitled or warning letters asserting that we are in violation of the FDCA; •impose restrictions on the marketing or manufacturing of any product candidate or product; •seek an injunction or impose civil, criminal and/or administrative penalties, damages, assess monetary fines, or require disgorgement; •suspend or withdraw regulatory approval; •suspend any ongoing clinical trials; •refuse to approve a pending NDA or supplements to an NDA submitted by us; or •seize the product. Moreover, any violation of these and other laws and regulations could result in exclusion from participation in federal healthcare programs, such as Medicareand Medicaid, require curtailment or restructuring of our operations and prohibit us from entering into government contracts. Similar requirements may apply in foreign jurisdictions in which we may seek approval of our products. Any government investigation of alleged violationsof law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penaltydescribed above may inhibit our ability to commercialize our products and generate revenues. In addition, the FDA's regulations or policies may change and new or additional statutes or government regulations in the United States and other jurisdictionsmay be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predictthe likelihood, nature or extent of adverse government regulation that may arise from pending or future legislation or administrative action, either in the UnitedStates or abroad. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our products and/or product candidates,which would adversely affect our ability to generate revenue and achieve or maintain profitability.The commercial success of Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201, depends upon attaining market acceptance by physicians,patients, third-party payors and the medical community. To date, we have expended significant time, resources, and effort on the development of Adzenys XR-ODT, Cotempla XR-ODT and NT-0201, and asubstantial majority of our resources are now focused on preparing for the commercial launch in the United States of Adzenys XR-ODT in the second quarter of2016, and, if approved, Cotempla XR-ODT by the third quarter of 2017, and NT-0201 in the fourth quarter of 2017. Accordingly, our ability to generate significantproduct revenue35Table of Contentswill depend almost entirely on our ability to successfully commercialize Adzenys XR-ODT and to obtain final marketing approval for and successfullycommercialize Cotempla XR-ODT and NT-0201. We may not sell Cotempla XR-ODT or NT-0201 in the United States until the FDA grants final marketingapproval and, therefore, our planned commercial launch of Cotempla XR-ODT and NT-0201 in the United States could experience unanticipated delays orproblems and may be prohibited altogether. Our ability to successfully commercialize Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201 will depend on, among other things, ourability to:•establish relationships with third-party suppliers for the active pharmaceutical ingredient, or API, in Adzenys XR-ODT, Cotempla XR-ODT andNT-0201; •manufacture and produce, through a validated process, sufficiently large quantities and inventory of Adzenys XR-ODT, Cotempla XR-ODT andNT-0201 to permit successful commercialization; •build and maintain a wide variety of internal sales, distribution and marketing capabilities sufficient to build commercial sales of our products; •establish collaborations with third parties for the commercialization of our products in countries outside the United States, and such collaborators'ability to obtain regulatory and reimbursement approvals in such countries; •secure widespread acceptance of our products by physicians, health care payors, patients and the medical community; •properly price and obtain adequate coverage and reimbursement of the product by governmental authorities, private health insurers, managed careorganizations and other third-party payors; •maintain compliance with ongoing FDA labeling, packaging, storage, advertising, promotion, recordkeeping, safety and other post-marketrequirements; and •manage our growth and spending as costs and expenses increase due to commercialization. There are no guarantees that we will be successful in completing these tasks. Successful commercialization will also depend on whether we can adequatelyprotect against and effectively respond to any claims by holders of patents and other intellectual property rights that our products infringe their rights, whether anyunanticipated adverse effects or unfavorable publicity develops in respect of our products, as well as the emergence of new or existing products as competition,which may be proven to be more clinically effective and cost-effective. If we are unable to successfully complete these tasks, we may not be able to commercializeAdzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201 in a timely manner, or at all, in which case we may be unable to generate sufficientrevenues to sustain and grow our business. In addition, we have begun, and will need to continue, investing substantial financial and management resources to build out our commercial infrastructureand to recruit and train sufficient additional qualified marketing, sales and other personnel in anticipation of the planned commercial launch of Adzenys XR-ODTand, if approved, Cotempla XR-ODT and NT-0201. We have committed and will continue to commit these additional resources prior to obtaining final approval ofany of Cotempla XR-ODT or NT-0201 from the FDA. If we are unable to successfully obtain final FDA approval of any of our product candidates or completethese activities, or experience unanticipated delays or problems, our costs could substantially increase and our business, financial condition and results ofoperations will be adversely affected. In addition, we have certain revenue expectations with respect to the sale of Adzenys XR-ODT and, if approved, CotemplaXR-ODT and NT-0201. If we cannot successfully commercialize and achieve those revenue expectations with respect to Adzenys36Table of ContentsXR-ODT and, if approved, Cotempla XR-ODT and NT-0201, our anticipated revenues and liquidity will be materially adversely impacted. Moreover, even if we are able to timely launch Adzenys XR-ODT and, if approved, Cotempla XR-ODT or NT-0201, their continued commercial successmay be largely dependent on the capability of third-party collaborators. Such third-party collaborators may not deploy the resources we would like them to, andour revenue would then suffer. In addition, we could become embroiled in disputes with these parties regarding the terms of any agreements, their performance orintellectual property rights. Any dispute could disrupt the sales of our products and adversely affect our reputation and revenue. In addition, if any of ourmanufacturing or collaboration partners fail to effectively perform under our arrangements for any reason, we may not be able to find a suitable replacementpartner on a timely basis or on acceptable terms.We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively. The biopharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We expect to have competitors both inthe United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other researchinstitutions. For example, amphetamine XR is currently marketed in the United States by Shire under the brand name Adderall XR, and methylphenidate ismarketed in the United States by Janssen under the brand name Concerta, and by Novartis under the brand names Focalin XR and Ritalin LA. Further, makers ofbranded drugs could also enhance their own formulations in a manner that competes with our enhancements of these drugs. We are also aware of efforts by severalpharmaceutical companies with ADHD medications in clinical development, including Shire, Noven, Alcobra, Highland Therapeutics, Sunovian and Neurovance.Pfizer, in collaboration with Tris Pharmaceuticals, or Tris, is working in this space to reformulate existing methylphenidate medications and recently receivedapproval for a methylphenidate-based XR chewable. Tris is also working with amphetamine medications and recently received approval for an amphetamine basedXR-liquid suspension for the treatment of ADHD. Rhodes Pharmaceuticals recently received approval for Aptensio XR, a methylphenidate capsule for thetreatment of ADHD. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and moreexperienced marketing and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even moreresources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be moreeffective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly throughcollaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability oftechnologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on anexclusive basis drug products or drug delivery technologies that are more effective or less costly than our XR-ODT or XR liquid suspension, or any productcandidate that we are currently developing or that we may develop. In addition, our competitors may file citizens petitions with the FDA in an attempt to persuadethe FDA that our products, or the nonclinical studies or clinical trials that support their approval, contain deficiencies or that new regulatory requirements beplaced on the product candidate or drug class of the product candidate. Such actions by our competitors could delay or even prevent the FDA from approving anyNDA that we submit under Section 505(b)(2).37Table of Contents We believe that our ability to successfully compete will depend on, among other things:•the ability to commercialize and market any of our products and product candidates that receive regulatory approval; •the price of our product and product candidates that receive regulatory approval, including in comparison to branded or generic competitors; •the efficacy and safety of our product and product candidates, including as relative to marketed products and product candidates in development bythird parties; •the ability to manufacture on a cost-effective basis and sell commercial quantities of our product and product candidates that receive regulatoryapproval; •acceptance of any of our products and product candidates that receive regulatory approval by physicians and other healthcare providers; •the time it takes for our product candidates to complete clinical development and receive marketing approval; •the ability to maintain a good relationship with regulatory authorities; •whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;and •the ability to protect intellectual property rights related to our product and product candidates. If our competitors market products that are more effective, safer or less expensive than our product, if any, or that reach the market sooner than our products,if any, we may enter the market too late in the cycle and may not achieve commercial success, or we may have to reduce our price, which would impact our abilityto generate revenue and obtain profitability. In addition, the biopharmaceutical industry is characterized by rapid technological change. Because we have limitedresearch and development capabilities, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront oftechnological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies orproduct candidates obsolete, less competitive or not economical.If we are unable to differentiate our product or product candidates from branded drugs or existing generic therapies for similar treatments, or if the FDA orother applicable regulatory authorities approve generic products that compete with any of our product or product candidates, our ability to successfullycommercialize such product or product candidates would be adversely affected. We expect to compete against branded drugs and to compete with their generic counterparts that will be sold for a lower price. Although we believe that ourproduct and product candidates will be clinically differentiated from branded drugs and their generic counterparts, if any, it is possible that such differentiation willnot impact our market position. If we are unable to achieve significant differentiation for our product and product candidates against other drugs, the opportunityfor our product and, if approved, product candidates to achieve premium pricing and be commercialized successfully would be adversely affected. After an NDA, including a 505(b)(2) application, is approved, the covered product becomes a "listed drug" that, in turn, can be cited by potential competitorsin support of approval of an abbreviated new drug application, or ANDA. The FDCA, implementing regulations and other applicable laws provide incentives tomanufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes. Thesemanufacturers might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredient(s), dosage form, strength,route of administration, and38Table of Contentsconditions of use, or labeling, as our product candidate and that the generic product is bioequivalent to ours, meaning it is absorbed in the body at the same rate andto the same extent as our product candidate. These generic equivalents, which must meet the same quality standards as the listed drugs, would be significantly lesscostly than ours to bring to market and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product, such as Adzenys XR-ODT, or Cotempla XR-ODT and NT-0201, if approved, can be lost to the generic version. Accordingly, competition from generic equivalents to our product candidates would materiallyadversely impact our revenues, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in our productcandidates.The design, development, manufacture, supply and distribution of our products and product candidates are highly regulated processes and technicallycomplex. We are subject to extensive regulation in connection with the preparation and manufacture of our products, product candidates and potential productcandidates for clinical trials and commercial sale. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trialsmust be manufactured in accordance with cGMPs and equivalent foreign standards. These regulations govern manufacturing processes and procedures, includingrecord keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved forsale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties orstability of our products and product candidates that may not be detectable in final product testing. The development, manufacture, supply, and distribution of ourgeneric Tussionex, Adzenys XR-ODT, Cotempla XR-ODT and NT-0201, as well as any of our future potential product candidates, are highly regulated processesand technically complex. We, along with our third-party suppliers, must comply with all applicable regulatory requirements of the FDA and foreign authorities.For instance, because each of Adzenys XR-ODT, Cotempla XR-ODT and NT-0201 is a regulated drug product and subject to DEA regulation, we will need tosecure state licenses from each state in which we intend to sell such product allowing us to distribute a regulated drug product in such state. We must supply all necessary documentation in support of our regulatory filings for our product candidates on a timely basis and must adhere to applicableparts of the FDA's Good Laboratory Practices, or GLP, and cGMP requirements enforced by the FDA through its facilities inspection program, and the equivalentstandards of the regulatory authorities in other countries. Any failure to comply with cGMP requirements or failure to scale-up manufacturing processes, includingany failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of ourproduct candidates. Our facilities and quality systems must also pass a pre-approval inspection for compliance with the applicable regulations as a condition ofregulatory approval of our product candidates or any of our other potential products. For example, the FDA conducted a cGMP and pre-approval inspection relatedto our NDA for Cotempla XR-ODT from May 27 to June 4, 2015. At the end of the inspection, the agency issued a Form FDA 483 with one observation findingthat appropriate controls are not exercised over one of our computer systems in order to assure that changes in records are instituted only by authorized personnel.We implemented corrective action related to this observation and responded to the FDA, and the FDA closed the inspection. In addition, the regulatory authoritiesin any country may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or our other potential products orthe associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities and quality systems do not pass apre-approval plant inspection, FDA approval of our product candidates, or the equivalent approvals in other jurisdictions, will not be granted.39Table of Contents Regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities. If any such inspection or auditidentifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such aninspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us to implement and thatmay include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of our facility. Any such remedialmeasures imposed upon us could materially harm our business. If we fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including,among other things, refusal to approve a pending application for a new drug product or revocation of a pre-existing approval. As a result, our business, financial condition and results of operations may be materially harmed.We rely on limited sources of supply for Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 and our generic Tussionex, and any disruption in the chain of supplymay impact production and sales of Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 and our generic Tussionex, and cause delays in developing andcommercializing our product candidates and currently manufactured and commercialized products. Our approved NDA for Adzenys XR-ODT, and the NDAs we plan to resubmit for Cotempla XR-ODT and submit for NT-0201, include our proposedmanufacturing process for each product candidate. Any change to our manufacturing process, facilities or suppliers could require that we supplement our approvedNDA and amend any pending NDA. Also, because of our proprietary processes for manufacturing our product candidates, we cannot immediately transfermanufacturing activities for Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 or our generic Tussionex to an alternate supplier, and a change of facilities wouldbe a time-consuming and costly endeavor. This would also require us to supplement or amend our NDA filings to include the change of manufacturing site. Anychanges to our manufacturing process would involve substantial cost and could result in a delay in our desired clinical and commercial timelines. We are alsoreliant on a limited number of suppliers for resin, drug compounds, coating and other component substances of our final product candidates and products. If any ofthese single-source suppliers were to breach or terminate its supply agreement, if any, with us or otherwise not supply us, we would need to identify an alternativesource for the supply of component substances for our product candidates and products. Identifying an appropriately qualified source of alternative supply for anyone or more of the component substances for our product candidates or product could be time consuming, and we may not be able to do so without incurringmaterial delays in the development and commercialization of our approved product or product candidates or a decrease in sales of our generic Tussionex, whichcould harm our financial position and commercial potential for our product candidates and products. Any alternative vendor would also need to be qualifiedthrough an NDA supplement which could result in further delay, including delays related to additional clinical trials. The FDA, U.S. Drug EnforcementAdministration, or DEA, or other regulatory agencies outside of the United States may also require additional studies if we enter into agreements with newsuppliers for the manufacture of Adzenys XR-ODT, Cotempla XR-ODT and NT-0201 and our generic Tussionex that differ from the suppliers used for clinicaldevelopment of such product candidates. These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our products and product candidates,cause us to incur higher costs and prevent us from commercializing them successfully. Furthermore, if our suppliers fail to deliver the required commercialquantities of components and APIs on a timely basis and at commercially reasonable prices, including if our suppliers did not receive adequate DEA quotas for thesupply of certain scheduled components, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost,commercialization of Adzenys XR-ODT, our generic Tussionex and, if approved, our branded product candidates and clinical trials of future potential40Table of Contentsproduct candidates, may be delayed or we could lose potential revenue and our business, financial condition, results of operation and reputation could be adverselyaffected.If we fail to produce our products or product candidates in the volumes that we require on a timely basis, or fail to comply with stringent regulations applicableto pharmaceutical drug manufacturers, we may face penalties from wholesalers and contracted retailers of our products and delays in the development andcommercialization of our product candidates. We currently depend on third-party suppliers for the supply of the APIs for our products and product candidates, including drug substance for nonclinicalresearch, clinical trials and commercialization. For Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 and our generic Tussionex, we currently rely on singlesuppliers for raw materials including APIs, which we use to manufacture, produce and package final dosage forms. In particular, we have an exclusive supplyagreement with Coating Place, Inc., or CPI, pursuant to which CPI (i) is the exclusive supplier of the active ingredient complexes in our generic Tussionex and(ii) has agreed to not supply anyone else engaged in the production of generic Tussionex with such active ingredient complexes. Any future curtailment in theavailability of raw materials could result in production or other delays with consequent adverse effects on us. In addition, because regulatory authorities mustgenerally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw materialcosts. We are subject to penalties from wholesalers and contracted retailers if we do not deliver our generic Tussionex in quantities that meet their demand, and inthe future we may enter into agreements with similar penalties for Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201. Any such delays couldtrigger these penalty provisions, which would have a negative impact on our business. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturingtechniques and process controls. Pharmaceutical companies often encounter difficulties in manufacturing, particularly in scaling up production of their products.These problems include manufacturing difficulties relating to production costs and yields, quality control, including stability of the product and quality assurancetesting, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations. If we are unable to demonstrate stability in accordancewith commercial requirements, or if our raw material manufacturers were to encounter difficulties or otherwise fail to comply with their obligations to us, ourability to obtain FDA approval and market our products and product candidates would be jeopardized. In addition, any delay or interruption in the supply ofclinical trial supplies could delay or prohibit the completion of our bioequivalence and/or clinical trials, increase the costs associated with conducting ourbioequivalence and/or clinical trials and, depending upon the period of delay, require us to commence new trials at significant additional expense or to terminate atrial. Manufacturers of pharmaceutical products need to comply with cGMP requirements enforced by the FDA through their facilities inspection programs. Theserequirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. We may be unable to comply withthese cGMP requirements and with other FDA and foreign regulatory requirements. A failure to comply with these requirements may result in fines and civilpenalties, suspension of production, suspension or delay in product approval, product seizure or voluntary recall, or withdrawal of product approval. If the safety ofany of our products or product candidates is compromised due to failure to adhere to applicable laws or for other reasons, we may not be able to obtain, or tomaintain once obtained, regulatory approval for such products or product candidate or successfully commercialize such products or product candidates, and wemay be held liable for any injuries sustained as a result. Any of these factors could cause a delay in clinical developments, regulatory submissions, approvals orcommercialization of our products or product candidates, entail higher costs or result in our being unable to effectively commercialize our product candidates. The41Table of ContentsFDA conducted a cGMP and pre-approval inspection related to our NDA for Cotempla XR-ODT from May 27 to June 4, 2015. At the end of the inspection, theagency issued a Form FDA 483 with one observation finding that appropriate controls are not exercised over one of our computer systems in order to assure thatchanges in records are instituted only by authorized personnel. We implemented corrective action related to this observation and responded to the FDA, and theFDA closed the inspection.If we fail to manufacture Adzenys XR-ODT, or if approved, Cotempla XR-ODT or NT-0201 in sufficient quantities and at acceptable quality and pricinglevels, or fail to obtain adequate DEA quotas for controlled substances, or to fully comply with cGMP regulations, we may face delays in thecommercialization of this product or our product candidates or be unable to meet market demand, and may be unable to generate potential revenues. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturingtechniques and process controls, and the use of specialized processing equipment. In order to meet anticipated demand for Adzenys XR-ODT and, if approved,Cotempla XR-ODT and NT-0201, we have installed specialized processing equipment in our Grand Prairie, Texas facilities, which we believe will producesufficient quantities of Adzenys XR-ODT and if approved, Cotempla XR-ODT and NT-0201, for commercialization. We purchase raw materials and componentsfrom various suppliers in order to manufacture Adzenys XR-ODT, Cotempla XR-ODT and NT-0201. If we are unable to source the required raw materials fromour suppliers, or if we do not obtain DEA quotas or receive inadequate DEA quotas, we may experience delays in manufacturing Adzenys XR-ODT, CotemplaXR-ODT and NT-0201, and may not be able to meet our customers' demands for Adzenys XR-ODT, Cotempla XR-ODT and NT-0201. In addition, we must comply with federal, state and foreign regulations, including cGMP requirements enforced by the FDA through its facilities inspectionprogram. Any failure to comply with applicable regulations may result in fines and civil penalties, suspension of production, suspension or delay in productapproval, product seizure or voluntary recall, or withdrawal of product approval, and would limit the availability of our product. Any manufacturing defect or errordiscovered after products have been produced and distributed could result in even more significant consequences, including costly recall procedures, re-stockingcosts, damage to our reputation and potential for product liability claims. Our Grand Prairie facility was formerly operated by our predecessor, PharmaFab, Inc., or PharmaFab. In April 2007, the FDA announced entry of a ConsentDecree of Permanent Injunction, or the Consent Decree, against PharmaFab, one of its subsidiaries and two of its officials, including Mark Tengler, who was, atthe time, PharmaFab's president, or jointly, the Defendants. The Consent Decree arose out of several perceived cGMP deficiencies related to the manufacture ofunapproved drugs or Drug Efficacy Study Implementation, or DESI, drugs that we no longer manufacture. Pursuant to the Consent Decree, the Defendants werepermanently restrained and enjoined from directly or indirectly manufacturing, processing, packing, labeling, holding or distributing any prescription drugs that arenot the subject of an NDA or an abbreviated NDA. Among other things, the Consent Decree also granted the FDA the ability to, without prior notice, inspectPharmaFab's place of business and take any other measures necessary to monitor and ensure continuing compliance with the terms of the Consent Decree. TheFDA has inspected the Grand Prairie facility several times since the Consent Decree was entered, and we have been able to manufacture and ship our genericTussionex and drug products for our clinical trials. Although we have concluded the annual audit program prescribed by the Consent Decree entered into by ourpredecessor, our facilities may be inspected by the FDA at any time as a result of the Consent Decree. Although for our most recent annual audit by the cGMPexpert in November 2014, the expert concluded that our corrective actions satisfactorily addressed the observations noted in its report, on May 22, 2015, the FDA'sDallas District Office identified three ongoing cGMP deviations in our response to the audit related to batch failure investigations, quality42Table of Contentscontrol unit procedures, and in-process specifications. We implemented corrective actions and submitted additional information in our response to the FDApursuant to the Consent Decree. Although we may apply for relief from the Consent Decree in the future, there is no guarantee that such relief will be granted orthat we will be in compliance with the requirements of the Consent Decree. If we are unable to produce the required commercial quantities of Adzenys XR-ODT or, if approved, Cotempla XR-ODT or NT-0201 to meet market demandfor Adzenys XR-ODT, Cotempla XR-ODT and NT-0201 on a timely basis or at all, or if we fail to comply with applicable laws for the manufacturing of AdzenysXR-ODT or, if approved, Cotempla XR-ODT or NT-0201, we will suffer damage to our reputation and commercial prospects and we will be unable to generatepotential revenues.If we are unable to support demand for Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201 and any future product candidates, includingensuring that we have adequate capacity to meet increased demand, or we are unable to successfully manage the evolution of our drug delivery technologyplatform, our business could suffer. As our volume grows, we will need to continue to increase our workflow capacity for customer service, improve our billing and general process, expand ourinternal quality assurance program and extend our platform to support product production at a larger scale within expected turnaround times. We may needadditional certified laboratory scientists and other scientific and technical personnel to process higher volumes of Adzenys XR-ODT and, if approved, CotemplaXR-ODT and NT-0201. Portions of our process are not automated and will require additional personnel to scale. We may also need to purchase additionalequipment, some of which can take several months or more to procure, set up and validate, and increase our software and computing capacity to meet increaseddemand. There is no assurance that any of these increases in scale, expansion of personnel, equipment, software and computing capacities, or processenhancements will be successfully implemented, or that we will have adequate space in our facilities to accommodate such required expansion. As additional products, such as Adzenys XR-ODT, and, if approved, Cotempla XR-ODT and NT-0201, are commercialized, we will need to incorporate newequipment, implement new technology systems and laboratory processes and hire new personnel with different qualifications. Failure to manage this growth ortransition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service and slower responses tocompetitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products and could damage ourreputation and the prospects for our business.If our sole facility becomes damaged or inoperable or we are required to vacate our facility, our ability to manufacture Adzenys XR-ODT, our genericTussionex and, if approved, our product candidates for commercialization, or future potential product candidates for clinical development, may be jeopardized.Our inability to continue manufacturing adequate supplies of Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201, could adversely affect ourability to generate revenues. All of our manufacturing capabilities are housed in our sole facility located in Grand Prairie, Texas. Our facility and equipment could be harmed or renderedinoperable by natural or man-made disasters, including war, fire, tornado, power loss, communications failure or terrorism, any of which may render it difficult orimpossible for us to operate our drug delivery technology platform and manufacture our product candidates or products for some period of time. The inability tomanufacture our products and product candidates if our facility or our equipment is inoperable, for even a short period of time, may result in the loss of customersor harm to our reputation, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facility and the equipment weuse to manufacture our products and product candidates could become damaged and43Table of Contentstime-consuming to repair or replace. It would be difficult, time-consuming and expensive to rebuild our facility or repair or replace our equipment or license ortransfer our proprietary technology to a third-party, particularly in light of the requirements for a DEA-registered manufacturing and storage facility like ours. If weare required to change or add a new manufacturer or supplier, the process would likely require prior FDA, DEA and/or equivalent foreign regulatory authorityapproval, and would be very time consuming. Even in the unlikely event we are able to find a third party with such qualifications to enable us to manufacture ourproducts or product candidates, we may be unable to negotiate commercially reasonable terms. We carry insurance for damage to our property and the disruption of our business, but this insurance may not cover all of the risks associated with damage ordisruption to our business, may not provide coverage in amounts sufficient to cover our potential losses and may not continue to be available to us on acceptableterms, if at all. An inability to continue manufacturing adequate supplies of Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 or our generic Tussionex at ourGrand Prairie, Texas facilities could result in a disruption in the supply of Adzenys XR-ODT, and, if approved, Cotempla XR-ODT, and NT-0201, or our genericTussionex, to physicians and pharmacies, which would adversely affect our ability to generate revenues.If other patient-friendly forms of extended-release amphetamine or methylphenidate products are approved and successfully commercialized, especially ifapproved before we can successfully commercialize Adzenys XR-ODT, or, if approved, Cotempla XR-ODT or NT-0201, our business would be materiallyharmed. Other third parties may seek approval to manufacture and market their own versions of extended-release amphetamine or methylphenidate in patient-friendlydosage forms for the treatment of ADHD in the United States. If any of these parties obtain FDA approval of such a competitive product before we do, they maybe entitled to three years of marketing exclusivity. Such exclusivity would, for example, delay the commercialization of Adzenys XR-ODT and, as a result, we maynever achieve significant market share for this product. Consequently, revenues from product sales of these products would be similarly delayed and our business,including our development programs, and growth prospects would suffer. Even if any of our product candidates are approved before a competitor, we may not beentitled to any marketing exclusivity and, other than under circumstances in which third parties may infringe or are infringing our patents, we may not be able toprevent the submission or approval of another full NDA for any competitor's product candidate.Amphetamine, methylphenidate and hydrocodone are Schedule II controlled substances under the Controlled Substances Act, and any failure to comply withthis Act or its state equivalents would have a negative impact on our business. Amphetamine, methylphenidate and hydrocodone are listed by the DEA as a Schedule II controlled substance under the Controlled Substances Act, or CSA.The DEA classifies substances as Schedule I, II, III, IV or V controlled substances, with Schedule I controlled substances considered to present the highest risk ofsubstance abuse and Schedule V controlled substances the lowest risk. Scheduled controlled substances are subject to DEA regulations relating to supply,procurement, manufacturing, storage, distribution and physician prescription procedures. For example, Schedule II controlled substances are subject to variousrestrictions, including, but not limited to, mandatory written prescriptions and the prohibition of refills. In addition to federal scheduling, some drugs may besubject to state-controlled substance laws and regulations and more extensive requirements than those determined by the DEA and FDA. Though state controlledsubstances laws often mirror federal law, because the states are separate jurisdictions, they may schedule products separately. While some states automaticallyschedule a drug when the DEA does so, other states require additional state rulemaking or legislative action, which could delay commercialization.44 Table of Contents Entities must register annually with the DEA to manufacture, distribute, dispense, import, export and conduct research using controlled substances. Inaddition, the DEA requires entities handling controlled substances to maintain records and file reports, including those for thefts or losses of any controlledsubstances, and to obtain authorization to destroy any controlled substances. Registered entities also must follow specific labeling and packaging requirements,and provide appropriate security measures to control against diversion of controlled substances. Security requirements vary by controlled substance schedule withthe most stringent requirements applying to Schedule I and Schedule II controlled substances. Required security measures include background checks onemployees and physical control of inventory through measures such as vaults and inventory reconciliations. Failure to follow these requirements can lead tosignificant civil and/or criminal penalties and possibly even lead to a revocation of a DEA registration. The DEA also has a production and procurement quotasystem that controls and limits the availability and production of Schedule I or II controlled substances. If we or any of our suppliers of raw materials that areDEA-classified as Schedule I or II controlled substances are unable to receive any quota or a sufficient quota to meet demand for our products, if any, our businesswould be negatively impacted. Products containing controlled substances may generate public controversy. As a result, these products may have their marketing approvals withdrawn.Political pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict, the introduction and marketing of our product orproduct candidates.Legislative or regulatory reform of the health care system in the United States may adversely impact our business, operations or financial results. Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. In particular, in March 2010, thePatient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act,was signed into law. This legislation changes the current system of healthcare insurance and benefits intended to broaden coverage and control costs. The law alsocontains provisions that will affect companies in the pharmaceutical industry and other healthcare related industries by imposing additional costs and changes tobusiness practices. Provisions affecting pharmaceutical companies include the following:•Mandatory rebates for drugs sold into the Medicaid program have been increased, and the rebate requirement has been extended to drugs used inrisk-based Medicaid managed care plans. •The 340B Drug Pricing Program under the Public Health Service Act has been extended to require mandatory discounts for drug products sold tocertain critical access hospitals, cancer hospitals and other covered entities. •Pharmaceutical companies are required to offer discounts on branded drugs to patients who fall within the Medicare Part D coverage gap,commonly referred to as the "Donut Hole." •Pharmaceutical companies are required to pay an annual non-tax deductible fee to the federal government based on each company's market share ofprior year total sales of branded drugs to certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs andDepartment of Defense. The aggregated industry-wide fee is expected to total $28.0 billion through 2019. Since we expect our brandedpharmaceutical sales to constitute a small portion of the total federal health program pharmaceutical market, we do not expect this annualassessment to have a material impact on our financial condition. Despite initiatives to invalidate the Affordable Care Act, the U.S. Supreme Court has upheld certain key aspects of the legislation, including the requirementthat all individuals maintain health insurance coverage or pay a penalty, referred to as the individual mandate. Additionally, there are legal45Table of Contentschallenges to the Affordable Care Act in lower courts on other grounds. We will not know the full effects of the Affordable Care Act until applicable federal andstate agencies issue regulations or guidance under the law. Although it is too early to determine the effect of the Affordable Care Act, the law appears likely tocontinue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. In addition, in September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted giving the FDA enhanced post-marketing authorityincluding the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information and compliance with REMSapproved by the FDA. The FDA's exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatoryreview, increased costs to ensure compliance with post-approval regulatory requirements and potential restrictions on the sale and/or distribution of approvedproducts. Moreover, we cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatorydevelopments are likely, and we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect onanticipated revenues from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overallfinancial condition and ability to develop product candidates. Additionally, drug prices are under significant scrutiny, and along with other health care costs, continue to be subject to intense political and societalpressures, which we anticipate will continue and escalate, including on a global basis. As a result, our business and reputation may be harmed, our stock price maybe adversely impacted and experience periods of volatility, and our results of operations may be adversely impacted.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have amaterial adverse effect on the success of our business. We are subject to numerous environmental, health and safety laws and regulations. Our operations involve the use of hazardous and flammable materials,including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal ofthese materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from ouruse of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costsassociated with civil or criminal fines and penalties. Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from theuse of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. In addition, we may incursubstantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations mayimpair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or othersanctions.If we are unable to achieve and maintain adequate levels of coverage and reimbursement for our product or product candidates, if approved, their commercialsuccess may be severely hindered. Successful sales of our product and any product candidates that receive regulatory approval depend on the availability of adequate coverage andreimbursement from third-party payors. Patients who are prescribed medications for the treatment of their conditions generally rely on third-party payors toreimburse all or part of the costs associated with their prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such asMedicare and Medicaid, and46Table of Contentscommercial payors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug productswhen more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain coverage for a givenproduct, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikelyto use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. In addition, the market for Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201, will depend significantly on access to third-party payors'drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in suchformularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug intheir formularies or otherwise restrict patient access through formulary controls or otherwise to a branded drug when a less costly generic equivalent or otheralternative is available. Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcarecosts. In addition, in the United States, no uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors.Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process is often atime-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with noassurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in internationalmarkets. Third party coverage and reimbursement for our product candidates for which we may receive regulatory approval may not be available or adequate ineither the United States or international markets, which could have a material adverse effect on our business, results of operations, financial condition andprospects.Our relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations,which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings. For our product and any product candidates that obtain regulatory approval and are marketed in the United States, our arrangements with third-party payorsand customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financialarrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. In addition, we may be subjectto health information privacy and security regulation by U.S. federal and state governments and foreign jurisdictions in which we conduct our business. The lawsthat may affect our ability to operate include:•the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering orpaying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase or recommendation of anitem or service for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs; •federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal andcivil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including theMedicare and Medicaid programs, claims for payment that are false or fraudulent or making a47Table of Contentsfalse statement to avoid, decrease or conceal an obligation to pay money to the federal government;•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal statutes that prohibit executing ascheme to defraud any healthcare benefit program and making false statements relating to healthcare matters; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respectiveimplementing regulations, which imposes certain obligations, including mandatory contractual terms, on covered healthcare providers, health plansand healthcare clearinghouses, as well as their business associates, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information; •The Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable underMedicare, Medicaid or the Children's Health Insurance Program to report annually to Centers for Medicare and Medicaid Services, or CMS,information related to payments and other transfers of value to physicians and teaching hospitals, and ownership and investment interests held byphysicians and their immediate family members; and •analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketingarrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, andstate and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other insignificant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs.It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation,damages, fines, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, and the curtailment orrestructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not incompliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government fundedhealthcare programs.Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products. The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. We face a risk of product liabilityexposure related to the testing of our product candidates in clinical trials and will face even greater risks upon any commercialization by us of our productcandidates. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any ofthese lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or more of our products.48Table of ContentsOur product liability insurance coverage may not be adequate to cover any and all liabilities that we may incur. We currently have $10.0 million in product liability insurance coverage in the aggregate, which may not be adequate to cover any and all liabilities that wemay incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate tosatisfy any liability that may arise. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successfulproduct liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affectour business. In addition, we may not be able to obtain or maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potentialproduct liability claims, which could prevent or inhibit the commercial production and sale of our products.RISKS RELATED TO THE CLINICAL DEVELOPMENT, REGULATORY REVIEW AND APPROVAL OF OUR PRODUCT CANDIDATESWe are heavily dependent on the success of Adzenys XR-ODT and our product candidates, Cotempla XR-ODT and NT-0201. We cannot give any assurancethat we will receive regulatory approval for such product candidates or any other product candidates, which is necessary before they can be commercialized. Our business and future success are substantially dependent on our ability to successfully commercialize Adzenys XR-ODT, and our ability to timely obtainregulatory approval for and commercialize our product candidates, Cotempla XR-ODT and NT-0201, for the treatment of ADHD, and any other productcandidates that we may identify and pursue. We are not permitted to market any of our product candidates in the United States until we receive approval of anNDA from the FDA, or in any foreign jurisdiction until we receive the requisite approvals from such jurisdiction. Satisfaction of regulatory requirements can beprotracted, is dependent upon the type, complexity and novelty of the product candidate and requires the expenditure of substantial resources. For example, onNovember 10, 2015, we announced that we received a Complete Response Letter from the FDA for our NDA for Cotempla XR-ODT. We will need tosatisfactorily address the deficiencies the FDA identified or may identify in the future in order to obtain the FDA's approval of our NDA. We cannot predictwhether we will obtain regulatory approval to commercialize our product candidates, and we cannot, therefore, predict the timing of any future revenues from theseproduct candidates, if any. Any delay or setback in the regulatory approval or commercialization of any of these product candidates could adversely affect ourbusiness.Premarket review of our product candidates by the FDA or other regulatory authorities is a lengthy and uncertain process and approval may be delayed,limited or denied, any of which would adversely affect our ability to generate operating revenues. The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for manyreasons. For example, the FDA:•could determine that we cannot rely on the 505(b)(2) regulatory approval pathway for Cotempla XR-ODT, NT-0201 or any other product candidatethat we may identify and develop; •could determine that the information provided by us was inadequate, contained clinical deficiencies or otherwise failed to demonstrate safety andeffectiveness of any of our product candidates for any indication; •may not find the data from bioequivalence studies and/or clinical trials sufficient to support the submission of an NDA or to obtain marketingapproval in the United States, including any findings that the safety risks outweigh clinical and other benefits of our product candidates;49Table of Contents•may require us to conduct additional bioequivalence studies to demonstrate that the proposed commercial product is bioequivalent to the batch usedin clinical trials; •may disagree with our trial design or our interpretation of data from nonclinical studies, bioequivalence studies and/or clinical trials, or may changethe requirements for approval even after it has reviewed and commented on the design for our trials; •may determine that we inappropriately relied on a certain listed drug or drugs for our 505(b)(2) NDA or that approval of our applications forCotempla XR-ODT, NT-0201 or any other product candidate is blocked by patent or non-patent exclusivity of the listed drug or drugs; •may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we enter into agreements for thesupply of the API used in our product candidates; •may identify deficiencies in our own manufacturing processes or our proposed scale-up of the manufacturing processes or facilities for theproduction of our product candidates; •may approve our product candidates for fewer or more limited indications than we request, or may grant approval contingent on the performance ofcostly post-approval clinical trials; •may change its approval policies or adopt new regulations; or •may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates. On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our NDA for Cotempla XR-ODT, it had identifieddeficiencies that precluded discussion of labeling and post marketing requirements or commitments at that time. On November 10, 2015, we announced that wereceived a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trialmaterial and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. If we areunable to satisfactorily address the agency's concerns, the FDA could deny approval of our NDA for Cotempla XR-ODT. Notwithstanding the approval of many products by the FDA pursuant to 505(b)(2), over the last few years, some pharmaceutical companies and others haveobjected to the FDA's interpretation of 505(b)(2). If the FDA changes its interpretation of 505(b)(2), or if the FDA's interpretation is successfully challenged incourt, this could delay or even prevent the FDA from approving any 505(b)(2) application that we submit. Any failure to obtain regulatory approval of our productcandidates would significantly limit our ability to generate revenues, and any failure to obtain such approval for all of the indications and labeling claims we deemdesirable could reduce our potential revenues.The FDA may determine that our NDA for NT-0201 for the treatment of attention deficit hyperactivity disorder is not sufficiently complete to permit asubstantive review. We intend to submit to the FDA an NDA for NT-0201, which will be indicated for the treatment of ADHD, in the fourth quarter of 2016. Within 60 days ofthe agency's receipt of an NDA, the FDA will make a threshold determination of whether the NDA is sufficiently complete to permit a substantive review. This 60-day review is referred to as the filing review. If the NDA is sufficiently complete, the FDA will file the NDA. If the agency refuses to file the NDA, it will notify usand state the reason(s) for the refusal. The FDA may refuse to file an NDA for various reasons, including, but not limited to, if:•the NDA is incomplete because it does not on its face contain the information required under the Federal Food, Drug, and Cosmetic Act, or FDCA,or the FDA's regulations;50Table of Contents•the NDA does not contain a statement that each nonclinical laboratory study was conducted in compliance with the GLP, requirements, or for eachstudy not so conducted, a brief statement of the reason for the noncompliance; •the NDA does not contain a statement that each clinical trial was conducted in compliance with the FDA's institutional review board, or IRB,regulations or was not subject to those regulations, and the agency's informed consent regulations or a brief statement of the reason fornoncompliance; and •the drug is a duplicate of a listed drug approved before receipt of the NDA and is eligible for approval under an ANDA, for generic drugs. In its procedures, the FDA has stated that it could find a 505(b)(2) NDA incomplete and refuse to file it if the NDA:•fails to include appropriate literature or a listed drug citation to support the safety or efficacy of the drug product; •fails to include data necessary to support any aspects of the proposed drug that represent modifications to the listed drug(s) relied upon; •fails to provide a bridge, e.g., via comparative bioavailability data, between the proposed drug product and the listed drug product to demonstratethat such reliance is scientifically justified; •uses an unapproved drug as a reference product for a bioequivalence study; and •fails to provide a patent certification or statement as required by the FDA's regulations where the 505(b)(2) NDA relies on one or more listed drugs. Additionally, the FDA will refuse to file an NDA if an approved drug with the same active moiety is entitled to five years of exclusivity, unless the exclusivityperiod has elapsed or unless four years of the five year period have elapsed and the NDA contains a certification of patent invalidity or non-infringement. If the FDA refuses to file our NDA for NT-0201, we may amend the NDA and resubmit it. In such a case, the FDA will again review the NDA and determinewhether it is a complete response or may be filed. There can be no assurance that the FDA will file the NDA for NT-0201. If the agency refuses to file the NDA forNT-0201, we will need to address the deficiencies cited by the FDA, which could substantially delay the review process.If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the requirements forapproval of any of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product candidates will likely takesignificantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated, and in any case may not besuccessful. We intend to seek FDA approval through the 505(b)(2) regulatory approval pathway for each of our product candidates described in this Annual Report onForm 10-K. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, added 505(b)(2) to the FDCA.Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from trials that were not conducted by orfor the applicant and for which the applicant does not have a right of reference. If we cannot pursue the 505(b)(2) regulatory approval pathway for our product candidates as we intend, we may need to conduct additional nonclinical studiesor clinical trials, provide additional data and information and meet additional requirements for regulatory approval. If this were to occur, the time and financialresources required to obtain FDA approval for our product candidates likely would51Table of Contentsincrease substantially. Moreover, the inability to pursue the 505(b)(2) regulatory approval pathway could result in new competitive products reaching the marketbefore our product candidates, which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the 505(b)(2)regulatory approval pathway for a product candidate, we cannot assure you that we will receive the requisite or timely approvals for commercialization of suchproduct candidate. In addition, our competitors may file citizen petitions with the FDA in an attempt to persuade the FDA that our product candidates, or the clinical trials thatsupport their approval, contain deficiencies or that new regulatory requirements be placed on the product candidate or drug class of the product candidate. Suchactions by our competitors could delay or even prevent the FDA from approving any NDA that we submit under 505(b)(2).An NDA submitted under 505(b)(2) may subject us to a patent infringement lawsuit that would delay or prevent the review or approval of our productcandidate. Our product candidates will be submitted to the FDA for approval under 505(b)(2) of the FDCA. Section 505(b)(2) permits the submission of an NDA whereat least some of the information required for approval comes from trials that were not conducted by, or for, the applicant and for which the applicant has notobtained a right of reference. An NDA under 505(b)(2) would enable us to reference published literature and/or the FDA's previous findings of safety andeffectiveness for the previously approved drug. For NDAs submitted under 505(b)(2), the patent certification and related provisions of the Hatch-Waxman Act apply. Accordingly, we may be required toinclude certifications, known as Paragraph IV certifications, that certify that any patents listed in the Approved Drug Products with Therapeutic EquivalenceEvaluations, commonly known as the Orange Book, with respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable or will not beinfringed by the manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA. Under the Hatch-Waxman Act, the holder of patents that the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice ofthe Paragraph IV certification. Filing of a patent infringement lawsuit against the filer of the 505(b)(2) applicant within 45 days of the patent owner's receipt ofnotice triggers a one-time, automatic, 30-month stay of the FDA's ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in favor of theParagraph IV filer or the patent expires before that time. Accordingly, we may invest a significant amount of time and expense in the development of one or moreproduct candidates only to be subject to significant delay and patent litigation before such product candidates may be commercialized, if at all. In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity,or NCE, listed in the Orange Book for the listed drug has expired. The FDA also may require us to perform one or more additional clinical trials or measurements tosupport the change from the listed drug, which could be time consuming and could substantially delay our achievement of regulatory approval. The FDA also mayreject any future 505(b)(2) submissions and require us to submit traditional NDAs under 505(b)(1), which would require extensive data to establish safety andeffectiveness of the drug for the proposed use and could cause delay and additional costs. These factors, among others, may limit our ability to commercialize ourproduct candidates successfully.Our approved product and product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limitthe scope of any approved label or market acceptance, or result in significant negative consequences following marketing approval, if any. As with many pharmaceutical products, treatment with our product or product candidates may produce undesirable side effects or adverse reactions or events.Although our product and product52Table of Contentscandidates contain active ingredients that have already been approved, meaning that the side effects arising from the use of the active ingredient or class of drug inour product candidates is generally known, our product or product candidates still may cause undesirable side effects. These could be attributed to the activeingredient or class of drug or to our unique formulation of such product or product candidates, or other potentially harmful characteristics. Such characteristicscould cause us, IRBs, clinical trial sites, the FDA or other regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label,if the product candidate is approved, or the delay, denial or withdrawal of regulatory approval, which may harm our business, financial condition and prospectssignificantly. Further, if any of our products cause serious or unexpected side effects after receiving market approval, a number of potentially significant negativeconsequences could result, including:•regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution; •the FDA may require implementation of a REMS; •regulatory authorities may require the addition of labeling statements, such as warnings or contraindications; •we may be required to change the way the product is administered or conduct additional clinical trials; •we may need to voluntarily recall our products; •we could be sued and held liable for harm caused to patients; or •our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or product candidate and could substantiallyincrease the costs of commercializing our products and product candidates.We will need to obtain FDA approval of any proposed names for our product candidates that gain marketing approval, and any failure or delay associated withsuch naming approval may adversely impact our business. Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademarkregistration from the U.S. Patent and Trademark Office, or USPTO. The FDA typically conducts a review of proposed product names, including an evaluation ofwhether proposed names may be confused with other product names. The FDA may object to any product name we submit if it believes the name inappropriatelyimplies medical claims. If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our product candidates, which could result infurther evaluation of proposed names with the potential for additional delays and costs.Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatoryapproval of our product candidates in other jurisdictions. Even if we obtain and maintain regulatory approval of our product candidates in one jurisdiction, such approval does not guarantee that we will be able toobtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negativeeffect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatoryauthorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those53Table of Contentscountries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States,including additional nonclinical studies or clinical trials as investigations conducted in one jurisdiction may not be accepted by regulatory authorities in otherjurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in thatjurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for usand could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international marketsand/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates willbe harmed.Our failure to successfully identify, develop and market additional product candidates could impair our ability to grow. As part of our growth strategy, we intend to identify, develop and market additional product candidates. We are exploring various therapeutic opportunities forour pipeline and proprietary technologies. We may spend several years completing our development of any particular current or future internal product candidates,and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internalresearch capabilities are limited, we may be dependent upon pharmaceutical companies, academic scientists and other researchers to sell or license productcandidates, approved products or the underlying technology to us. The success of this strategy depends partly upon our ability to identify, select, discover andacquire promising product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Othercompanies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of productcandidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses andtechnologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that arenever completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates onterms that we find acceptable, or at all. In addition, future acquisitions may entail numerous operational and financial risks, including:•exposure to unknown liabilities; •disruption of our business and diversion of our management's time and attention to develop acquired products or technologies; •incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions; •higher than expected acquisition and integration costs; •difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel; •increased amortization expenses; •impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and •inability to motivate key employees of any acquired businesses.54Table of Contents Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing andapproval by the FDA and other regulatory authorities.The commencement and completion of clinical trials can be delayed or prevented for a number of reasons. We intend to identify, develop and market additional product candidates; however, we may not be able to commence or complete the clinical trials that wouldsupport the submission of an NDA to the FDA. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any ofour clinical trials. Clinical trials can be delayed or prevented for a number of reasons, including:•difficulties obtaining regulatory approval to commence a clinical trial or complying with conditions imposed by a regulatory authority regarding thescope or term of a clinical trial; •delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations, or CROs, contractmanufacturing organizations, or CMOs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly amongdifferent CROs and trial sites; •failure of our third-party contractors, such as CROs and CMOs, or our investigators to comply with regulatory requirements or otherwise meet theircontractual obligations in a timely manner; •insufficient or inadequate supply or quality of a product candidate or other materials necessary to conduct our clinical trials; •difficulties obtaining IRB approval to conduct a clinical trial at a prospective site; •the FDA requiring alterations to any of our study designs, our nonclinical strategy or our manufacturing plans; •challenges recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including size and nature of subject population,proximity of subjects to clinical sites, eligibility criteria for the trial, nature of trial protocol, the availability of approved effective treatments for therelevant disease and competition from other clinical trial programs for similar indications; •difficulties maintaining contact with subjects after treatment, which results in incomplete data; •receipt by a competitor of marketing approval for a product targeting an indication that our product targets; •governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and •varying interpretations of data by the FDA and similar foreign regulatory agencies. Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended orterminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, or a data safety monitoring board overseeing the clinical trial at issue, orother regulatory authorities due to a number of factors, including:•failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols; •inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;55Table of Contents•unforeseen safety issues, including serious adverse events associated with a product candidate, or lack of effectiveness; and •lack of adequate funding to continue the clinical trial.Positive results in previous nonclinical studies and clinical trials of any of our product candidates may not be replicated in future clinical trials of the sameproduct candidates, which could result in development delays or a failure to obtain marketing approval. Positive results in nonclinical studies and clinical trials of any of our product candidates may not be predictive of similar results in future clinical trials. Also,interim results during a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries havesuffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from anycompleted nonclinical studies and clinical trials for any of our product candidates may not be predictive of the results we may obtain in later stage trials. Ourclinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials. Moreover,clinical data is often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorilyin nonclinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products. For example, On November 10, 2015, we announcedthat we received a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trialmaterial and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. Resultsfrom our previous clinical trials may not be predictive of similar results in a bridging study.RISKS RELATED TO OUR BUSINESS AND FINANCIAL POSITIONWe have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. Our company has limited operating history commercializing branded products. To date, we have focused primarily on developing our product Adzenys XR-ODT and our product candidates, Cotempla XR-ODT and NT-0201. Adzenys XR-ODT requires substantial additional resources before we implementcommercialization strategies and begin generating revenue from product sales. In addition, our product candidates will require substantial additional resourcesbefore we will be able to receive regulatory approvals, implement commercialization strategies and begin generating revenue from product sales, if approved.There can be no assurance that any of our product candidates will ever achieve regulatory approval or generate any revenue. We do not anticipate generatingsubstantial revenue from sales of Adzenys XR-ODT, or any revenue from sales of Cotempla XR-ODT, NT-0201 or any of our other product candidates in the nearterm, if ever. We have incurred significant net losses of $30.8 million, $20.8 million and $19.0 million for the years ended December 31, 2015, 2014 and 2013,respectively. As of December 31, 2015, we had an accumulated deficit of $116.8 million. We have devoted most of our financial resources to manufacturingoperations and product development. To date, we have financed our operations primarily through the sale of equity and debt securities and payments receivedunder collaborative arrangements. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenue.Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to fully predict the timing or amount of ourincreased expenses, but we expect to continue to incur substantial expenses, which we expect will increase as we expand our development activities and build aspecialty sales force and commercialization infrastructure. Our expenses could increase beyond expectations if we are required by the FDA to perform studies inaddition to the clinical trials we have already completed. As a result of the foregoing, we expect to continue to incur significant and increasing losses and56Table of Contentsnegative cash flows for the foreseeable future, which may increase compared to past periods. Even if we are able to generate revenue from the sale of any approvedproducts, we may not become profitable and may need to obtain additional funding to continue operations.We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product developmentprograms or commercialization efforts. Developing future potential product candidates, conducting clinical trials, establishing raw material supplier relationships and manufacturing and marketingdrugs are expensive and uncertain processes. Although we believe our cash, cash equivalents and marketable securities and anticipated future product revenues,will be sufficient to allow us to fund the commercialization of Adzenys XR-ODT, we may need to obtain additional capital through equity offerings, debtfinancing, payments under new or existing licensing and research and development collaboration agreements, or any combination thereof, in order to become cashflow positive and to develop and commercialize additional product candidates. If sufficient funds on acceptable terms are not available when needed, we could berequired to significantly reduce operating expenses and delay, reduce the scope of, or eliminate one or more of our development programs, which may have amaterial adverse effect on our business, results of operations and financial condition. In addition, unforeseen circumstances may arise, or our strategic imperatives could change, causing us to consume capital significantly faster than wecurrently anticipate, requiring us to seek to raise additional funds sooner than expected. We have no committed external sources of funds. The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:•the costs of establishing sales, marketing, distribution and commercial manufacturing capabilities for Adzenys XR-ODT and, if approved,Cotempla XR-ODT, NT-0201 and any other potential product candidates; •our ability to successfully launch Adzenys XR-ODT and, if approved, Cotempla XR-ODT and NT-0201, and to continue to increase the level ofsales in the marketplace; •the timing of any regulatory approvals of Cotempla XR-ODT and NT-0201; •the rate of progress and cost of our trials and other product development programs for our other potential product candidates; •the costs and timing of in-licensing additional product candidates or acquiring other complementary technologies, assets or companies; •the actions of our competitors and their success in selling competitive product offerings; and •the status, terms and timing of any collaborative, licensing, co-promotion or other arrangements. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek additionalcapital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. Ifadequate funds are not available to us on a timely basis, or at all, we may be required to delay, reduce the scope of or eliminate commercialization efforts for one ormore of our product candidates or development programs for future potential product candidates.We may sell additional equity or incur debt to fund our operations, which may result in dilution to our stockholders and impose restrictions on our business. In order to raise additional funds to support our operations, we may sell additional equity or incur debt, which could adversely impact our stockholders, aswell as our business. The sale of additional57Table of Contentsequity or convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to all of our stockholders. The incurrence ofindebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incuradditional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact ourability to conduct our business. We may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debtfinancings to repay our indebtedness at the time any such repayment is required (causing a default under such indebtedness), which could have a material adverseeffect on our business, financial condition and results of operations.We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due. In December 2013, we reissued a promissory note to Essex Capital Corporation, or Essex, which was later amended in July 2014 and March 2015, for anaggregate principal amount of approximately $5.9 million. In March 2014, we entered into a secured credit facility pursuant to a loan and security agreementamong Hercules Technology III, L.P., or Hercules, as lender, which was subsequently amended in September 2014, and promissory notes issued in favor ofHercules, providing for term loans of up to an aggregate of $25.0 million. All obligations under our secured credit facility are secured by substantially all of ourexisting property and assets (excluding our intellectual property and assets under capital lease), subject to certain exceptions. These debt financings may createadditional financial risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstandingdebt obligations at maturity. Since our inception, we have had significant operating losses. As of December 31, 2015, we had an accumulated deficit of $116.8 million. We expect tocontinue to incur net losses and have negative cash flow from operating activities for the foreseeable future as we continue to develop and seek marketing approvalfor our product candidates. As a result, we may not have sufficient funds, or may be unable to arrange for additional financing, to pay the amounts due on ouroutstanding indebtedness under our secured credit facility or promissory note. Further, funds from external sources may not be available on economicallyacceptable terms, if at all. For example, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary torelinquish potentially valuable rights to our product candidates or technologies, or to grant licenses on terms that are not favorable to us. If adequate funds are notavailable when and if needed, our ability to make interest or principal payments on our debt obligations, finance our operations, our research and developmentefforts and other general corporate activities would be significantly limited and we may be required to delay, significantly curtail or eliminate one or more of ourprograms. Failure to satisfy our current and future debt obligations under our secured credit facility or promissory note to Essex could result in an event of default and,as a result, our lenders could accelerate all of the amounts due. In the event of an acceleration of amounts due under our secured credit facility as a result of anevent of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness. In addition, our lenders couldseek to enforce their security interests in any collateral securing such indebtedness.Our quarterly operating results may fluctuate significantly. We expect our operating results to be subject to quarterly and annual fluctuations. We expect that any revenues we generate will fluctuate from quarter toquarter and year to year as a result of the timing of our commercialization efforts and seasonal trends with respect to ADHD diagnosis and use of medicinalproducts in the management of this disorder. Our net loss and other operating results will be affected by numerous factors, including:•any delays in regulatory review and approval of our product candidates;58Table of Contents•our ability to establish an effective sales and marketing infrastructure; •variations in the level of expenses related to our commercialization efforts and the development of additional clinical programs; •competition from existing products or new products that may emerge; •the level of market acceptance for any approved product candidates and underlying demand for that product, seasonality in the use of that productby end-users and wholesalers' buying patterns; •regulatory developments affecting our products and product candidates; •our dependency on third-party manufacturers to supply components of our product candidates; •potential side effects of our future products that could delay or prevent commercialization or cause an approved drug to be taken off the market; •any intellectual property infringement lawsuit in which we may become involved; and •our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under thesearrangements. Due to the various factors mentioned above, and others, the results of any prior quarterly period should not be relied upon as an indication of our futureoperating performance. If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could declinesubstantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an "ownership change," generally defined as agreater than 50% change (by value) in its equity ownership over a three year period, the corporation's ability to use its pre-change net operating loss carry-forwardsand other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. With our initial public offering, or IPO, our mostrecent private placement and other transactions that have occurred over the past three years, we may have triggered an "ownership change" limitation. In addition,we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability touse our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increasedfuture tax liability to us.Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel. We are highly dependent on the principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives.Any of our executive officers could leave our employment at any time, as all of our employees are "at will" employees. Recruiting and retaining other qualifiedemployees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives inour industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attractand retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In addition,failure to succeed in clinical trials or to receive regulatory approval for our product candidates may make it more challenging to recruit and retain qualifiedpersonnel. The inability to recruit key executives or the loss of the services of any executive or key employee might impede the progress of our development andcommercialization objectives.59Table of ContentsIf we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or preventfraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of ourcommon stock. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls andprocedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, couldcause us to fail to meet our reporting obligations. Our independent registered public accounting firm considered our internal controls over financial reporting as ofDecember 31, 2014 for purposes of expressing an opinion on our financial statements but not for purposes of expressing an opinion on the effectiveness of ourinternal controls, and two significant deficiencies in internal controls were identified in connection with the preparation of our financial statements. The firstsignificant deficiency was due to inadequate design and implementation of general controls surrounding our information technology, or IT, and the secondsignificant deficiency was due to inadequate maintenance and administration of our stock option program. We are taking steps to remedy both significantdeficiencies, including with respect to the IT deficiency, engaging an independent third party to perform an assessment of internal controls over our IT systemsthat support financial reporting processes in our efforts to prepare for compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and to identifyopportunities for improving our IT general controls environment. With respect to the stock option program deficiencies, we have implemented new approval anddocumentation procedures and controls governing all such grants. In addition, we have implemented a new third party software solution for managing andaccounting for stock-based compensation. We are in the very early stages of the costly and challenging process of compiling our system of internal controls overfinancial reporting and processing documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We maydiscover additional deficiencies in our internal controls over financial reporting, including those identified through testing conducted by us in connection withSection 404 of the Sarbanes-Oxley Act or subsequent testing by our independent registered public accounting firm. Such deficiencies may be deemed to besignificant deficiencies or material weaknesses and may require prospective or retroactive changes to our consolidated financial statements or identify other areasfor further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which couldhave a negative effect on the trading price of our common stock.Our business and operations would suffer in the event of system failures. Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage fromcomputer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such an event could cause interruption ofour operations. For example, the loss of data from completed clinical trials for our product candidates could result in delays in our regulatory approval efforts andsignificantly increase our costs. To the extent that any disruption or security breach were to result in a loss of or damage to our data, or inappropriate disclosure ofconfidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.We may rely on third parties to perform many essential services for any products that we commercialize, including distribution, customer service, accountsreceivable management, cash collection and adverse event reporting. If these third parties fail to perform as expected or to comply with legal and regulatoryrequirements, our ability to commercialize Adzenys XR-ODT and, if approved, Cotempla XR-ODT or NT-0201 will be significantly impacted and we may besubject to regulatory sanctions. We may retain third-party service providers to perform a variety of functions related to the sale and distribution of Adzenys XR-ODT and, if approved,Cotempla XR-ODT and NT-0201, key aspects60Table of Contentsof which will be out of our direct control. These service providers may provide key services related to distribution, customer service, accounts receivablemanagement and cash collection. We would substantially rely on these third-party providers to perform services for us. If these third-party service providers fail tocomply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to us, our ability to deliverproduct to meet commercial demand may be significantly impaired. In addition, we may engage third parties to perform various other services for us relating toadverse event reporting, safety database management, fulfillment of requests for medical information regarding our product candidates and related services. If thequality or accuracy of the data maintained by these service providers is insufficient or if they fail to comply with various requirements, we could be subject toregulatory sanctions.RISKS RELATED TO OUR INTELLECTUAL PROPERTYIf our intellectual property related to our products or product candidates is not adequate, we may not be able to compete effectively in our market. We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our products,product candidates and technology. Any disclosure to or misappropriation by third parties of our confidential or proprietary information could enable competitorsto duplicate or surpass our technological achievements, thus eroding our competitive position in our market. Due to legal standards relating to patentability, validity, enforceability and scope of claim, patents covering pharmaceutical and biotechnology inventionsinvolve complex legal, scientific and factual questions. Formulation of drug products such as ours with complex release profiles is an area of intense research,publishing and patenting, which limits the scope of any new patent applications. As a result, our ability to obtain, maintain and enforce patents is uncertain and anyrights under any existing patents, or any patents we might obtain or license, may not provide us with sufficient protection for our products and product candidatesto afford a commercial advantage against competitive products or processes. The patent applications that we own may fail to result in issued patents in the UnitedStates or in foreign countries. Even if patents do successfully issue, third parties may challenge their patentability, validity (e.g., by discovering previouslyunidentified prior art, or a patent-barring event such as a prior public disclosure, use, sale or offer for sale of the invention), enforceability or scope, which mayresult in such patents being narrowed, invalidated or held unenforceable. For example, U.S. patents may be challenged by third parties via inter partes review, postgrant review, derivation or interference proceedings at the USPTO, and European patents may be challenged via an opposition proceeding at the European PatentOffice. Furthermore, if we were to assert our patent rights against a competitor, the competitor could challenge the validity and/or enforceability of the assertedpatent rights. Although a granted U.S. patent is entitled to a statutory presumption of validity, its issuance is not conclusive as to its validity or its enforceability,and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to our products and product candidatesis successfully challenged, we may face unexpected competition that could have a material adverse impact on our business. Even if they are unchallenged, ourpatents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. For example, a third partymay develop a competitive product that provides therapeutic benefits similar to our products or product candidates, but is sufficiently different to fall outside thescope of our patent protection. Furthermore, if we encounter delays in our clinical trials or entry onto the market in a particular jurisdiction, the period of time during which we could marketa particular product under patent protection would be reduced.61Table of Contents Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights,and the outcome of such litigation would be uncertain. If we or one of our future collaborators were to initiate legal proceedings against a third party to enforce apatent covering a product or our technology, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the UnitedStates, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meetany of several statutory requirements, including lack of novelty, obviousness, lack of written description, non-enablement or a patent-barring event, such as apublic disclosure, use or sale of the invention more than a year before the filing date of the application. Grounds for an unenforceability assertion could, forexample, be an allegation that someone connected with prosecution of the patent withheld material information from the USPTO, or made a misleading statement,during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot becertain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution, or that a third party challenging one of ourpatents would not assert that a patent-barring event had occurred. If a plaintiff or a defendant were to prevail on a legal assertion of invalidity and/orunenforceability against one or more of our patents, we would lose at least part, and perhaps all, of the patent protection for one or more of our products or productcandidates. Such a loss of patent protection could have a material adverse impact on our business. Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in reexamination, inter partes review,or interference proceedings challenging our patent rights. Patents based on applications that we file in the future may also be subject to derivation and/or post-grantreview proceedings. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights and allowthird parties to commercialize our technology or products and compete directly with us. In addition, if the breadth or strength of protection provided by our patentsand patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future productcandidates.We may not seek to protect our intellectual property rights in all jurisdictions throughout the world, and we may not be able to adequately enforce ourintellectual property rights even in the jurisdictions where we seek protection. Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, andour intellectual property rights in some countries outside the United States are less extensive than in the United States. In addition, the laws of some foreigncountries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, even where we do elect topursue patent rights outside the United States, we may not be able to obtain relevant claims and/or we may not be able to prevent third parties from practicing ourinventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or otherjurisdictions. Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, maypossibly export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. Theseproducts may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient toprevent third parties from competing with us. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies haveencountered significant problems in protecting62Table of Contentsand defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor theenforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents, if obtained, or themisappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner mustgrant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or governmentcontractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes.Accordingly, we have, and may in the future, choose not to seek patent protection in certain countries. Furthermore, while we intend to protect our intellectualproperty rights in certain markets for our products, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we maywish to market our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirementsimposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and otherprovisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting inpartial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwisehave been the case.If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigationwould have a material adverse effect on our business. Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell their approved products andour product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents andpending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the pharmaceutical industryexpands and more patents are issued, the risk increases that our products and product candidates may give rise to claims of infringement of the patent rights ofothers. There may, for example, be issued patents of third parties of which we are currently unaware, that may be infringed by our products or product candidates,which could prevent us from being able to commercialize our products or product candidates, respectively. Because patent applications can take many years toissue, there may be currently pending applications which may later result in issued patents that our products or product candidates may infringe. The pharmaceutical industry is rife with patent litigation between patent holders and producers of follow-on drug products. The possibility of blocking FDAapproval of a competitor's product for up to 30 months provides added incentive to litigate over Orange Book patents, but suits involving non-Orange Book patentsare also common in the ADHD space. There have been multiple patent litigations involving nearly all of the medications for treatment of ADHD. This trend maycontinue and, as a result, we may become party to legal matters and claims arising in the ordinary course of business. We may be exposed to, or threatened with, future litigation by third parties alleging that our products or product candidates infringe their intellectual propertyrights. If one of our products or product candidates is found to infringe the intellectual property rights of a third party, we or our63Table of Contentscollaborators could be enjoined by a court and required to pay damages and could be unable to commercialize the applicable approved products and productcandidates unless we obtain a license to the patent. A license may not be available to us on acceptable terms, if at all. In addition, during litigation, the patent holdercould obtain a preliminary injunction or other equitable relief which could prohibit us from making, using or selling our approved products, pending a trial on themerits, which may not occur for several years. There is a substantial amount of litigation involving patent and other intellectual property rights in the pharmaceutical industry generally. If a third partyclaims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:•infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert ourmanagement's attention from our core business; •third parties bringing claims against us may have more resources than us to litigate claims against us; •substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party'srights, and, if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner's attorneys' fees; •a court prohibiting us from selling our product or any product candidate approved in the future, if any, unless the third party licenses its rights to us,which it is not required to do; •if a license is available from a third party, we may have to pay substantial royalties, fees or grant cross-licenses to our intellectual property rights;and •redesigning any of our products and product candidates so they do not infringe, which may not be possible or may require substantial monetaryexpenditures and time.Our drug development strategy relies heavily upon the 505(b)(2) regulatory approval pathway, which requires us to certify that we do not infringe upon third-party patents covering approved drugs. Such certifications typically result in third-party claims of intellectual property infringement, the defense of whichwould be costly and time consuming, and an unfavorable outcome in any litigation may prevent or delay our development and commercialization efforts whichwould harm our business. Our commercial success depends in large part on our avoiding infringement of the patents and proprietary rights of third parties for existing approved drugproducts. Because we utilize the 505(b)(2) regulatory approval pathway for the approval of our products and product candidates, we rely in whole or in part onstudies conducted by third parties related to those approved drug products. As a result, upon filing with the FDA for approval of our product candidates, we will berequired to certify to the FDA that either: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA; (2) the patents listed in theOrange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) thelisted patents are invalid or will not be infringed by the manufacture, use or sale of our proposed drug product. If we certify to the FDA that a patent is invalid ornot infringed, or a Paragraph IV certification, a notice of the Paragraph IV certification must also be sent to the patent owner once our 505(b)(2) NDA is acceptedfor filing by the FDA. The third party may then initiate a lawsuit against us asserting infringement of the patents identified in the notice. The filing of a patentinfringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving our NDA until the earliest of 30 months or the date onwhich the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in our favor. If the third party does not file a patentinfringement lawsuit within the required 45-day period, our NDA will not be subject to the 30-month64Table of Contentsstay. However, even if the third party does not sue within the 45-day time limit, thereby invoking the 30-month stay, it may still challenge our right to market ourproduct upon FDA approval; therefore, some risk of an infringement suit remains even after the expiry of the 45-day limit. By way of example, when we initiallysubmitted our Adzenys XR-ODT NDA in December 2012 and in response to our Paragraph IV certification, Shire LLC, or Shire, initiated a lawsuit against usclaiming patent infringement against certain of Shire's patents. We settled with Shire in July 2014. As part of our settlement, among other things, we stipulated thatthe commercial manufacture, use, selling, offering for sale or importing of Adzenys XR-ODT would infringe on certain Shire patents and that such patent claimsare valid and enforceable with respect to our Adzenys XR-ODT NDA, but that such stipulations do not preclude us from filing new regulatory applicationscontaining a Paragraph IV certification citing such patents. We also entered into a non-exclusive license agreement with Shire for certain of Shire's patents withrespect to our Adzenys XR-ODT NDA. Under the terms of the license agreement, upon obtaining FDA approval of our Adzenys XR-ODT NDA, we are requiredto pay a lump-sum, non-refundable license fee no later than thirty days after receiving such approval and a single-digit royalty on net sales of Adzenys XR-ODTduring the life of Shire's patents.We may be unable to adequately prevent disclosure of trade secrets and other proprietary information. We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriateor obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientificcollaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectivelyprevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Inaddition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce anddetermine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information todevelop products that compete with our products or cause additional, material adverse effects upon our competitive business position.We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership ofwhat we regard as our own intellectual property. Some of our employees were previously employed at other companies, including actual or potential competitors. We may also engage advisors andconsultants who are concurrently employed at other organizations or who perform services for other entities. Although we try to ensure that our employees,advisors and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees,advisors, or consultants have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such party's former employeror in violation of an agreement with or legal obligation in favor of another party. Litigation may be necessary to defend against these claims. In addition, while we generally require our employees, consultants, advisors and contractors who may be involved in the development of intellectual propertyto execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact developsintellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced tobring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. Similarly,we may be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person's obligations to a third party, such as anemployer65Table of Contentsor former employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may benecessary to defend against these claims. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights orpersonnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.RISKS RELATED TO OUR COMMON STOCKThe market price of our common stock may be highly volatile and investors in our common stock could incur substantial losses. The trading price of our common stock is likely to be volatile. Since shares of our common stock were sold in our IPO in July 2015 at a price of $15.00 pershare, our stock price has ranged from $7.57 to $28.99, through March 17, 2016. Our stock price could be subject to wide fluctuations in response to a variety offactors, including the following:•any delay in filing an NDA for any of our product candidates and any adverse development or perceived adverse development with respect to theFDA's review of that NDA; •failure to successfully execute our commercialization strategy with respect to Adzenys XR-ODT and, if approved, Cotempla XR-ODT or NT-0201,or any other approved potential product candidate in the future; •adverse results or delays in clinical trials, if any; •significant lawsuits, including patent or stockholder litigation; •inability to obtain additional funding; •failure to successfully develop and commercialize our product candidates; •changes in laws or regulations applicable to our product candidates; •inability to manufacture adequate amounts of product supply or obtain adequate amounts of components of our product supply for our productcandidates, or the inability to do so at acceptable prices; •unanticipated serious safety concerns related to the use of our generic Tussionex, Adzenys XR-ODT, Cotempla XR-ODT, NT-0201 or any futurepotential product candidates; •adverse regulatory decisions; •introduction of new products or technologies by our competitors; •failure to meet or exceed product development or financial projections we provide to the public; •failure to meet or exceed the estimates and projections of the investment community; •the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community; •announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; •disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for ourtechnologies; •additions or departures of key scientific or management personnel;66Table of Contents•changes in the market valuations of similar companies; •sales of our common stock by us or our stockholders in the future; and •trading volume of our common stock. In addition, the stock market in general, and the NASDAQ Global Market, or NASDAQ, in particular, has experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performance of these listed companies. Broad market and industry factors may negatively affectthe market price of our common stock, regardless of our actual operating performance.Our principal stockholders and management own a significant percentage of our shares and will be able to exert significant control over matters subject tostockholder approval. As of December 31, 2015, our executive officers, directors, 5% or greater stockholders and their affiliates, including shares purchased in the IPO by membersof that group and their affiliated entities, beneficially own approximately 60% of our outstanding voting stock. These stockholders may be able to determine allmatters requiring stockholder approval. For example, these stockholders, acting together, may be able to control elections of directors, amendments of ourorganizational documents or approval of any merger, sale of assets or other major corporate transaction. This may prevent or discourage unsolicited acquisitionproposals or offers for our common stock that you may believe are in your best interest as one of our stockholders.Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall. Sales of a substantial number of shares of our common stock by our existing stockholders in the public market or the perception that these sales might occur,could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable topredict the effect that such sales may have on the prevailing market price of our common stock. Approximately 10,471,356 of our shares became eligible for saleupon expiration of the lock-up period on January 18, 2016, although a portion of such shares held by our affiliates will be subject to volume limitations and otherconditions pursuant to Rule 144 of the Securities Act. In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of thelock-up period also became eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of ourcommon stock. Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or theSecurities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the sharesbecoming freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on thetrading price of our common stock.We will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantialtime to new compliance initiatives. As a public company, we will continue to incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rulessubsequently implemented by the SEC and NASDAQ, have imposed various requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reformand Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions inthe Dodd-Frank Act that required the SEC to adopt additional rules and regulations in these areas such as "say on pay"67Table of Contentsand proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead tosubstantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) themanner in which we operate our business. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives.Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Forexample, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may berequired to incur substantial costs to maintain our current levels of such coverage.We are an "emerging growth company," and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will makeour common stock less attractive to investors. We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be anemerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not"emerging growth companies," including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act reduceddisclosure obligations regarding executive compensation in this Annual Report on Form 10-K and our periodic reports and proxy statements, and exemptions fromthe requirements of holding a non-binding advisory vote on executive compensation. We will remain an emerging growth company until the earlier of (1) the lastday of the fiscal year (a) in 2020, (b) in which we have total annual gross revenue of at least $1 billion, or (c) in which we are deemed to be a large acceleratedfiler, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior March 31st, and (2) the date on whichwe have issued more than $1 billion in non-convertible debt during the prior three-year period. Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to takeadvantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements ofSection 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Wecannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock lessattractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply toprivate companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject tothe same new or revised accounting standards as other public companies that are not emerging growth companies.We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation inthe price of our common stock. We have never declared or paid any cash dividend on our common stock and do not currently intend to do so in the foreseeable future. We currently anticipatethat we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in theforeseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is noguarantee that shares of our common stock will appreciate in value or even maintain the price at which you purchased them.68Table of ContentsProvisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a thirdparty to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management. These provisionsinclude:•authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval; •limiting the removal of directors by the stockholders; •creating a classified board of directors; •prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; •eliminating the ability of stockholders to call a special meeting of stockholders; and •establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon atstockholder meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject toSection 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of businesscombinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless suchtransactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desiredby or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging withus.Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for certain litigationthat may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors,officers or employees. Our amended and restated certificate of incorporation, as currently in effect, provides that the Court of Chancery of the State of Delaware is the exclusiveforum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors,officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law,our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim governed by the internal affairsdoctrine. The choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or ourdirectors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a courtwere to find the choice of forum provision contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicableor unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our businessand financial condition.69Table of Contents ITEM 1B. Unresolved Staff Comments None. ITEM 2. Properties Our corporate headquarters are located in Grand Prairie, Texas, where we lease approximately 97,282 square feet of office, laboratory and manufacturingspace. Our lease expires on December 31, 2024, with an option to extend. We believe our current office, laboratory and manufacturing space is sufficient to meetour needs until the expiration of the lease. In addition, we executed a 60-month lease for 6,078 square feet of office space in Blue Bell, Pennsylvania for ourcommercial operations which is planned to commence on May 1, 2016 and which has an option to extend for 60 months. We may seek to negotiate new leases orevaluate additional or alternate space to accommodate operations relating to commercialization. We believe that appropriate alternative space is readily available oncommercially reasonable terms. ITEM 3. Legal Proceedings We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise inthe ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to anyclaim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverseeffect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of managementresources and other factors. ITEM 4. Mine Safety Disclosures Not applicable. ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for our Common Stock Our common stock has been listed on the NASDAQ Global Market under the symbol "NEOS" since July 23, 2015. Prior to that date, there was no publictrading market for our common stock. Our initial public offering was priced at $15.00 per share on July 22, 2015. The following table sets forth for the periodsindicated the high and low sales prices per share of our common stock as reported on the NASDAQ Global Market: On December 31, 2015, the last trading day of 2015, the last reported sale price of our common stock on the NASDAQ Global Market was $14.32 per share.As of March 15, 2016, there were 16,035,048 shares of common stock outstanding, held by approximately 90 holders of record of our common stock. The actualnumber of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in streetname by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.70 High Low Third Quarter (from July 23, 2015 to September 30, 2015) $28.99 $16.12 Fourth Quarter (from October 1, 2015 to December 31, 2015) $21.70 $11.53 Table of ContentsDividends We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings, if any, to fund thedevelopment and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to paydividends will be made at the discretion of our board of directors. Our ability to pay dividends on our common stock is limited by restrictions under the terms ofour credit facility with Hercules Technology III, L.P. In addition, any future indebtedness that we may incur could preclude us from paying dividends. Investorsshould not purchase our common stock with the expectation of receiving cash dividends.Securities Authorized for Issuance under Equity Compensation Plans Information about our equity compensation plans is included in Item 12 of Part III of this Annual Report on Form 10-K.Performance Graph The following stock performance graph illustrates a comparison of the total cumulative stockholder return on our common stock to two indices; the NASDAQComposite Index and the NASDAQ Biotechnology Index since July 23, 2015, which is the date our common stock first began trading on the NASDAQ GlobalMarket. The graph assumes an initial investment of $100 at the initial public offering price to the public for Neos stock of $15 on July 23, 2015 or at June 30, 2015if invested in the indices, and all dividends, if any, were reinvested. No cash dividends have been declared or paid on our common stock. Stockholder return overthe indicated period should not be considered indicative of future stockholder returns. COMPARISON OF 5 MONTH CUMULATIVE TOTAL RETURN*Among Neos Therapeutics, Inc., the NASDAQ Composite Index, and the NASDAQ BiotechnologyIndex *$100 invested on 7/22/15 in stock or 6/30/15 in index, including reinvestment of dividends.Fiscal year ending December 31.71Table of ContentsRecent Sales of Unregistered Securities Since January 1, 2015, we have issued the following securities that were not registered under the Securities Act:(a) Sales of Capital Stock(1)During the period January 1, 2015 through July 29, 2015 when Neos filed a Form S-8 Registration Statement, options to purchase an aggregate of36,093 shares of common stock reserved under our Neos Therapeutics, Inc. 2009 Equity Plan were exercised, having exercise prices ranging from$0.32 to $2.55 per share for an aggregate exercise price of $0.1 million. (2)Between January 1, 2015 and February 23, 2015, we issued and sold to investors an aggregate of 2,624,936 shares of Series C redeemableconvertible preferred stock, or Series C preferred stock, for aggregate consideration of $13.1 million, pursuant to subscription agreements enteredinto with investors. In connection with the sale of our Series C preferred stock, we issued 1,197,218,warrants to Purchase Series C preferred stock atan exercise price of $5.00 per share. (3)On June 29, 2015, we issued 17 shares of our common stock to one investor as consideration for that investor's shares in Neostx, Inc., a formersubsidiary, as part of a merger of Neostx, Inc. with and into us. (4)Between June 30, 2015 and July 7, 2015 we issued a total of 600,000 shares of our Series C preferred stock to two investors upon the exercise ofwarrants held by those investors at an exercise price of $5.00 per share, for an aggregate exercise price of $3.0 million. (5)Between January 1, 2015 and December 31, 2015, we issued a total of 286,968 shares of our common stock to several investors upon the exerciseof warrants to purchase shares of our common stock, originally issued in connection with our Series B-1 redeemable convertible preferred stockheld by those investors, at an exercise price of $0.0024 per share. (6)On July 28, 2015, we issued 78,926 shares of our common stock to several investors upon the net exercise of warrants held by those investors at anexercise price of $12.00 per share, for an aggregate exercise price of $2.8 million. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and the registrant believes thateach transaction was exempt from the registration requirements of the Securities Act in reliance on the following exemptions:•with respect to the transactions described in paragraph (1), Rule 701 promulgated under the Securities Act as transactions pursuant to acompensatory benefit plan approved by the registrant's board of directors; and •with respect to the transactions described in paragraphs (2), (3), (4), (5) and (6), Section 4(a)(2) of the Securities Act, or Rule 506 of Regulation Dpromulgated thereunder, as transactions by an issuer not involving a public offering. Each recipient of the securities in these transactionsrepresented his or her intention to acquire the securities for investment only and not with a view to, or for resale in connection with, any distributionthereof, and appropriate legends were affixed to the share certificates issued in each such transaction. In each case, the recipient received adequateinformation about us or had adequate access, through his or her relationship with the registrant, to information about us.72Table of ContentsUse of Proceeds from Initial Public Offering of Common Stock On July 13, 2015, we commenced our initial public offering ("IPO") pursuant to a registration statement on Form S-1 (File No. 333-205106) that was declaredeffective by the SEC on July 22, 2015. On July 28, 2015, we closed our IPO whereby we sold 5,520,000 shares of common stock, at a public offering price of$15.00 per share for an aggregate offering price of $82.8 million, which includes 720,000 shares of common stock resulting from the underwriters' exercise oftheir over-allotment option at the IPO price on July 23, 2015. The net offering proceeds to us, after deducting underwriting discounts and commissions and offeringcosts, were $75.0 million. The managing underwriters of the IPO were UBS Securities, LLC, BMO Capital Markets Corp., RBC Capital Markets, LLC and JMPSecurities, LLC. No offering expenses were paid or are payable directly or indirectly, to our directors or officers, to persons owning 10% or more of any class ofour equity securities or to any of our affiliates. The net proceeds from the offering have been invested in highly-liquid money market funds. There has been no material change in the expected use of the netproceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on July 24, 2015.Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ITEM 6. Selected Consolidated Financial Data The following selected consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013, and the balance sheet data as ofDecember 31, 2015 and 2014 are derived from our audited financial statements appearing elsewhere in this Annual Report on Form 10-K. You should read thisdata together with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the information under the caption"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Our historical results for any prior period are not necessarilyindicative of results to be expected in any future period.73Table of ContentsConsolidated Statements of Operations Data:Consolidated Balance Sheet Data:74 Year ended December 31, 2015 2014 2013 (in thousands, except per share data) Total Revenue $3,792 $758 $1,044 Cost of Goods Sold 5,547 3,354 2,534 Research and Development 11,887 10,601 9,974 Selling and Marketing Expenses 5,462 212 153 General and Administrative Expenses 7,474 5,063 5,471 Interest and Other Expense (Income) 4,203 2,377 1,512 Net Loss from Continuing Operations $(30,781)$(20,849)$(18,600)Loss from Discontinued Operations — — (437)Net Loss $(30,781)$(20,849)$(19,037)Preferred Stock Accretion to Redemption Value (1,169) (1,118) (1,227)Preferred Stock Dividends (1,221) (2,185) (2,185)Net Loss Attributable to Common Stock $(33,171)$(24,152)$(22,449)Net Loss per Share—Basic and Diluted(1) $(4.38)$(27.56)$(28.45)Shares Used to Compute Net Loss per Share—Basic and Diluted(1) 7,581,881 876,318 788,964 (1)See Note 4 to the notes to our audited financial statements included elsewhere in this Annual Report on Form 10-k for an explanation ofthe calculations of our basic and diluted net loss per common share. December 31, 2015 2014 (in thousands) Cash and Cash Equivalents $90,763 $13,343 Short-Term Investments — 3,000 Working Capital 82,306 13,380 Total Assets 122,510 45,230 Long Term Debt, net of Current Portion 26,271 23,121 Warrant Liability(1) — 1,789 Redeemable Convertible Preferred Stock(2) — 90,149 Stockholders' Equity (Deficit) 78,374 (78,782)(1)Upon closing the IPO, the warrants issued in conjunction with the Series C preferred stock financing were exchanged in a cashless exercisefor 947,185 shares of Series C preferred stock which converted into 78,926 shares of the Company's common stock. The remainingSeries C warrants issued with the senior debt to purchase 170,000 pre-split shares of Series C preferred stock, or the Hercules Warrants,were converted into warrants to purchase 70,833 shares of the Company's common stock and the warrant liability was reclassified toAdditional Paid in Capital within Stockholders' Equity (Deficit). (2)On the closing of the IPO, all outstanding shares of redeemable preferred stock converted into 9,217,983 shares of common stock and allremaining outstanding Series C warrants issued in conjunction with purchases of Series C preferred stock were net exercised at the IPOprice forTable of Contents ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the "Item 6. Selected ConsolidatedFinancial Data" and the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussioncontains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 1A. Risk Factors" or in other parts of thisAnnual Report on Form 10-K.OVERVIEW We are a pharmaceutical company focused on developing, manufacturing and commercializing products utilizing our proprietary modified-release drugdelivery technology platform, which we have already used to develop Adzenys XR-ODT and our two product candidates for the treatment of attention deficithyperactivity disorder, or ADHD. Our product and product candidates are extended-release, or XR, medications in patient-friendly, orally disintegrating tablets, orODT, or liquid suspension dosage forms. Our proprietary modified-release drug delivery platform has enabled us to create novel, extended-release ODT and liquidsuspension dosage forms. We received approval from the U.S. Food and Drug Administration, or FDA, for Adzenys XR-ODT, our amphetamine XR-ODT, onJanuary 27, 2016. We believe Adzenys XR-ODT and, if approved, Cotempla XR-ODT, will be the first amphetamine XR-ODT and the first methylphenidate XR-ODT, respectively, for the treatment of ADHD on the market. Cotempla XR-ODT is the provisionally accepted trade name of our methylphenidate XR-ODT. OnOctober 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our New Drug Application, or NDA, for Cotempla XR-ODT, it had identified deficiencies that precluded discussion of labeling and post marketing requirements or commitments at that time. On November 10, 2015, weannounced that we received a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between theclinical trial material and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stabilitydata. We expect to resubmit an NDA for Cotempla XR-ODT in the fourth quarter of 2016, following the completion of the bioequivalence bridging study. Inaddition, we plan to submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the fourth quarter of 2016. We plan to focus on commercialization in the United States using our own commercial infrastructure. We intend to manufacture our ADHD products in ourcurrent Good Manufacturing Practice, or cGMP, and U.S. Drug Enforcement Administration, or DEA-registered manufacturing facilities, thereby obtaining ourproducts at cost without manufacturer's margins and better controlling supply quality and timing. We currently use these facilities to manufacture our genericequivalent to the branded product, Tussionex, an XR liquid suspension of hydrocodone and chlorpheniramine indicated for the relief of cough and upperrespiratory symptoms of a cold. Our predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. and subsequently changed its name to Neostx, Inc. OnJune 15, 2009, we completed a reorganization pursuant to which substantially all of the capital stock of Neostx, Inc. was acquired by a newly formed Delawarecorporation, named Neos Therapeutics, Inc. The remaining capital stock of Neostx, Inc. was acquired by us on June 29, 2015, and Neostx, Inc. was merged withand into Neos Therapeutics, Inc.7578,926 shares of common stock. Upon the closing of the Company's IPO, all of the shares of the Company's redeemable convertiblepreferred stock were retired and cancelled and shall not be reissued as shares of such series, and all rights and preferences of those sharesof redeemable convertible preferred stock were cancelled, including the right to receive undeclared accumulated dividends.Table of ContentsHistorically, we were primarily engaged in the development and contract manufacturing of unapproved or Drug Efficacy Study Implementation, or DESI,pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The unapproved or DESI pharmaceuticals contract business was discontinued in 2007, andthe manufacture of nutraceuticals for third parties was discontinued in March 2013. Since our reorganization in 2009, we have devoted substantially all of our resources to funding our manufacturing operations and to our product candidateswhich consist of research and development activities, clinical trials for our product candidates, the general and administrative support of these operations andintellectual property protection and maintenance. Prior to our recent initial public offering of our common stock, we funded our operations principally throughprivate placements of our common stock, redeemable convertible preferred stock, bank and other lender financings and through payments received undercollaborative arrangements. On August 28, 2014, we completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug Application, or Tussionex ANDA, whichinclude the rights to produce, develop, market and sell, as well as all the profits from such selling activities, our generic Tussionex, which we previously owned therights to manufacture, but which was marketed and sold by the generic drug division of Cornerstone Biopharma, Inc., or Cornerstone. These rights were acquiredfrom the collaboration of the Company, Cornerstone and Coating Place, Inc. Prior to the acquisition, we shared profits generated by the sale and manufacture of theproduct under a development and manufacturing agreement with those companies. We have incurred significant losses in each year since our reorganization in 2009. Our net losses were $30.8 million for the year ended December 31, 2015,respectively. As of December 31, 2015, we had an accumulated deficit of approximately $116.8 million. We expect to continue to incur significant expenses andincreasing operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we:•seek regulatory approval for our product candidates; •build commercial infrastructure to support sales and marketing for Adzenys XR-ODT and our product candidates; •continue research and development activities for new product candidates; •manufacture supplies for our preclinical studies and clinical trials; and •operate as a public company. On July 28, 2015, we closed our initial public offering, or IPO, whereby we sold 5,520,000 shares of common stock, at a public offering price of $15.00 pershare, which includes 720,000 shares of our common stock resulting from the underwriters' exercise of their over-allotment option at the IPO price on July 23,2015. The net proceeds from our IPO, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately$75.0 million. The securities described above were offered by us pursuant to a registration statement on Form S-1 declared effective by the SEC on July 22, 2015. We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no assurance that such funds will beavailable on terms favorable to us, if at all, or that we will be able to successfully commercialize our product candidates. In addition, we may not be profitable evenif we succeed in commercializing Adzenys XR-ODT and any of our product candidates.76Table of ContentsFINANCIAL OPERATIONS OVERVIEWRevenue Our revenue is currently generated from product sales of our generic Tussionex, recorded on a net sales basis. We sell our product to drug wholesalers in theUnited States. We have also established indirect contracts with drug, food and mass retailers that order and receive our product through wholesalers. As a result ofour acquisition of all of the rights to the Tussionex ANDA, we expect our future revenue to increase from historical levels as a result of our efforts directed towardthe commercialization of our generic Tussionex. We historically had generated revenue from manufacturing, development and profit sharing from a development and manufacturing agreement; however, weexpect that these revenue streams will end since we terminated our development and manufacturing agreement in August 2014. As a result of our acquisition of therights to commercialize and derive future profits from the Tussionex ANDA, we intend to utilize our manufacturing capability to derive revenue directly fromsales made by us, rather than through a commercial partner. Sales of our generic Tussionex are seasonal and correlate with the cough and cold season. In the future, we will seek to generate revenue from product sales of Adzenys XR-ODT and our two late-stage branded product candidates. We do not expectto generate any significant revenue unless or until we commercialize our product candidates. If we fail to effectively launch our marketing plans for Adzenys XR-ODT or to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our inability to generate future revenuefrom product sales may adversely affect our results of operations and financial position.Research and development We expense research and development costs as they are incurred. Research and development expenses consist of costs incurred in the discovery anddevelopment of our product candidates, and primarily include:•expenses, including salaries and benefits of employees engaged in research and development activities; •expenses incurred under third party agreements with contract research organizations, or CROs, and investigative sites that conducted our clinicaltrials and a portion of our pre-clinical activities; •cost of raw materials, as well as manufacturing cost of our materials used in clinical trials and other development testing; •cost of facilities, depreciation and other allocated expenses; •fees paid to regulatory authorities for review and approval of our product candidates; and •expenses associated with obtaining and maintaining patents. Direct development expenses associated with our research and development activities are allocated to our product candidates. Indirect costs related to ourresearch and development activities that are not allocated to a product candidate are included in "Other Research and Development Activities" in the table below.77Table of Contents The largest component of our total operating expenses has historically been our investment in research and development activities including the clinicaldevelopment of our product candidates. The following table summarizes our research and development expenses for the periods indicated: We expect that our research and development expenses will fluctuate over time as we engage in additional post-marketing studies of Adzenys XR-ODT, seekregulatory approval of our two ADHD product candidates and explore new product candidates, but will decrease as a percentage of revenue if we generate revenuefrom Adzenys XR-ODT and if any of our product candidates are approved. We expect to fund our research and development expenses from our current cash andcash equivalents and revenues, if any, from Adzenys XR-OT and our product candidates. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketingapproval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data,competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research anddevelopment projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. On October 16, 2015, we received notification from the FDA stating that, as part of its ongoing review of our NDA for Cotempla XR-ODT, it had identifieddeficiencies that precluded discussion of labeling and post marketing requirements or commitments at that time. On November 10, 2015, we announced that wereceived a Complete Response Letter from the FDA, which requires us to conduct a bridging study to demonstrate bioequivalence between the clinical trialmaterial and the to-be-marketed drug product, including an assessment of food effect, and to provide process validation and three months of stability data. Weexpect to resubmit an NDA for Cotempla XR-ODT and submit an NDA for NT-0201, our amphetamine XR liquid suspension, in the fourth quarter of 2016. Anyfurther actions required by the FDA may result in further research and development expenses. For additional information regarding the FDA review process,including the Prescription Drug User Fee Act, see "Government Regulation—NDA and FDA review process."Selling and marketing Selling and marketing expenses consist primarily of salaries and related costs for personnel, pre-commercialization activities for Adzenys XR-ODT and ourproduct candidates and trade sales of our generic Tussionex. Other selling and marketing expenses include market research, brand development, advertisingagency and other public relations costs, managed care sales planning and market data and analysis.78 December 31, 2015 2014 2013 (in thousands) NT-0102 Cotempla XR-ODT $3,232 $1,641 $2,089 NT-0201 Amphetamine Liquid 237 822 625 NT-0202 Adzenys XR- ODT 330 762 829 Other Research and Development Activities(1) 8,088 7,376 6,431 $11,887 $10,601 $9,974 (1)Includes unallocated product development cost, salaries and wages, occupancy and depreciation and amortization.Table of Contents We expect that our selling and marketing expenses will increase with the potential commercialization of Adzenys XR-ODT and our product candidatesparticularly as we move to a business model in which we commercialize our own products in the United States.General and administrative General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, for ouremployees in executive, finance and human resources functions. Other general and administrative expenses include facility-related costs not otherwise included inresearch and development expenses or cost of goods sold, and professional fees for business development, accounting, tax and legal services. We anticipate that our general and administrative expenses will increase due to increased expenses associated with being a public company, including costsfor audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs, as well as accounting and compliancecosts to support the anticipated commercialization of Adzenys XR-ODT.Interest expense, net Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is liquidity and capitalpreservation. Interest expense to date has consisted primarily of interest expense on senior debt, including the amortization of debt discounts, a subordinated note payableto a related party and the capitalized leases resulting from the sale-leaseback transactions of our existing and newly-acquired property and equipment. We amortizedebt issuance costs over the life of the notes which are reported as interest expense in our consolidated statements of operations.Other income (expense), net Other income and expense to date has primarily consisted of amortization of the net gain recorded on the sale-leaseback of our property and equipment. Thesesale-leaseback financings occurred in five separate transactions, each with a 42-month lease term. The gains on the transactions are being recognized on a straight-line basis over the respective 42-month lease term (see Note 8 to the notes to our audited financial statements included elsewhere in this Annual Report onform 10-K). Other income and expense also includes changes resulting from the remeasurement of the fair values of our warrant liabilities through the effectivedate of the IPO, July 22, 2015 and our earnout liability.RESULTS OF OPERATIONSYear ended December 31, 2015 compared to the year ended December 31, 2014Revenues The following table summarizes our revenues for the year ended December 31, 2015 and 2014:79 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Product $3,792 $316 $3,476 1,100%Manufacturing — 113 (113) (100)%Profit Sharing — 169 (169) (100)%Development — 160 (160) (100)% $3,792 $758 $3,034 400.3%Table of Contents Total revenues were $3.8 million for the year ended December 31, 2015, an increase of $3.0 million or 400.3%, from the $0.8 million for the year endedDecember 31, 2014. All $3.8 million of product revenue in the year ended December 31, 2015 was generated from net sales of our generic Tussionex for which weacquired all commercialization and profit rights in August 2014. This was partially offset by decreases in development, profit sharing and manufacturing revenue.The manufacturing and profit sharing revenues decreased by $0.3 million due to the termination of our development and manufacturing agreement in August 2014.In addition, the $0.2 million decrease in development revenues for the year ended December 31, 2015 was due to reduced development work related to our genericTussionex. The $0.3 million of product revenue for the year ended December 31, 2014 included reserves we established for the estimated returns of our genericTussionex outstanding at the wholesalers as of the October 6, 2014 effective date of the August 26, 2014 DEA reclassification of Tussionex from a Schedule IIIcontrolled substance to a Schedule II controlled substance. This ruling had the effect of requiring unsold product to either be relabeled or returned.Cost of goods sold The following table summarizes our cost of goods sold for the year ended December 31, 2015 and 2014: The total cost of goods sold was $5.5 million for the year ended December 31, 2015, an increase of $2.2 million or 65.4%, from the $3.3 million for the yearended December 31, 2014. This increase was primarily due to $1.0 million increase in raw material costs due to the increased sales of Tussionex, $0.7 million ofamortization of the intangibles resulting from the acquisition of the rights to commercialize and derive future profits from Tussionex ANDA and a $0.5 millionincrease in other cost of goods sold, principally due to personnel for lab testing of products, distribution costs and freight incurred for the shipment of our genericTussionex and audits of suppliers in 2015.Research and development expenses The following table summarizes our research and development expenses for the year ended December 31, 2015 and 2014: Research and development expenses were $11.9 million for the year ended December 31, 2015, an increase of $1.3 million, or 12.1%, from the $10.6 millionfor the year ended December 31, 2014. This increase was primarily due to a $2.3 million FDA filing fee for the NDA for Cotempla XR-ODT submitted in January2015, a $0.6 million increase in research and development materials, equipment, outside lab testing and other costs, a $0.5 million increase in medical affairsspending related to our ADHD product candidates, a $0.3 million increase due to salaries and benefits for additional research and development personnel and a$0.2 million amortization of the 2015 annual FDA facility fee for our generic Tussionex. These increases were offset by a $2.0 million decrease in clinical expense,primarily as a result of the completion of our classroom study of Cotempla XR-ODT and the completion of80 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Cost of Goods Sold $5,547 $3,354 $2,193 65.4% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Research & Development Expenses $11,887 $10,601 $1,286 12.1%Table of Contentsclinical trials for Adzenys XR-ODT and NT-0201 in 2014 and a $0.6 million decrease in consulting firm services related to the preparation of our prior NDAsubmissions.Selling and marketing expenses The following table summarizes our selling and marketing expenses for the year ended December 31, 2015 and 2014: Selling and marketing expenses were $5.5 million for the year ended December 31, 2015, an increase of $5.3 million or 2,476.0%, from the $0.2 million forthe year ended December 31, 2014. Selling and marketing professional services increased by $3.8 million due to the pre-commercialization advertising agency andsales organization management costs, market research, managed care research, public relations, sales force planning, recruiting fees and corporate communicationsexpenses incurred in 2015 for Adzenys XR-ODT and Cotempla XR-ODT. Salary and compensation expense increased $1.3 million due to the addition ofpersonnel as part of pre-commercialization efforts for our product candidates and trade sales support for our generic Tussionex. In addition, selling and marketingtravel expenses increased $0.2 million related to these pre-commercialization activities.General and administrative expenses The following table summarizes our general and administrative expenses for the year ended December 31, 2015 and 2014: General and administrative expenses were $7.5 million for the year ended December 31, 2015, an increase of $2.4 million or 47.6%, from the $5.1 million forthe year ended December 31, 2014. Salary and compensation expense increased $1.4 million in the year ended December 31, 2015 primarily due a $1.0 millionincrease in compensation related to share-based payments and a $0.4 million increase in 2015 due to the restructuring of the executive team and the addition ofcontract labor during 2015 and 2014 to bring on additional industry experience in support of our IPO. In addition, general and administrative expenses increased by$0.3 million for directors and officers insurance policy premium for the period following the IPO effective date and $0.2 million for board of directors fees andexpenses. Also, Professional Fees included the following offsetting variances: an increase of $1.1 million related to services provided by consultants primarily foraudit, tax, business development, financial reporting, computer services, recruiting, compensation review, financial analysis and government pricing, offset by a$0.6 million decrease in legal fees resulting from the termination and settlement of litigation related to the Paragraph IV certification of Adzenys XR-ODT in July2014.81 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Sales and Marketing $5,462 $212 $5,250 2,476.4% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) General and Administrative $7,474 $5,063 $2,411 47.6%Table of ContentsInterest expense The following table summarizes interest expense for the year ended December 31, 2015 and 2014: The total interest expense was $3.7 million for the year ended December 31, 2015, an increase of $0.7 million or 26.0% from the $3.0 million for the yearended December 31, 2014. The interest on senior debt increased by $0.9 million due to the increased senior debt balance in 2015. This increase was offset by a$0.2 million reduction in capital lease interest due the reduced capital lease balances resulting from ongoing lease payments.Other income (expense), net The following table summarizes our other income (expense) for the year ended December 31, 2015 and 2014: Other expense was $0.5 million for the year ended December 31, 2015, a decrease of $1.1 million or 183.7%, from the $0.6 million of other income for theyear ended December 31, 2014. This change was due to the $1.7 million year-to-date effect of the remeasurements of the fair value of the warrant liabilities due tothe increased weighting assigned to the IPO scenario in the PWERM valuation model which was partially offset by a $0.6 million decrease in the fair value of theearnout liability, which resulted primarily from new information regarding the projected impact of the DEA's reclassification of Tussionex from a Schedule IIIcontrolled substance to a Schedule II controlled substance and a review of the projected launch dates of Adzenys XR-ODT and our two ADHD product candidatesYear ended December 31, 2014 compared to the year ended December 31, 2013Revenues The following table summarizes our revenues for the years ended December 31, 2014 and 2013: Total revenues were $0.8 million for the year ended December 31, 2014, a decrease of $0.3 million or 27.4%, from the year ended December 31, 2013. The$0.5 million or 76.5% decrease in development revenues for the year ended December 31, 2014 was primarily due to reduced development work82 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Interest Expense $(3,721)$(2,954)$(767) 26.0% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2015 2014 (in thousands) Other Income, net $(482)$577 $(1,059) (183.5)% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Product $316 $— $316 N/A Manufacturing 113 137 (24) (17.5)%Profit Sharing 169 226 (57) (25.2)%Development 160 681 (521) (76.5)% $758 $1,044 $(286) (27.4)%Table of Contentsrelated to our generic Tussionex as we completed various stability programs and shifted our efforts toward launching commercialization in September 2013. Inaddition, the manufacturing and profit sharing revenues combined decrease of $0.1 million or 22.3% was primarily due to the termination of our three-way profitsplit development and manufacturing agreement in August 2014. These decreases were partially offset by $0.3 million of product revenue due to net sales of ourgeneric Tussionex after our acquisition of all commercialization and profit rights to our generic Tussionex in August 2014.Cost of goods sold The following table summarizes our cost of goods sold for the years ended December 31, 2014 and 2013: The total cost of goods sold was $3.4 million for the year ended December 31, 2014, an increase of $0.8 million or 32.4% from the year ended December 31,2013. This increase was primarily due to a $0.8 million increase in production cost of our generic Tussionex as a result of increased sales and indirect costsassociated with scaling up of commercial manufacturing. In addition, the increase was due to manufacturing overhead expenses which were not capitalizable intoinventory and were recognized as period expenses.Research and development expenses The following table summarizes our research and development expenses for the years ended December 31, 2014 and 2013: Research and development expenses were $10.6 million for the year ended December 31, 2014, an increase of $0.6 million or 6.3% from the year endedDecember 31, 2013. This increase was primarily due to a $0.5 million increase in third party costs related to the preparation of our NDA submissions and a$0.5 million increase in depreciation and amortization costs primarily due to additional depreciation on new equipment and increased amortization of equipmentfinanced under sale-leaseback agreements. These decreases were partially offset by a net $0.3 million decrease in clinical expense, primarily as a result of thecompletion of our classroom study of Cotempla XR-ODT, and a $0.1 million decrease in salary expense.83 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Cost of Goods Sold $3,354 $2,534 $820 32.4% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Research & Development Expenses $10,601 $9,974 $627 6.3%Table of ContentsSelling, general and administrative expenses The following table summarizes our SG&A expenses for the years ended December 31, 2014 and 2013: The total SG&A expenses were $5.3 million for the year ended December 31, 2014, a decrease of $0.3 million or 6.2% from the year ended December 31,2013. Salary and compensation expense increased $0.4 million in the year ended December 31, 2014 due to incentive compensation related to achievement ofcertain performance milestones. In addition, salary and compensation increased $0.5 million due to a restructuring of the executive team to bring on additionalindustry experience. In the year ended December 31, 2014, we also incurred an additional $0.1 million in marketing and professional consultants expenses relatedto the commercialization of our generic Tussionex. These increased costs were offset by a $1.0 million decrease in legal and professional services, due to thetermination and settlement of litigation related to the Paragraph IV certification of Adzenys XR-ODT in July 2014, and a $0.3 million decrease related to a marketresearch study for our product candidates conducted in the year ended December 31, 2013.Interest expense The following table summarizes interest expense for the years ended December 31, 2014 and 2013: The total interest expense was $3.0 million for the year ended December 31, 2014, an increase of $0.8 million or 39.7% from the year ended December 31,2013. This increase was primarily due to a $0.4 million increase due to amortization of costs and fees resulting from the repayment of $10.0 million of senior debtin March 2014, a $0.1 million increase driven by interest associated with an increase in debt principal, a $0.1 million increase related to the additional closing costand exit fee amortization resulting from the September 2014 debt modification and a $0.2 million increase related to incremental equipment note interestassociated with capital leases entered into during the years ended December 31, 2014 and 2013.84 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Sales and Marketing $212 $153 $59 38.6%General and Administrative 5,063 5,471 (408) (7.5)%Total Selling, General and Administrative Expenses $5,275 $5,624 $(349) (6.2)% Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Interest Expense $(2,954)$(2,115)$839 39.7%Table of ContentsOther income (expense), net The following table summarizes our other income (expense) for the years ended December 31, 2014 and 2013: Other income was $0.6 million for the year ended December 31, 2014, was essentially unchanged from the year ended December 31, 2013. Additionalamortization of the deferred gain recognized on the sales-leaseback arrangement, was offset by the remeasurement of the fair value of the possible earnout relatedto our purchase of the commercialization and profit rights to our generic Tussionex.Loss from discontinued operations In March 2013, we discontinued the contract manufacturing of nutraceuticals in order to concentrate on the manufacture of our proprietary extended-releasepharmaceutical products. In accordance with Topic ASC, 360-10, the results of operations for the contract manufacturing of nutraceuticals has been excluded fromcontinuing operations and reported as discontinued operations for the year ended December 31, 2013. The components of discontinued operations which relate tocontract manufacturing of nutraceuticals are as follows:LIQUIDITY AND CAPITAL RESOURCESSources of liquidity Since our reorganization in 2009 until our IPO, we have financed our operations primarily through private placements of common stock and redeemableconvertible preferred stock and bank and other lender financing. On July 28, 2015, we closed our IPO whereby we sold 5,520,000 shares of our common stock, ata public offering price of $15.00 per share, which includes 720,000 shares of our common stock resulting from the underwriters' exercise of their over-allotmentoption at the IPO price. We received aggregate net proceeds of $75.0 million from the offering, after deducting underwriting discounts and commissions of$5.8 million and offering expenses of approximately $2.0 million. As of December 31, 2015, we had $90.8 million in cash and cash equivalents. Between December 2014 and February 2015, we issued and sold 4,124,871shares of Series C redeemable convertible preferred stock, or Series C preferred stock, for net proceeds of $20.6 million, of which $7.5 million is reflected in theDecember 31, 2014 cash balance and $13.1 million was received after December 31, 2014. Between June 30 and July 27, 2015, we issued 1,000,000 shares of ourSeries C redeemable convertible preferred stock to several investors upon the exercise of Series C warrants held by those investors at an exercise price of $5.00per share, for an aggregate exercise price of $5.0 million. On March 13, 2015, we received an advance of $5.0 million under our senior debt facility as a result ofachievement of a certain regulatory milestone. In addition, on June 10, 2015, we drew down the final $5 million tranche under our senior debt facility prior tomeeting the milestones associated with that85 Year EndedDecember 31, Increase(Decrease) % Increase(Decrease) 2014 2013 (in thousands) Other Income, net $577 $603 $(26) (4.3)% 2013 (in thousands) Revenue $943 Direct costs 836 Impairment of intangible assets 544 Net loss from discontinued operations $(437)Table of Contentstranche. We had agreed to prepay the $5.0 million Tranche 4 principal balance together with all accrued and unpaid interest applicable to Tranche 4 on July 31,2015 if we had not met certain regulatory or financing milestones, or the Tranche 4 Milestones, on or before July 31, 2015. We did meet the Tranche 4 Milestonesstated in the LSA prior to July 31, 2015; therefore, we did not prepay the $5.0 million Tranche 4 principal balance on July 31, 2015. We believe that the$75.0 million net proceeds from our recently completed IPO and our existing cash and cash equivalents will be sufficient to fund our operations for at least the next12 months. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity.Accordingly, our cash equivalents are invested primarily in money market funds which are currently providing only a minimal return.Cash flows The following table sets forth the primary sources and uses of cash for the periods indicated:Cash used in operating activities Net cash used in operating activities during these periods primarily reflected our net losses and changes in working capital, partially offset by non-cashcharges including depreciation expense, amortization of intangible assets net of amortized gain on sale of equipment, changes in fair value of warrant and earnoutliabilities and stock-based compensation expense. Net cash used in operating activities was $25.9 million and $17.4 million for the years ended December 31, 2015 and 2014, respectively. The $8.5 millionincrease in net cash used from operating activities was primarily due to the $9.9 million increase in our net losses, as discussed above, and a $1.3 million increasein the usage of cash from working capital changes, partially offset by a $2.7 million increase in noncash items. The increase in usage of cash from working capitalchanges resulted primarily from a $4.0 million increase in cash usage for accounts receivable associated with increased sales of our generic Tussionex and a$0.6 million increase in cash usage for other assets due to the timing of customer and vendor payments, partially offset by a net $2.2 million increase in accountspayable and accrued expenses due to the timing of vendor invoicing and payments and a $1.1 million decrease in cash used for inventories due to the initialinventory buildup in 2014 after the Tussionex ANDA acquisition. The decrease in noncash items was principally due to the changes in the fair value of the warrantand earnout liabilities in 2015, an increase in share-based compensation expense and an increase in the amortization of costs to acquire all of the rights tocommercialize and derive future profits from Tussionex ANDA in August 2014.86 Year EndedDecember 31, Year EndedDecember 31, Increase(Decrease) Increase(Decrease) 2015 2014 2014 2013 (in thousands) Net Cash (used in) provided by: Net Cash (used in) operating activities $(25,867)$(17,390)$(8,478)$(17,390)$(14,955)$(2,435)Net Cash (used in) provided by investingactivities 1,977 (2,125)$4,102 (2,125) (9,517)$7,392 Net Cash provided by financing activities 101,310 20,911 $80,400 20,911 13,133 $7,778 Net increase (decrease) in cash and cashequivalents $77,420 $1,396 $76,024 $1,396 $(11,339)$12,735 Table of Contents Net cash used in operating activities was $17.4 million and $15.0 million for the years ended December 31, 2014 and 2013, respectively. The $2.4 millionincrease in net cash used from operating activities was primarily due to the $1.8 million increase in our net losses, as discussed above, a $0.3 million decrease innoncash items principally due to the write off of assets related to our discontinued operations in 2013 and a $0.3 million increase in the usage of cash fromworking capital changes.Cash used in investing activities Net cash used in investing activities is generally due to investments of cash in excess of our operating needs as well as purchase of equipment to support ourresearch and development and manufacturing activities. Net cash provided by investing activities was $2.0 million for the year ended December 31, 2015 as compared to net cash used in investing activities of$2.1 million for the year ended December 31, 2014, which resulted from the net sale of $3.0 million and $4.5 million, respectively, of short term investments,offset by a $0.7 million increase in 2015 capital expenditures, primarily in association with the expansion of our controlled substances vault and a $6.3 millioncash outflow in 2014 for the acquisition all of the rights to commercialize and derive future profits from Tussionex ANDA in August 2014. Net cash used in investing activities was $2.1 million and $9.5 million for the years ended December 31, 2014 and 2013, respectively. During the year endedDecember 31, 2014, we used $6.3 million in cash to acquire commercialization and profit rights to our generic Tussionex.Cash provided by financing activities Net cash provided by financing activities of $101.3 million in the year ended December 31, 2015 primarily resulted from net cash proceeds of $77.0 millionfrom our IPO reduced by $2.0 million of cash public offering costs; $13.0 million, net of issuance costs, received from the sale of 2,624,936 shares of our Series Cpreferred stock and the issuance of Series C warrants for 1,197,218 shares of Series C preferred stock; proceeds of $10.0 million from additional drawdowns underour notes to our senior lender; $5.0 million from the exercise of 1,000,000 of Series C warrants and $0.1 million from the exercise of stock options, partially offsetby $1.6 million of principal payments under the sales leasebacks and $0.2 million of payments made to purchase treasury stock. Net cash provided by financing activities of $20.9 million in the year ended December 31, 2014 was related to proceeds of $17.4 million, net of issuance costs,received from the sale of 3,486,521 shares of our Series C preferred stock; proceeds of $15.0 million from the issuance of notes to our new lender, partially offsetby full repayment of the $10.0 million in principal under the previous term loan and $0.6 million of deferred financing costs; and $0.8 million from the saleleaseback of equipment, partially offset by principal payments under the sales leasebacks. Net cash provided by financing activities of $13.1 million in the year ended December 31, 2013 was primarily related to proceeds of $8.5 million, net ofissuance costs, from the sale and full funding of 1,739,448 shares of our Series C preferred stock and $5.5 million from the sale leaseback of equipment.Credit facilities In March 2014, we entered into a loan and security agreement, or LSA, with Hercules Technology Growth Capital, Inc. which was subsequently amended inAugust 2014, September 2014, December 2014 and June 2015. As amended, the LSA provides a total commitment of $25.0 million, available in four draws.Borrowings under the LSA are collateralized by substantially all of our assets, except our intellectual property and assets under capital lease. The first draw of$10.0 million, or Tranche 1, was87Table of Contentsissued during March 2014 and was used in its entirety to repay outstanding principal under a previous credit facility. The second draw of $5.0 million, orTranche 2, was issued in September 2014. The third draw, or Tranche 3, in the amount of $5.0 million was issued in March 2015. In June 2015, we furtheramended the LSA and the fourth draw of $5.0 million, or Tranche 4, was issued prior to achieving the Tranche 4 milestones, which we committed to repay if wedid not meet the Tranche 4 milestones by July 31, 2015. We met the Tranche 4 Milestones stated in the LSA prior to July 31, 2015; therefore we did not prepay the$5.0 million Tranche 4 principal balance on July 31, 2015. Each draw is to be repaid in monthly installments, comprised of interest-only monthly payments until May 2016 as we fulfilled the conditions set forth in theLSA, as amended, at which time installments of interest and principal calculated over a thirty-month amortization period commence. A balloon payment of theentire principal balance outstanding on October 1, 2017 and all accrued but unpaid interest thereunder is due and payable on October 1, 2017. The interest rate is9% per annum for Tranche 1 and Tranche 4 and 10.5% per annum for Tranche 2 and Tranche 3. An end of term charge of $1.1 million is payable at the earliest tooccur of (1) October 1, 2017, (2) the date we prepay our outstanding Secured Obligations, as defined therein, or (3) the date the Secured Obligations become dueand payable. The LSA, as amended, also contains certain financial and nonfinancial covenants, including limitations on our ability to transfer assets, engage in a change ofcontrol, merge or acquire with or into another entity, incur additional indebtedness, repurchase or redeem stock or other equity interest other than pursuant toemployee stock repurchase plans or other similar agreements, make investments and engage in transactions with affiliates. Upon an event of default, the lendermay declare the unpaid principal amount of all outstanding loans and interest accrued under the loan and security agreement to be immediately due and payable,and exercise its security interests and other rights. As of December 31, 2015, we were in compliance with the covenants under our LSA, as amended. In December 2011, we issued to Essex Capital Corporation, or Essex, a subordinated note, or Note, in the aggregate principal amount of $5.8 million. Interestaccrues and adds to the principal balance until such time as we achieve positive EBITDA for three consecutive months. In June 2012, we amended and restated theNote, resulting in an extension of the maturity date from June 2014 to March 2017 and the conversion of $1.0 million of outstanding principal amount into 200,000shares of our Series B redeemable convertible preferred stock. The conversion was executed in December 2012 and the Note was amended to reflect the newaggregate principal amount of $5.3 million. In December 2013, the Note was amended and restated to reflect the addition of accrued interest due at maturity with anew aggregate principal amount of $5.9 million. In July 2014, the interest rate on the Note was reduced to 6% for the period from July 2014 through June 2015pursuant to an amendment to the Note entered into as consideration for the $128,000 payment which we made to Essex as part of the Settlement and Release ofClaims Agreement with Essex and a third party. This agreement resolved certain issues and disputes whereby Essex paid $256,000 to the third party, we paidEssex $128,000 and Essex agreed to reduce the interest rate on the Note from 10% to 6% for the July 2014 through June 2015. The third party released both Essexand us from any and all claims. As of December 31, 2015, the aggregate principal amount of the Note was $5.9 million and $1,059,000 in interest had beenaccrued through December 31, 2015. During the years ended December 31, 2014 and 2013, we entered into five 42-month agreements with Essex for the sale-leaseback of existing and newlyacquired assets with a total capitalized cost of $795,000 and $5.5 million, respectively, and a bargain purchase option at the end of the respective lease, all of whichare classified as capital leases. The approximate imputed interest rate on these leases is 14.5%. See "Contractual commitments and obligations" below for futurepayments under these leases.88Table of ContentsCapital resources and funding requirements We may continue to seek private or public equity and debt financing to meet our capital requirements. There can be no assurance that such funds will beavailable on terms favorable to us, if at all, or that we will be able to successfully commercialize Adzenys XR-ODT or our product candidates. In addition, we maynot be profitable even if we succeed in commercializing Adzenys XR-ODT or any of our product candidates. We expect to continue to incur operating losses in thefuture over the next several years as we seek regulatory approval for our product candidates and build commercial infrastructure to support sales and marketing ofAdzenys XR-ODT or our product candidates. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operatingrequirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, resulting in the use of our availablecapital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of ourproduct candidates, we are unable to estimate the amount of increased capital required to become profitable. Our future funding requirements will depend on manyfactors, including:•the costs and timing involved in obtaining regulatory approvals for our product candidates; •the timing and number of product candidates for which we obtain regulatory approval; •the costs of developing our anticipated sales, marketing and distribution capabilities; •the market acceptance of our products and product candidates, if approved, and related success in commercializing and generating sales from ourproducts and product candidates, if approved by the regulatory authorities; •the costs of our manufacturing capabilities to support our commercialization activities, including any costs associated with adding new capabilities; •the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities; •the number and characteristics of new product candidates that we pursue; and •our ability to hire qualified employees at salary levels consistent with our estimates to support our growth and development, including additionalgeneral and administrative personnel as a result of becoming a public company, and sales and marketing personnel as we evolve into a commercialorganization. We may not generate a sufficient amount of product revenues from sales of Adzenys XR-ODT to finance our cash requirements. Until we obtain regulatoryapproval to market our product candidates, if ever, we cannot generate revenues from sales of those products. Even if we are able to sell our products, includingAdzenys XR-ODT, we may not generate a sufficient amount of product revenues to finance our cash requirements. Accordingly, we may need to obtain additionalfinancing in the future which may include public or private debt and equity financings and/or entrance into product and technology collaboration agreements orlicenses and asset sales. There can be no assurance that additional capital will be available when needed on acceptable terms, or at all. The issuance of equitysecurities may result in dilution to stockholders. If we raise additional funds through the issuance of debt securities, these securities may have rights, preferencesand privileges senior to those of our common stock and the terms of the debt securities could impose significant restrictions on our operations. If we raiseadditional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grantlicenses on terms that are not favorable to us. If adequate funds are not available, we may have to scale back our commercial operations or limit our research anddevelopment activities, which would have a material adverse impact on our business prospects and results of operations.89Table of ContentsCRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimatesand judgments that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financialstatements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base ourestimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates andassumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actualresults may differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 3 to the notes to our audited financial statements included elsewhere in thisAnnual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidatedfinancial statements.Revenue recognition Revenue is generated from product sales, recorded on a net sales basis in consideration of product returns, Medicaid rebates, wholesaler chargebacks, andhistorically, manufacturing, profit sharing and development revenue from a development and manufacturing agreement, each of which is described in more detailbelow. Product revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or serviceshave been rendered; price to the buyer is fixed and determinable; and collectability is reasonably assured. Revenue from sales transactions where the buyer has theright to return the product is recognized at the time of sale only if the price to the buyer is substantially fixed or determinable at the date of sale, the buyer has paidfor the product, or the buyer is obligated to pay for the product and the obligation is not contingent on resale of the product, the buyer's obligation to pay would notbe changed in the event of theft or physical destruction or damage of the product, the buyer acquiring the product for resale has economic substance apart from thatprovided by us, we do not have significant obligations for future performance to directly bring about resale of the product by the buyer and the amount of futurereturns can be reasonably estimated. We sell our generic Tussionex to a limited number of pharmaceutical wholesalers. Pharmaceutical wholesalers buy drug products directly frommanufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are assumed by the wholesaler. Thesewholesalers then resell the product to retail customers such as food, drug and mass merchandisers. We expect that manufacturing, profit sharing and development revenue will end as we have terminated our development and manufacturing agreement. As aresult of our acquisition of the rights to commercialize and derive future profits from the Tussionex ANDA, we will utilize our manufacturing capability to deriverevenue directly from sales made by us, rather than through our former commercial partner.Net product sales Net product sales for our generic Tussionex represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments includewholesaler fees and estimated allowances for product returns, government rebates, chargebacks and prompt-payment discounts to be incurred on the selling priceof the respective product sales. Wholesaler distribution fees are incurred on the management of these products by wholesalers and are recorded within net productsales based on90Table of Contentsdefinitive contractual agreements. We estimate gross to net sales adjustments for allowances for product returns, government rebates and chargebacks based uponanalysis of third-party information, including information obtained from our third party logistics provider, or 3PL, with respect to its inventory levels and sell-through to the wholesalers' customers, data available from third parties regarding prescriptions written for our products, as well as actual experience as reported byour customers and former commercialization partners. For sales of our new product candidates where no history of product returns will exist at the time of sale tofacilitate the estimation of product returns, we anticipate that we will initially recognize sales based on product sell-through to end customers using data availablefrom third parties; therefore, some revenue may be deferred until sufficient product return history is generated. Due to estimates and assumptions inherent indetermining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from theestimates, at which time reserves would be adjusted accordingly. Allowances and accruals are recorded in the same period that the related revenue is recognized. The following table presents our gross to net sales deductions for our generic Tussionex product since we acquired the rights to the Tussionex ANDA onAugust 28, 2014 and began to derive revenue directly from sales made by us: Total items deducted from gross product sales were $6,812 and $563, or 64.2% and 54.1% as a percentage of gross product sales, for the years endedDecember 31, 2015 and 2014, respectively.Product returns Our wholesalers' contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, productreturned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expiredproduct allows the wholesaler to return such product starting 6 months prior to expiry date to 12 months post expiry date. Product returns of our generic Tussionexare estimated based upon data available from sales of our product by our previous commercialization partner and from actual experience as reported by retailers.Historical trend of returns will be continually monitored and may result in future adjustments to such estimates. On August 26, 2014, the DEA reclassifiedTussionex from a Schedule III controlled substance to a Schedule II controlled substance, which had the effect of requiring unsold product at the wholesalers andour 3PL to either be relabeled or returned. This new ruling was effective October 6, 2014. As such, we established reserves for the estimated returns of suchproduct outstanding at our wholesalers as of October 6, 2014. We had no inventory labeled as Schedule III at our 3PL as of the effective date.91 Chargebacks CashDiscounts WholesalerFees Returns GovernmentRebates Total Grossto Net SalesDeductions (in thousands) Balance at December 31, 2013 $— $— $— $— $— $— Provision, net 202 18 122 212 9 563 Payments / credits (12) (4) (5) — — (21)Balance at December 31, 2014 190 14 117 212 9 542 Provision, net 5,359 194 914 242 103 6,812 Payments / credits (4,609) (109) (670) (25) (2) (5,415)Balance at December 31, 2015 $940 $99 $361 $429 $110 $1,939 Table of ContentsMedicaid rebates Our generic Tussionex is, and we anticipate Adzenys XR-ODT will be, subject to state government-managed Medicaid programs whereby discounts andrebates are provided to participating state governments. Estimated rebates payable under governmental programs, including Medicaid, are recorded as a reductionof revenue at the time revenues are recorded. For generic Tussionex sales, calculations related to these rebate accruals are estimated based on sales of our productby our previous commercialization partner. Historical trend of Medicaid rebates will be continually monitored and may result in future adjustments to suchestimates.Wholesaler chargebacks Our products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities.These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and thediscounted price back to us. Chargebacks are accounted for by establishing an accrual in an amount equal to our estimate of chargeback claims at the time ofproduct sale based on information provided by our distributor. Due to estimates and assumptions inherent in determining the amount of chargebacks, the actualamount of claims for chargebacks may be different from our estimates, which may result in adjustments to such reserves.Manufacturing Manufacturing revenue is derived from product manufactured by us and sold by our former commercial partner under a development and manufacturingagreement. Manufacturing revenue is derived from a contractual supply price paid to us by our former commercial partner.Profit sharing Profit sharing revenue is recorded as the product is sold by our former commercial partner. The profit share is our share of the net profits after taking intoaccount net revenue, which is gross product sales by our former commercial partner, net of discounts, returns and allowances incurred by our former commercialpartner, less collaboration expenses.Development revenue Development revenue from the development and manufacturing agreement has been recognized as the related services are completed. Development revenuein the form of milestone payments is recognized upon achievement of the related milestones and provided that collectability is reasonably assured and otherrevenue recognition criteria are met. Amounts received under cost reimbursement arrangements for production and research and development are recorded asoffsets to the costs incurred and not recognized as revenue.Research and development expenses Research and development expenses include costs incurred in performing research and development activities, personnel related expenses, laboratory andclinical supplies, facilities expenses, overhead expenses, fees for contractual services, including preclinical studies, clinical trials and raw materials. We estimateclinical trial expenses based on the services received pursuant to contracts with research institutions and CROs which conduct and manage clinical trials on ourbehalf. We accrue service fees based on work performed, which relies on estimates of total costs incurred based on milestones achieved, patient enrollment andother events. The majority of our service providers invoice us in arrears, and to the extent that amounts invoiced differ from our estimates of expenses incurred, weaccrue for additional costs. The financial terms of these agreements vary from contract to contract92Table of Contentsand may result in uneven expenses and cash flows. To date, we have not experienced any events requiring us to make material adjustments to our accruals forservice fees. If we do not identify costs that we incurred or if we underestimate or overestimate the level of services performed, our actual expenses could differfrom our estimates which could materially affect our results of operations. Adjustments to our accruals are recorded as changes in estimates become evident. Inaddition to accruing for expenses incurred, we may also record payments made to service providers as prepaid expenses that we will recognize as expense in futureperiods as services are rendered.Share-based compensation expense Share-based compensation awards, including grants of stock options to our employees and directors and restricted stock and modifications to existing stockoptions, are recognized in the statement of operations based on their fair values. Compensation expense related to awards to employees is recognized on a straight-line basis, based on the grant date fair value, over the requisite service period of the award, which is generally the vesting term. The fair value of our share-basedawards to employees and directors is estimated using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (1) theexpected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and (4) expected dividends. Due to the previous lack of a publicmarket for the trading of its common stock and a lack of company-specific historical and implied volatility data, prior to the IPO, we have historically utilized thirdparty valuation analyses to determine the fair value. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest. We reported share-based compensation expense for stock options granted to employees in our consolidated statements of operations as follows: We calculated the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing modelrequires the input of subjective assumptions, including stock price volatility and the expected life of stock options. The application of this valuation model involvesassumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. As a recently private company, we do not havesufficient history to estimate the volatility of our common stock price or the expected life of our options. We have not paid and do not anticipate paying cashdividends. Therefore, the expected dividend rate is assumed to be 0%. The expected stock price volatility for stock option awards was based on the historicalvolatility of a representative peer group of comparable companies' selected using publicly available industry and market capitalization data. The risk-free rate wasbased on the U.S. Treasury yield curve in effect commensurate with the expected life assumption. The average expected life of stock options was determinedaccording to the "simplified method" as described in Staff Accounting Bulletin 110, which is the midpoint between the vesting date and the end of the contractualterm. The risk-free interest rate was determined by reference to implied yields available from five-year U.S. Treasury securities with a remaining term equal to theexpected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. We estimate the fair value ofall stock option awards on the grant date by applying the Black-Scholes option pricing valuation model. The93 Year Ended December 31, 2015 2014 2013 (in thousands) General and Administrative Options $1,087 $120 $54 Restricted Stock 94 90 47 $1,181 $210 $101 Table of Contentsapplication of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. Given theabsence of an active market for our common stock prior to our IPO, our board of directors was required to estimate the fair value of our common stock at the timeof each option grant primarily based upon valuations performed by a third party valuation firm. The weighted-average key assumptions used in determining the fairvalue of options granted during the periods indicated are as follows: For additional information regarding the assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2015, 2014 and 2013,please see Note 14 to the notes to our financial statements included elsewhere in this Annual Report on Form 10-K. There is a high degree of subjectivity involved when using option-pricing models to estimate share-based compensation. There is currently no market-basedmechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means tocompare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, such amodel value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change andwe employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we havehistorically reported. Given the absence of an active market for our common stock prior to our IPO, our board of directors was required to estimate the fair value of our commonstock at the time of each option grant primarily based upon valuations performed by a third party valuation firm. In determining fair value for our common stock,the third party valuation firm determined the fair value of our common stock on the date of grant based on several factors, including:•our stage of development and business strategy; •the price per share at which our redeemable convertible preferred stock was issued to investors and the rights, preferences and privileges of theredeemable convertible preferred stock relative to the common stock; •our financial condition and book value; •economic and competitive elements affecting us, our industry and our target markets; •our projected operating results; •a comparative analysis of our financial condition and operating results with those of publicly-owned companies engaged in similar lines ofbusiness; •the current and historical relationship between the reported stock prices and revenue and earnings levels of selected publicly traded companiesengaged in similar lines of business; •important developments relating to the results of our one product and two product candidates; and •the likelihood of achieving a liquidity event for our outstanding shares of stock.94 Year Ended December 31, 2015 2014 2013 Estimated dividend yield 0% 0% 0%Expected stock price volatility 60% 60% 60%Weighted-average risk-free interest rate 1.60% 1.77% 1.23%Expected life of option in years 5 5 5 Weighted-average option fair value at grant $9.723 $2.884 $1.305 Table of Contents The valuations we obtained were prepared in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid,Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid, which prescribes several valuation approaches for setting thevalue of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. Inaccordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determinethe fair value of our common stock at each valuation date. Prior to August 2014, we generally used the income approach, utilizing the discounted cash flowmethod to determine our value and allocating to classes of equity using an option pricing model. Since August 2014, we utilized the Probability-WeightedExpected Return Method, or PWERM, to determine the value attributable to common stock based on a private company scenario and an initial public offeringscenario. The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected futureinvestment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. For each scenario, weutilized the discounted cash flow method to determine our value, allocated to classes of equity using an option pricing model and applied the PWERM approach,weighted based on management's expectations, yielding an estimated marketable, minority fair value of our common stock. A discount for lack of marketability, orDLOM, based on an option based approach (put option) was then applied, yielding a fair value of our common stock on a non-marketable basis. The materialassumptions involved to estimate the fair value of our common stock are the estimated timing of commercial launch dates for our product candidates, theprobability weighting of the private company scenario and the initial public offering scenario, the timeline to liquidity under each scenario and the DLOM undereach scenario. For options granted since the IPO, our board of directors determined the fair market value of each share of underlying common stock based on the closingprice of our common stock as reported by the NASDAQ Global Market on the date of grant.Intangible assets Intangible assets subject to amortization, which principally include our proprietary modified-release drug delivery technology and the costs to acquire therights to Tussionex ANDA, are recorded at cost and are amortized over the estimated lives of the assets ranging from 10 to 20 years.Warrant liability We account for our warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of eachinstrument. Warrants classified as derivative liabilities are recorded on our balance sheet at their fair value on the date of issuance and, prior to completion of ourIPO, were revalued at each subsequent balance sheet date, with fair value changes recognized as increases or reductions to other income (expense), net, in thestatements of operations (see Note 12 and Note 13 to the notes to our financial statements included elsewhere in this Annual Report on Form 10-K). Our Series Cwarrants and Hercules Warrants were classified as liabilities, and we estimated the fair value of these liabilities using option pricing models and assumptions thatwere based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, contractual term,dividend yield, and risk-free interest rate (see Notes 5, 12 and 13 in the notes to our financial statements above). In connection with the completion of our IPO, allthe outstanding Series C warrants and Hercules Warrants automatically converted into warrants to purchase shares of common stock. Upon closing the IPO, theSeries C warrants were exchanged in a cashless exercise for 947,185 shares of Series C preferred stock which converted into 78,926 shares of our common stock.The Hercules Warrants to purchase 170,000 pre-split shares of Series C preferred stock were converted into warrants to purchase95Table of Contents70,833 shares of our common stock and the warrant liability was reclassified to Additional Paid in Capital within Stockholders' Equity (Deficit) because theconverted warrants met the definition of an equity instrument under derivative accounting guidance.CONTRACTUAL COMMITMENTS AND OBLIGATIONS The following tables reflect summaries of our estimates of future material contractual obligations as of December 31, 2015. Future events could cause actualpayments to differ from these estimates. We have drawn down $25.0 million of the LSA, as amended, as of December 31, 2015. The payments above are inclusive of related interest amounts as ofDecember 31, 2015. In addition to the commitments shown above, in response to a lawsuit brought against us by Shire LLC, or Shire, for infringement of certain of Shire's patents,we entered into a settlement agreement and an associated license agreement with Shire for a non-exclusive license to certain patents for certain activities withrespect to our NDA No. 204326 for an extended-release orally disintegrating amphetamine Polistrex tablet related to Adzenys XR-ODT in July 2014. Under theterms of the license agreement, we are required to pay a lump sum, non-refundable license fee of an amount less than $1.0 million due no later than thirty daysafter we received regulatory approval by the FDA of our NDA. On January 27, 2016, we received approval from the FDA for Adzenys XR-ODT product and paidthe lump sum, non-refundable license fee on February 26, 2016. We will also pay a single digit royalty on net sales of the subject product during the life of thepatents. Due to the uncertainty of the amount of these royalties and when such payments will be made, they are not presented in the table above. The license feewill be capitalized and amortized over the life of the patents. The royalties will be recorded as cost of goods sold in the same period as the net sales upon whichthey are calculated.OFF-BALANCE SHEET ARRANGEMENTS We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC, including any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities,which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.RECENT ACCOUNTING PRONOUNCEMENTS In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of FinancialStatements (Topic 205) and Property, Plant and Equipment (topic 360); Reporting Discontinued Operations and Disclosures of Disposals of Components of anEntity. ASU 2014-08 provides additional requirements to classify a disposal of a component of an entity or a group of components of an entity in discontinuedoperations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The guidance iseffective for fiscal years, and interim periods within those years, beginning after96 Total < 1 Yr 1 - 3 Yrs. 3 - 5 Yrs Thereafter (In thousands) Loan and Security Agreement $29,574 $8,333 $21,241 $— $— Related Party Note Payable 8,134 — 8,134 — — Capital Leases for Equipment 2,597 2,124 473 — — Earnout Liability 214 — — — 214 Operating Lease for Facility 9,000 907 1,911 1,960 4,222 Pennsylvania Office Space Lease 752 96 296 308 52 $50,271 $11,460 $32,055 $2,268 $4,488 Table of ContentsDecember 15, 2014, with an option for early adoption. We adopted this guidance in the first quarter of 2015, and the adoption of this standard did not have amaterial impact on our financial statements. In May 2014, the FASB issued ASU, No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount ofrevenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognitionguidance in U.S. GAAP when it becomes effective. The new standard will become effective for us on January 1, 2018. Early application is not permitted. Thestandard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on itsconsolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on itsongoing financial reporting. In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Termsof an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affectsvesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annualperiods and interim periods within those annual periods beginning after December 15, 2015. We do not expect the adoption of this standard will have a materialimpact on our financial statements. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertaintiesabout an Entity's Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantialdoubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This ASU is for annual periods ending afterDecember 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reportingperiods for which the financial statements have not previously been issued. We have performed the review required by this ASU and believe we presently havesufficient liquidity to continue to operate for the next 12 months. On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest—Simplifying the Presentation of Debt Issuance Costs, which requires thatdebt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. This ASU is effective for financialstatements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. We elected toearly adopt this standard which did not have a material impact on our financial position or results of operations. In July 2015, FASB issued ASU No. 2015-11, Inventory—Simplifying the Measurement of Inventory (Topic 330). The amendments in this ASU require anentity to measure inventory that is not measured using the last-in, first-out (LIFO) or retail inventory methods at the lower of cost and net realizable value. Netrealizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Theamendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those years. We are evaluating thisASU and have not determined the effect of this standard on our ongoing financial reporting. In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842).Under the new guidance, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) Alease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is anasset that97Table of Contentsrepresents the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale andleaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balancesheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. TheCompany is evaluating this ASU and has not determined the effect of this standard on its ongoing financial reporting. From time to time, additional new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by us as of the specifiedeffective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on itsfinancial position or results of operations upon adoption. ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk Market risk We are exposed to market risk related to changes in interest rates as it impacts our interest income. As of December 31, 2015, we had cash and cashequivalents of $90.8 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interestrates as our cash equivalents are invested in interest-bearing money market funds. The goals of our investment policy are liquidity and capital preservation to fundour operations. Due to the short-term duration and low risk profile of our cash equivalents portfolio, a 10% change in interest rates would not have a material effecton interest income we recognize or the fair market value of our investments. Accordingly, we would not expect our operating results or cash flows to be affected toany significant degree by the effect of a sudden change in market interest rates.Interest risk The interest rates on our notes payable are fixed. Therefore, we are not exposed to market risk from changes in interest rates as it relates to these interest-bearing obligations.JOBS ACT In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107 of the JOBS Act provides that an"emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, forcomplying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until thosestandards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we willadopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.98Table of Contents ITEM 8. Financial Statements and Supplementary Data The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the endof the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer haveconcluded that as of such date, our disclosure controls and procedures were effective.Management's Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting Firm This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestationreport of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.Inherent Limitations of Internal Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or ourinternal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with thepolicies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur andnot be detected.Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. Other Information None.99Table of Contents PART III ITEM 10. Directors, Executive Officers and Corporate Governance Except as set forth below, information required by this item will be included under the captions Elections of Directors, Information Regarding the Board ofDirectors and Corporate Governance, Executive Compensation and Other Information, and Section 16(a) Beneficial Ownership Reporting Compliance containedin our definitive Proxy Statement to be filed with the Commission within 120 days after the conclusion of our year ended December 31, 2015 (the "ProxyStatement") pursuant to General Instructions G(3) of Form 10-K and is incorporated herein by reference. We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible forfinancial reporting. Our code of business conduct and ethics is available on our website, which is located at www.neostx.com. We intend to disclose anyamendments to the code, or any waivers of its requirements, on our website, or in a current report on Form 8-K as may be required by law or applicable NASDAQrules. ITEM 11. Executive Compensation We maintain an employee compensation program and benefit plans in which our executive officers are participants. Copies of these plans and programs areset forth or incorporated by reference as Exhibits to this report. The information required by this item will be included in our Proxy Statement under the captionExecutive Compensation and Other and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item will be included under the captions Security Ownership of Certain Beneficial Owners and Management and ExecutiveCompensation contained in our Proxy Statement and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence Information required by this item will be included under the captions Certain Relationships and Related Transactions and Information Regarding the Boardof Directors contained in our Proxy Statement and is incorporated herein by reference. ITEM 14. Principal Accounting Fees and Services Information required by this item will be included under the captions Selection of Independent Registered Public Accounting Firm contained in our ProxyStatement and is incorporated herein by reference.100Table of Contents PART IV ITEM 15. Exhibits and Financial Statement Schedules(a)Documents filed as part of this report: (1)Financial Statements. The following financial statements of Neos Therapeutics, Inc., together with the report thereon of RSM US LLP, requiredto be filed pursuant to Part II, Item 8 of this Annual Report on Form 10-K, are included on pages F-2 through F-41, as follows:(2)Financial Statement Schedules.Schedule II—Valuation and Qualifying Accounts (3)The exhibits required by Items 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits and are incorporatedherein.101 Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at December 31, 2015 and 2014 F-3 Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2015, 2014 and 2013 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 F-6 Notes to Consolidated Financial Statements F-7 Table of Contents Neos Therapeutics, Inc.Index to Consolidated Financial Statements F-1 Page Report of Independent Registered Public Accounting Firm F-2 Financial Statements: Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and StockholdersNeos Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Neos Therapeutics, Inc. and Subsidiaries (the "Company") as of December 31, 2015 and2014, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period endedDecember 31, 2015. Our audits also included the financial statement schedule of Neos Therapeutics, Inc. and Subsidiaries listed in Item 15(a). These financialstatements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeosTherapeutics, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in theperiod ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein./s/ RSM US LLPNew York, New YorkMarch 17, 2016F-2Table of Contents Neos Therapeutics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS See notes to consolidated financial statements.F-3 December 31, (In thousands, except share and per share data) 2015 2014 ASSETS Current Assets: Cash and cash equivalents $90,763 $13,343 Short term investments — 3,000 Accounts receivable, net of allowances of $1,039 and $204, respectively 3,903 367 Inventories 2,520 2,031 Other current assets 1,058 264 Total current assets 98,244 19,005 Property and Equipment, net 5,124 5,831 Intangible Assets, net 16,672 18,167 Other Assets 2,470 2,227 Total assets $122,510 $45,230 LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY(DEFICIT) Current Liabilities: Accounts payable $4,824 $1,257 Accrued expenses 3,141 2,715 Current portion of long-term debt 7,973 1,653 Total current liabilities 15,938 5,625 Long-Term Liabilities: Long-term debt, net of current portion 26,271 23,121 Earnout liability 214 756 Deferred gain on leaseback 547 1,383 Deferred rent 1,166 1,189 Warrant liabilities — 1,789 Total long-term liabilities 28,198 28,238 Redeemable Preferred Stock, $0.001 par value Series A—no shares authorized, issued or outstanding at December 31, 2015; 1,170,000 authorized,issued and outstanding; liquidation preference of $5,850 at December 31, 2014 — 1,068 Series B—no shares authorized, issued or outstanding at December 31, 2015; 4,000,000 authorized;3,113,099 issued and outstanding; liquidation preference of $15,565 at December 31, 2014 — 14,559 Series B-1—no shares authorized, issued or outstanding at December 31, 2015; 8,830,000authorized; 5,461,802 issued and outstanding; liquidiation preference of $61,647 at December 31,2014 — 32,391 Series C—no shares authorized, issued or outstanding at December 31, 2015; 13,500,000 authorized;8,753,547 issued and outstanding; and liquidation preference of $43,768 at December 31, 2014 — 42,131 — 90,149 Stockholders' Equity (Deficit): Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding atDecember 31, 2015, no shares authorized, issued or outstanding at December 31, 2014 — — Common stock, $0.001 par value, 100,000,000 and 35,000,000, authorized at December 31, 2015and December 31, 2014, respectively; 16,025,155 and 16,015,958 issued and outstanding,respectively, at December 31, 2015; 938,859 and 882,954 issued and outstanding at December 31,2014, respectively 16 1 Treasury stock, at cost, 9,197 and 55,905 shares at December 31, 2015 and 2014, respectively (171) — Additional paid-in capital 195,314 4,831 Accumulated deficit (116,785) (83,614)Total stockholders' equity (deficit) 78,374 (78,782)Total liabilities, redeemable preferred stock and stockholders' equity (deficit) $122,510 $45,230 Table of Contents Neos Therapeutics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS See notes to consolidated financial statements.F-4 Year Ended December 31, (In thousands, except share and per share data) 2015 2014 2013 Revenues: Product $3,792 $316 $— Manufacturing — 113 137 Profit Sharing — 169 226 Development — 160 681 3,792 758 1,044 Cost of Goods Sold 5,547 3,354 2,534 Gross loss (1,755) (2,596) (1,490)Research and Development 11,887 10,601 9,974 Selling and marketing expenses 5,462 212 153 General and administrative expenses 7,474 5,063 5,471 Loss from operations (26,578) (18,472) (17,088)Interest Expense (3,721) (2,954) (2,115)Other Income, net 831 826 603 Change in fair value of earnout and warrant liabilities (1,313) (249) — Net loss from continuing operations (30,781) (20,849) (18,600)Loss from discontinued operations, including $544 of impairment charges in 2013 — — (437)Net loss $(30,781)$(20,849)$(19,037)Net loss from continuing operations $(30,781)$(20,849)$(18,600)Preferred Stock Accretion to Redemption Value (1,169) (1,118) (1,227)Preferred Stock Dividends (1,221) (2,185) (2,185)Net loss from continuing operations attributable to common stock $(33,171)$(24,152)$(22,012)Loss from discontinued operations, including $544 of impairment charges in2013 — — (437)Net loss (30,781) (20,849) (19,037)Preferred Stock Accretion to Redemption Value (1,169) (1,118) (1,227)Preferred Stock Dividends (1,221) (2,185) (2,185)Net loss attributable to common stock $(33,171)$(24,152)$(22,449)Weighted average common shares outstanding used to compute net loss per share,basic and diluted 7,581,881 876,318 788,964 Net loss per share of common stock, basic and diluted: Net loss per share from continuing operations attributable to common stock $(4.38)$(27.56)$(27.90)Loss per share from discontinued operations $— $— $(0.55)Net loss per share attributable to common stock $(4.38)$(27.56)$(28.45)Table of Contents Neos Therapeutics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT See notes to consolidated financial statements.F-5 Preferred Stock Common Stock Treasury Stock TotalStockholders'Equity(Deficit) AdditionalPaid-inCapital AccumulatedDeficit (In thousands, except shares) Shares Amount Shares Amount Shares Amount Balance, December 31, 2012 — $— 770,412 $1 — $— $4,514 $(37,012)$(32,497)Restricted stock grants — — 149,244 — — — — — — Proceeds from exercise of options andwarrants — — 5,795 — — — 2 — 2 Share-based compensation expense — — — — — — 101 — 101 Series B Preferred Stock accretion toredemption value — — — — — — — (394) (394)Series B-1 Preferred Stock accretion toredemption value — — — — — — — (756) (756)Series B-1 accrued dividend — — — — — — — (2,185) (2,185)Series C Preferred Stock accretion toredemption value — — — — — — — (78) (78)Treasury shares purchased — — — — (55,905) — — — — Net loss — — — — — — — (19,037) (19,037)Balance, December 31, 2013 — $— 925,451 $1 (55,905)$— $4,617 $(59,462)$(54,844)Proceeds from exercise of options andwarrants — — 13,408 — — — 4 — 4 Share-based compensation expense — — — — — — 210 — 210 Series B Preferred Stock accretion toredemption value — — — — — — — (352) (352)Series B-1 Preferred Stock accretion toredemption value — — — — — — — (679) (679)Series B-1 accrued dividend — — — — — — — (2,185) (2,185)Series C Preferred Stock accretion toredemption value — — — — — — — (87) (87)Net loss — — — — — — — (20,849) (20,849)Balance, December 31, 2014 — $— 938,859 $1 (55,905)$— $4,831 $(83,614)$(78,782)Proceeds from exercise of options andwarrants — — 325,292 — — — 75 — 75 Share-based compensation expense — — — — — — 1,181 — 1,181 Cancellation of treasury stock — — (55,905) — 55,905 — — — — Purchase of treasury stock — — — — (9,197) (171) — — (171)Series B Preferred Stock accretion toredemption value — — — — — — — (192) (192)Series B-1 Preferred Stock accretion toredemption value — — — — — — — (370) (370)Series B-1 accrued dividend — — — — — — — (1,221) (1,221)Series C Preferred Stock accretion toredemption value — — — — — — — (607) (607)Conversion of Redeemable PreferredStock — — 9,217,983 9 — — 110,767 — 110,776 Cashless exercise of Series C warrantsissued with Series C financing — — 78,926 — — — 2,842 — 2,842 Reclassification of Series C warrantsissued with senior debt — — — — — — 611 — 611 Net proceeds from issuance of commonstock in IPO — — 5,520,000 6 — — 75,007 — 75,013 Net loss — — — — — — — (30,781) (30,781)Balance, December 31, 2015 — $— 16,025,155 $16 (9,197)$(171)$195,314 $(116,785)$78,374 Table of Contents Neos Therapeutics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS See notes to consolidated financial statements.F-6 Year Ended December 31, (In thousands) 2015 2014 2013 Cash Flows From Operating Activities: Net loss $(30,781)$(20,849)$(19,037)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 1,724 1,645 1,330 Amortization of intangible assets 1,495 1,037 842 Changes in fair value of warrant and earnout liabilities 1,313 249 — Amortization of patents 23 31 — Amortization and write-off of senior debt fees 576 627 141 Gain on sale of equipment (831) (824) (601)Provision for bad debts — (264) 227 Loss on impairment of intangible assets — — 544 Share-based compensation expense 1,181 210 101 Interest accrued on note payable 548 511 592 Change in deferred rent (23) 41 385 Changes in operating assets and liabilities: Accounts receivable (3,536) 417 971 Inventories (489) (1,612) 637 Other current assets (794) (167) (97)Other assets (266) (231) (343)Accounts payable 3,567 284 (349)Accrued expenses 426 1,505 (298)Net cash used in operating activities (25,867) (17,390) (14,955)Cash Flows From Investing Activities: Net proceeds from sale of short-term investments 3,000 4,497 (7,498)Capital expenditures (1,023) (339) (2,019)Intangible asset acquisition — (6,283) — Net cash provided by (used in) investing activities 1,977 (2,125) (9,517)Cash Flows From Financing Activities: Proceeds from senior debt note 10,000 15,000 — Proceeds from sale of equipment — 795 5,500 Net proceeds from issuance of stock 18,122 17,350 8,523 Net proceeds from initial public offering, net of underwriting discounts, commissions and offering costs 75,013 — — Payments made on borrowings (1,654) (11,671) (890)Payments made to purchase treasury stock (171) — — Deferred financing costs — (563) — Net cash provided by financing activities 101,310 20,911 13,133 Increase (decrease) in cash and cash equivalents 77,420 1,396 (11,339)Cash and Cash Equivalents: Beginning 13,343 11,947 23,286 Ending $90,763 $13,343 $11,947 Noncash Investing and Financing Activities: Earnout liability incurred in connection with intangible asset acquisition $— $589 $— Issuance of stock warrants $2,131 $1,707 $— Exercise of Series C warrants for Series C Preferred Stock $2,322 $— $— Cashless exercise of Series C warrants from Series C financing in IPO closing $2,842 $— $— Conversion of Redeemable Preferred Stocks into Common Stock $110,776 $— $— Reclassification of Series C warrants issued with senior debt upon IPO closing $611 $— $— Preferred Stock Accretion $1,169 $1,118 $1,227 Preferred Stock Dividend $1,221 $2,185 $2,185 Supplemental Cash Flow Information: Interest paid $2,524 $1,793 $1,324 Table of Contents Neos Therapeutics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of presentation The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP,and with the rules and regulations of the Securities and Exchange Commission, or SEC.Note 2. Organization and nature of operations Neos Therapeutics, Inc., a Delaware corporation, and its subsidiaries (the "Company") is a fully integrated pharmaceutical company. The Company hasdeveloped a broad, proprietary modified-release drug delivery technology that enables the manufacture of single and multiple ingredient extended-releasepharmaceuticals in patient- and caregiver-friendly orally disintegrating tablet and liquid suspension dosage forms. The Company has a pipeline of extended-releasepharmaceuticals including one approved product and two proprietary product candidates in late stage development for the treatment of attention deficithyperactivity disorder ("ADHD"). Adzenys XR-ODT was approved by the US Food and Drug Administration, or FDA, on January 27, 2016. In addition, theCompany manufactures and markets a generic Tussionex (hydrocodone and chlorpheniramine) ("generic Tussionex") extended-release liquid suspension for thetreatment of cough and upper respiratory symptoms of a cold. These products are developed and manufactured using the Company's proprietary and patentedmodified-release drug delivery technology. The Company's predecessor company was incorporated in Texas on November 30, 1994 as PharmaFab, Inc. andsubsequently changed its name to Neostx, Inc. On June 15, 2009, the Company completed a reorganization pursuant to which substantially all of the capital stockof Neostx, Inc. was acquired by a newly formed Delaware corporation, named Neos Therapeutics, Inc. The remaining capital stock of Neostx, Inc. was acquired bythe Company on June 29, 2015. Historically, the Company was primarily engaged in the development and contract manufacturing of unapproved or Drug EfficacyStudy Indication ("DESI"), pharmaceuticals and, to a lesser extent, nutraceuticals for third parties. The unapproved or DESI pharmaceuticals contract business wasdiscontinued in 2007 and the manufacturing of nutraceuticals for third parties was discontinued in March 2013. On August 28, 2014, the Company completed an acquisition of all of the rights to the Tussionex Abbreviated New Drug Application ("Tussionex ANDA"),which included the rights to produce, develop, market and sell, as well as all the profits from such selling activities, the Company's generic Tussionex, which theCompany previously owned the rights to manufacture, but which was marketed and sold by the generic drug division of Cornerstone Biopharma, Inc.("Cornerstone"). These rights were acquired from the collaboration of the Company, Cornerstone and Coating Place, Inc. ("CPI"), a supplier of the resins for theproduct (see Note 9). Prior to the acquisition, the Company, Cornerstone and CPI shared profits generated by the sale and manufacture of the product under adevelopment and manufacturing agreement with those companies. On July 28, 2015, the Company closed its initial public offering ("IPO") whereby the Company sold 5,520,000 shares of common stock, at a public offeringprice of $15.00 per share, which includes 720,000 shares of common stock resulting from the underwriters' exercise of their over-allotment option at the IPO priceon July 23, 2015. Proceeds from the Company's IPO, net of underwriting discounts and commissions and other offering costs, were $75.0 million. In connection with the IPO, the Company's Board of Directors approved a 1-for-2.4 reverse stock split of the Company's common stock which also resulted ina proportional adjustment to the conversion ratios of the preferred stock and the preferred stock warrants. All references to commonF-7Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 2. Organization and nature of operations (Continued)stock and per share amounts in these condensed financial statements and accompanying footnotes have been retroactively adjusted for all periods presented to giveeffect to this reverse stock split. Between June 30, 2015 and July 27, 2015, the Company issued a total of 1,000,000 shares of its Series C redeemable convertible preferred stock ("Series C")to several existing investors upon the exercise of warrants to purchase Series C preferred stock ("Series C warrants") held by those investors at an exercise price of$5.00 per share, for an aggregate exercise price of $5.0 million. On the IPO closing date, all outstanding shares of redeemable preferred stock converted into9,217,983 shares of common stock and all remaining outstanding Series C warrants issued in conjunction with purchases of Series C were net exercised at the IPOprice for 78,926 shares of common stock. Upon the closing of the Company's IPO, all of the shares of the Company's redeemable convertible preferred stock("Preferred Shares") were retired and cancelled and shall not be reissued as shares of such series, and all rights and preferences of those Preferred Shares werecancelled including the right to receive undeclared accumulated dividends. These transactions produced a significant increase in the number of shares outstandingwhich will impact the year-over-year comparability of the Company's loss per share calculations. Additionally, in connection with the closing of the IPO, theCompany amended and restated its certificate of incorporation to increase the number of authorized shares of common stock to 100,000,000 and to authorize5,000,000 shares of undesignated preferred stock.Note 3. Summary of significant accounting policies Principles of consolidation: At December 31, 2015, the consolidated financial statements include the accounts of the Company and its four wholly-ownedsubsidiaries. At December 31, 2014, Neos Therapeutics, Inc. owned, directly or indirectly, 100% of two of its subsidiaries and 99.9% of the third subsidiary,Neostx, Inc. ("NTX"). The remaining 0.1% ownership of NTX was held by a third party and all such remaining capital stock was acquired by the Company onJune 29, 2015, and NTX was merged with and into the Company. The amounts attributable to the noncontrolling interest were not material to the consolidatedfinancial statements. On September 16, 2015, the Company established two new wholly-owned subsidiaries, Neos Therapeutics Brands, LLC and NeosTherapeutics Commercial, LLC. All significant intercompany transactions have been eliminated. Cash equivalents: The Company invests its available cash balances in bank deposits and money market funds. The Company considers highly liquidinvestments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains deposits in federally insuredfinancial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financialposition of the depository institutions in which those deposits are held. The Company's primary objectives for investment of available cash are the preservation ofcapital and the maintenance of liquidity. Short-term investments: Short-term investments consist of U.S. Treasury Bills that have original maturities greater than three months but less than or equalto one year and are classified as available-for-sale securities. These investments are recorded at fair value. Realized gains and losses are reported in theconsolidated statements of operations. Unrealized gains and losses are immaterial. Allowance for doubtful accounts: The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can bereasonably anticipated. Management determines the adequacy of the allowance based on reviews of individual accounts, historical losses, existingF-8Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued)economic conditions and estimates based on management's judgments in specific matters. Accounts are written off as they are deemed uncollectible based onperiodic review of the accounts. There is no allowance for doubtful accounts at December 31, 2015 or December 31, 2014, as management believes that allreceivables are fully collectible. Fair value of financial instruments: The carrying value of the Company's financial instruments, including cash and cash equivalents, short-term investments,accounts receivable, other current assets, accounts payable, accrued expenses, and debt, approximates fair value due to the short-term nature of the instrumentsand/or the current interest rates payable in relation to current market conditions. The fair value of the Company's warrants and earnout liabilities is disclosed inNote 5. Inventories: Inventories, comprised of raw materials, labor, and manufacturing overhead, as well as finished goods inventory, are stated at the lower of cost(actual, which approximates first-in, first-out) or market, net of an allowance for obsolete inventory. Property and equipment: Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line methodover the estimated useful lives of the assets, ranging from three to ten years. Leasehold improvements are amortized using the straight-line method over the shorterof the respective lease term or the estimated useful lives of the assets. Intangible assets: Intangible assets subject to amortization, which principally include proprietary modified-release drug delivery technology and the costs toacquire the rights to Tussionex ANDA, are recorded at cost and amortized over the estimated lives of the assets ranging from 10 to 20 years. Impairment of long-lived assets: Long-lived assets such as property and equipment and intangibles subject to amortization are evaluated for impairmentwhenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Such assets are also evaluated forimpairment in light of the Company's continuing losses. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset areless than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. No impairment charges were recorded for theyears ended December 31, 2015 or December 31, 2014. Impairment charges of intangible assets related to the discontinued nutraceutical manufacturing operationsof $544,000 were recognized in the year ended December 31, 2013. Patent costs: The Company estimates that the patents it has filed have a future beneficial value. Therefore, costs associated with filing for its patents arecapitalized. Once the patent is approved and commercial revenue realized, the costs associated with the patent are amortized over the useful life of the patent. If thepatent is not approved, the costs will be expensed. Revenue recognition: Revenue is generated from product sales, recorded on a net sales basis, and historically, manufacturing, development and profitsharing from a development and manufacturing agreement. Product revenue is recognized when all of the following criteria are met: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed and determinable; and (4) collectability is reasonablyassured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the price to the buyer issubstantially fixed or determinable at the date of sale, (2) the buyer hasF-9Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued)paid for the product, or the buyer is obligated to pay for the product and the obligation is not contingent on resale of the product, (3) the buyer's obligation to paywould not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substanceapart from that provided by the Company, (5) the Company does not have significant obligations for future performance to directly bring about resale of theproduct by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company sells its generic Tussionex to a limited number of pharmaceutical wholesalers. Pharmaceutical wholesalers buy drug products directly frommanufacturers. Title to the product passes upon delivery to the wholesalers, when the risks and rewards of ownership are assumed by the wholesaler (freight onboard destination). These wholesalers then resell the product to retail customers such as food, drug and mass merchandisers. The Company's manufacturing, profit sharing and development revenue ended in 2014 as the Company has terminated the Company's development andmanufacturing agreement. As a result of the Company's acquisition of the rights to commercialize and derive future profits from the Tussionex ANDA, theCompany will utilize its manufacturing capability to derive revenue directly from sales made by the Company, rather than through the Company's commercialpartner.Net product sales Net product sales for the Company's generic Tussionex product represent total gross product sales less gross to net sales adjustments. Gross to net salesadjustments include wholesaler fees and estimated allowances for product returns, government rebates, chargebacks and prompt-payment discounts to be incurredon the selling price of the respective product sales. Wholesale distribution fees are incurred on the management of these products by wholesalers and are recordedwithin net product sales based on definitive contractual agreements. The Company estimates gross to net sales adjustments for allowances for product returns,government rebates and chargebacks based upon analysis of third-party information, including information obtained from the Company's third party logisticsprovider, or 3PL, with respect to their inventory levels and sell-through to the wholesalers' customers, data available from third parties regarding prescriptionswritten for the Company's products, as well as actual experience as reported by the Company's customers and previous commercialization partners. Due toestimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates andchargebacks may be different from the estimates, at which time reserves would be adjusted accordingly. Allowances and accruals are recorded in the same periodthat the related revenue is recognized.Product returns Wholesalers' contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, productreturned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expiredproduct allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Generic Tussionex product returnsare estimated based upon data available from sales of the Company's product by its previous commercialization partner and from actual experience as reported byretailers. Historical trend of returns will be continually monitored and may result in future adjustments to such estimates. On August 26, 2014, the U.S. DrugEnforcementF-10Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued)Agency reclassified the Company's generic Tussionex from a Schedule III controlled substance to a Schedule II controlled substance which had the effect ofrequiring unsold product at the wholesalers and the 3PL to either be relabeled or returned. This new ruling was effective October 6, 2014. As such, the Companyestablished reserves for the estimated returns of such product outstanding at the wholesalers as of October 6, 2014. The Company had no inventory labeled asSchedule III at the 3PL as of the effective date.Medicaid rebates The Company's products are subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating stategovernments. Estimated rebates payable under governmental programs, including Medicaid, are recorded as a reduction of revenue at the time revenues arerecorded. For generic Tussionex, calculations related to these rebate accruals are estimated based on sales of the Company's product by its previouscommercialization partner. Historical trend of Medicaid rebates will be continually monitored and may result in future adjustments to such estimates.Wholesaler Chargebacks The Company's products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price toparticipating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between theiracquisition cost and the discounted price back to the Company. Chargebacks are accounted for by establishing an accrual in an amount equal to the Company'sestimate of chargeback claims at the time of product sale based on information provided by the distributor. Due to estimates and assumptions inherent indetermining the amount of chargebacks, the actual amount of claims for chargebacks may be different from estimates, which may result in adjustments to suchreserves.Manufacturing Manufacturing revenue is derived from product manufactured by the Company and sold by the Company's commercial partner under a development andmanufacturing agreement. Manufacturing revenue is derived from a contractual supply price paid to the Company by the Company's commercial partners.Profit sharing Profit sharing revenue is recorded as the product is sold by the Company's commercial partner. The profit share is the Company's share of the net profits aftertaking into account net revenue, which is gross product sales by the Company's commercial partner, net of discounts, returns and allowances incurred by theCompany's commercial partner, less collaboration expenses.Development revenue Development revenue from the development and manufacturing agreement has been recognized as the related services are completed. Development revenuein the form of milestone payments is recognized upon achievement of the related milestones and provided that collectability is reasonably assured and otherrevenue recognition criteria are met. Amounts received under cost reimbursementF-11Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued)arrangements for production and research and development are recorded as offsets to the costs incurred and not recognized as revenue. Distribution expenses: Costs invoiced to the Company by its third party logistics firm are classified as cost of goods sold in the consolidated statements ofoperations. Shipping and handling costs: Amounts billed to customers for shipping and handling fees for the delivery of goods are classified as cost of goods sold in theconsolidated statements of operations. Research and development costs: Research and development costs are charged to operations when incurred, include salaries and benefits, facilities costs,overhead costs, clinical trial costs, contract services, fees paid to regulatory authorities for review and approval of the Company's product candidates and otherrelated costs, and are included in research and development in the consolidated statements of operations. Income taxes: Income taxes are accounted for using the liability method, under which deferred taxes are determined based on differences between thefinancial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected toreverse. Management evaluates the Company's tax positions in accordance with guidance on accounting for uncertainty in income taxes. Using that guidance, taxpositions initially need to be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination. As ofDecember 31, 2015 and December 31, 2014, the Company had no uncertain tax positions that qualify for recognition in the consolidated financial statements. Taxbenefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuationallowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized. Warrants: The Company accounts for its warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics andprovisions of each instrument. Warrants classified as derivative liabilities are recorded on the Company's balance sheet at their fair value on the date of issuanceand prior to completion of the Company's IPO were revalued at each subsequent balance sheet date, with fair value changes recognized as increases or reductions toother income (expense) in the statements of operations. The Company estimates the fair value of its derivative liabilities using third party valuation analysis thatutilizes option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well asassumptions for expected volatility, expected life, yield, and risk-free interest rate. Prior to the closing of the IPO, the Company's Series C warrants weredetermined to be derivative liabilities and they were revalued at each subsequent balance sheet date. Upon closing the IPO, the warrants issued in conjunction withthe Series C financing were exchanged in a cashless exercise for 947,185 shares of Series C which converted into 78,926 shares of the Company's common stock.The remaining Series C warrants issued with the senior debt to purchase 170,000 pre-split shares of Series C ("Hercules Warrants") were converted into warrants topurchase 70,833 shares of the Company's common stock and the warrant liability was reclassified to Additional Paid in Capital within Stockholders' Equity(Deficit).F-12Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued) Share-based compensation: Share-based compensation awards, including grants of stock options to employees and directors and restricted stock andmodifications to existing stock options, are recognized in the statement of operations based on their fair values. Compensation expense related to awards toemployees is recognized on a straight-line basis, based on the grant date fair value, over the requisite service period of the award, which is generally the vestingterm. The fair value of the Company's stock-based awards to employees and directors is estimated using the Black-Scholes option pricing model, which requires theinput of and subjective assumptions, including (1) the expected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and(4) expected dividends. Due to the previous lack of a public market for the trading of its common stock and a lack of company-specific historical and impliedvolatility data, prior to the IPO, the Company utilized third party valuation analyses to determine the fair value. Forfeitures are estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period willonly be for those options that vest. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affectreported amounts and disclosures. Actual results could differ from those estimates. Concentration of credit risk: Accounts receivable subjects the Company to concentrations of credit risk. Four customers accounted for all the revenue in theyear ended December 31, 2015 and two customers accounted for substantially all revenue in each of the years ended December 31, 2014 and 2013. Accountsreceivable at December 31, 2015 and 2014 were due from three customers and one customer, respectively. Segment information: Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluationby the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views itsoperations and manages its business in one operating segment, which is the development, manufacturing and commercialization of pharmaceuticals. Liquidity: During 2015, 2014 and 2013, the Company produced operating losses and used cash to fund operations. Management intends to achieveprofitability through revenue growth from pharmaceutical products developed with its extended-release technologies. The Company does not anticipate it will beprofitable until after the launch of its approved product, Adzenys XR-ODT, or one or more of its ADHD product candidates. With the completion of theCompany's IPO in July 2015, management believes the Company presently has sufficient liquidity to continue to operate for at least the next 12 months. Application of revised accounting standards: In April 2012, the Jumpstart Our Business Startups Act (the "JOBS Act"), was enacted in the United States.Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) ofthe Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption ofcertain accounting standards until those standards would otherwise apply to private companies. The Company has irrevocably elected not to avail itself of thisextended transition period and, as a result, will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required forother public companies.F-13Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued) Recent accounting pronouncements: In April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update,("ASU"), No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (topic 360); Reporting Discontinued Operations andDisclosures of Disposals of Components of an Entity. ASU 2014-08 provides additional requirements to classify a disposal of a component of an entity or a groupof components of an entity in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operationsand financial results. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with an option for earlyadoption. The Company adopted this guidance in the first quarter of 2015, and the adoption of this standard did not have a material impact on the Company'sfinancial statements. In May 2014, the FASB issued ASU, No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount ofrevenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognitionguidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. Early application is notpermitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect ofthe standard on its ongoing financial reporting. In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Termsof an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affectsvesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annualperiods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of this standard will havea material impact on the Company's financial statements. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertaintiesabout an Entity's Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantialdoubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This ASU is for annual periods ending afterDecember 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reportingperiods for which the financial statements have not previously been issued. The Company has performed the review required by this ASU and believes theCompany presently has sufficient liquidity to continue to operate into the first quarter of 2016. On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest—Simplifying the Presentation of Debt Issuance Costs, which requires thatdebt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. This ASU is effective for financialstatements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The Companyelected to early adopt this standard which did not have a material impact on the Company's financial position or results of operations.F-14Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3. Summary of significant accounting policies (Continued) In July 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2015-11, Inventory—Simplifyingthe Measurement of Inventory (Topic 330). The amendments in this ASU require an entity to measure inventory that is not measured using the last-in, first-out(LIFO) or retail inventory methods at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course ofbusiness, less reasonably predictable costs of completion, disposal and transportation. The amendments in this ASU are effective for fiscal years beginning afterDecember 15, 2016, including interim periods within those years. The Company is evaluating this ASU and has not determined the effect of this standard on itsongoing financial reporting. In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842).Under the new guidance, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) Alease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is anasset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale andleaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balancesheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. TheCompany is evaluating this ASU and has not determined the effect of this standard on its ongoing financial reporting. From time to time, additional new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of thespecified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have amaterial impact on its financial position or results of operations upon adoption. Reclassifications: Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current period'spresentation. Subsequent events: The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statementsto provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.Note 4. Net loss per share Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted netloss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period.Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities, which include redeemable convertible preferred stock,warrants, and outstanding stock options under the stock option plan, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company's netloss position.F-15 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 4. Net loss per share (Continued) The following potentially dilutive securities were excluded from consideration in the computation of diluted net loss per share of common stock for theperiods presented because including them would have been anti-dilutive:Note 5. Fair value of financial instruments Financial instruments are categorized into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value intothree broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization of the financialinstrument is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets recorded at fair value on the Company's consolidated balance sheets are categorized as follows:F-16 December 31, 2015 2014 2013 Series A Redeemable Convertible Preferred Stock (as converted) — 487,494 487,494 Series B Redeemable Convertible Preferred Stock (as converted) — 1,297,100 1,297,100 Series B-1 Redeemable Convertible Preferred Stock (as converted) — 2,275,733 2,275,733 Series C Redeemable Convertible Preferred Stock (as converted) — 3,647,274 2,194,569 Series C Redeemable Convertible Preferred Stock Warrants (as converted) 70,833 383,316 — Common Stock Warrants 50,158 337,133 337,133 Stock options 1,352,283 511,775 326,062 Level 1: Unadjusted quoted prices for identical assets in an active market.Level 2: Quoted prices in markets that are not active or inputs that are observable either directly or indirectly forsubstantially the full-term of the asset. Level 2 inputs include the following: d Quoted prices for similar assets in active markets. d Quoted prices for identical or similar assets in nonactive markets. d Inputs other than quoted market prices that are observable. d Inputs that are derived principally from or corroborated by observable market data through correlation orother means.Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fairvalue measurement. They reflect management's own assumptions about the assumptions a market participantwould use in pricing the asset.Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 5. Fair value of financial instruments (Continued) The following table presents the hierarchy for the Company's financial instruments measured at fair value on a recurring basis for the indicated dates: The Company's Level 1 assets include bank deposits, U.S. Treasury bills and money market funds with quoted prices in active markets. Level 3 liabilities include the fair values of the earnout liability and the outstanding warrants to purchase Series C. There were no outstanding warrants topurchase preferred stock as of December 31, 2015. Various methodologies were utilized to value the Level 3 liabilities including Black-Scholes-Merton, Probability-Weighted Expected Return ("PWERM"),Option Pricing and Monte Carlo. TheF-17 Fair Value as of December 31, 2015 Level 1 Level 2 Level 3 Total (in thousands) Cash and cash equivalents $90,763 $— $— $90,763 Earnout liability — — 214 214 $90,763 $— $214 $90,977 Fair Value as of December 31, 2014 (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $13,343 $— $— $13,343 Short term investments 3,000 — — 3,000 Earnout liability — — 756 756 Series C Redeemable Preferred Stock Warrants — — 1,789 1,789 $16,343 $— $2,545 $18,888 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 5. Fair value of financial instruments (Continued)methodologies and significant inputs used in the determination of the fair value of the Hercules Warrants were as follows: As the Hercules Warrants converted into warrants for common stock effective on July 22, 2015 with the IPO, with a term of five years from the IPO date, itwas determined that the Black-Scholes-Merton Option-Pricing model would provide a better indication of the fair value as it was designed to calculate the value ofa put or call option over time. The methodologies and significant inputs used in the determination of the fair value of the Series C warrants issued with the Series C were as follows:F-18 Series C WarrantsIssued WithMarch 28, 2014Senior Debt Series C WarrantsIssued WithSeptember 25, 2014Senior Debt Revalue Series CWarrants Issued withSenior Debt atDecember 31, 2014 Revalue Series CWarrants Issued withSenior Debt atJuly 22, 2015 (Dollars in thousands, except $5 and $12 Exercise Prices)Date of Valuation 3/28/2014 9/25/2014 12/31/2014 7/22/2015Valuation Method Black-Scholes-Merton PWERM and Black-Scholes-Merton PWERM and OptionPricing Black-Scholes-MertonOption-PricingDividend yield (per share) 0 0 0 0Exercise price $5 $5 $5 $12Volatility (annual) 60% 60% 60% 60%Risk-free rate (annual) 0.34% 2.03% .25% - 2.47% 1.78%Contractual term (years) 1.76 5.76 1 - 5 5Number of warrants 60,000 110,000 170,000 70,833Fair value of liability atvaluation date $124 $248 $454 $611 Initial Valuation ofDecember 31, 2014Warrants IssuedWith Series CRedeemablePreferred Stock Initial Valuationof January 2015Warrants Issued WithSeries C RedeemablePreferred Stock Initial Valuationof February 2015Warrants Issued WithSeries C RedeemablePreferred Stock Revalue All WarrantsIssued With Series CRedeemable PreferredStock atJuly 22, 2015 (Dollars in thousands, except $5 and $12 Exercise Prices)Date of Valuation 12/31/2014 1/31/2015 2/28/2015 7/22/2015Valuation Method PWERM and OptionPricing PWERM and OptionPricing PWERM and OptionPricing Intrinsic ValueDividend yield (per share) 0 0 0 0Exercise price $5 $5 $5 $12Volatility (annual) 60% 60% 60% —Risk-free rate (annual) .25% - 2.47% .25% - 2.47% .25% - 2.47% —Contractual term (years) 1 - 5 1 - 5 1 - 5 —Number of warrants 749,967 590,906 606,312 1,347,185Fair value of liability atvaluation date $1,335 $1,052 $1,079 $4,042Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 5. Fair value of financial instruments (Continued) The methodologies and significant inputs used in the determination of the fair value of the earnout liability were as follows: Significant changes to these assumptions in the preceding valuation tables would result in increases/decreases to the fair value of the outstanding Series Cwarrants and the earnout liability. Changes in Level 3 liabilities measured at fair value for the periods indicated were as follows: The reductions in fair value of the earnout liability shown above resulted from new information regarding the projected impact of the DEA's reclassification ofTussionex from a Schedule III controlled substance to a Schedule II controlled substance and a review of the launch dates of the Company's approved product,Adzenys XR-ODT, and its two ADHD product candidates. The increases in the fair value of the Series C warrants were due to the increased weighting of the IPOscenario in the PWERM model.F-19 Initial ValuationEarnout Liability December 31, 2014Earnout Liability December 31, 2015Earnout Liability (Dollars in thousands)Date of Valuation 8/28/2014 12/31/2014 12/31/2015Valuation Method Monte Carlo Monte Carlo Monte CarloVolatility (annual) 50% 50% 50%Risk-free rate (annual) .03% - 3.56% .15% - 3.21% .56% - 3.31%Time period from valuation until end of earnout .1708 - 9.8417 .5 - 9.5 .5 - 9.5Earnout Target 1 $13,700 $13,700 $13,700Earnout Target 2 $18,200 $18,200 $18,200Discount rate 8.03% - 10.51% 7.96% - 11.03% 8.11% - 10.86%Fair value of liability at valuation date $589 $756 $214 EarnoutLiability Series C WarrantsIssued WithSenior Debt Series C WarrantsIssued WithSeries C RedeemablePreferred StockFinancing (in thousands) Balance at December 31, 2013 $— $— $— Additions during the period 589 372 1,335 Changes in fair value 167 82 — Balance at December 31, 2014 $756 $454 $1,335 Additions during the period — — 2,131 Changes in fair value (542) 157 1,698 Warrants exercised — — (2,322)Cashless warrant exercise due to IPO — — (2,842)Conversion to common stock warrant — (611) — Balance at December 31, 2015 $214 $— $— Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 6. Inventories Inventories at the indicated dates consist of the following:Note 7. Property and equipment Property and equipment, net at the indicated dates consists of the following: Depreciation and amortization expense related to property and equipment was $1,724,000, $1,645,000 and $1,330,000 for the years ended December 31,2015, 2014 and 2013, respectively. Depreciation and amortization expense is recorded in cost of goods sold, research and development, or general andadministrative expenses in the accompanying consolidated statements of operations. As noted in Note 8, the Company sold and leased back a substantial portion ofits operating assets in a series of capital lease transactions. Included in the total of assets under capital lease as of December 31, 2015 and December 31, 2014, are certain manufacturing, packaging and lab equipmentthat are temporarily idle as a result of the cessation of contract manufacturing. The cost of these assets was $1,699,000 and $1,728,000, and the accumulateddepreciation of these assets was $1,396,000 and $925,000 at December 31, 2015 and December 31, 2014, respectively.F-20 December 31, 2015 2014 (in thousands) Raw materials $1,211 $646 Work in progress 175 82 Finished goods 1,189 1,499 Inventory at cost 2,575 2,227 Inventory reserve (55) (196) $2,520 $2,031 December 31, 2015 2014 (in thousands) Assets under capital lease $6,241 $6,271 Leasehold improvements 3,497 3,388 Manufacturing, packaging and lab equipment 874 189 Office furniture and equipment 314 118 Assets under construction 244 215 11,170 10,181 Accumulated depreciation and amortization (including $3,684 and $2,317 atDecember 31, 2015 and 2014, respectively, applicable to capital leases) (6,046) (4,350) $5,124 $5,831 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 8. Sale-leaseback transaction In 2012, the Company negotiated financing arrangements with a related party which provided for the sale-leaseback of up to $6.5 million of the Company'sproperty and equipment with a bargain purchase option at the end of the respective lease. The transactions are accounted for as capital leases under the provisionsof Accounting Standards Codification ("ASC") Topic 840-40, Leases—Sale Leaseback Transactions. Accordingly, the leased assets are recorded in property andequipment and the capitalized lease obligations are included in long-term liabilities at the present value of the future lease payments in accordance with the termsof each lease (see Note 12 for further details). Lease payments are applied using the effective interest rate inherent in each lease. Depreciation of the property andequipment is included within depreciation and amortization in the consolidated statements of operations and consolidated statements of cash flows. The financing arrangements referred to in the preceding paragraph were executed in five separate tranches that occurred in February, July and November2013, and March 2014. In the aggregate, the Company sold groups of assets for $795,000 and $5.5 million, which resulted in a net gains of approximately$116,000 and $2.7 million, in the years ended December 31, 2014 and December 31, 2013, respectively, and executed capital leases for these assets withrepurchase options at the end of each respective lease term. Gains on the transactions are recognized on a straight-line basis over each respective 42-month leaseterm. For the years ended December 31, 2015, 2014 and 2013 approximately $831,000, $824,000 and $601,000, respectively, of the net gain was recognized inother income on the consolidated statements of operations A summary of the sale-leaseback transactions are as follows:F-21 Leases 1 & 2February 2013 Lease 3July 2013 Lease 4November 2013 Lease 5March 2014 Total (in thousands) Capitalization of leased assets $3,500 $1,000 $1,000 $— $5,500 2013 Amortization (875) (65) (18) — (958)Carrying value at December 31, 2013 2,625 935 982 — 4,542 2014 Capitalization of leased assets 795 795 Assets retired in 2014 (24) — — — (24)2014 Amortization (988) (143) (143) (85) (1,359)Carrying value at December 31, 2014 $1,613 $792 $839 $710 $3,954 Assets retired in 2015 (28) — (2) — (30)2015 Amortization (969) (143) (141) (114) (1,367)Carrying value at December 31, 2015 $616 $649 $696 $596 $2,557 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 9. Intangible assets Intangible assets, net at the indicated dates consist of the following: As part of the June 15, 2009 reorganization of the Company as Neos Therapeutics, Inc., the Company performed a purchase price allocation analysis. Theproprietary modified-release drug delivery technology was valued at $15.6 million based on projected cash flows expected to be generated from this technology.The $15.6 million is being amortized over 20 years. Amortization expense of $780,000 was recorded in each of the years ended December 31, 2015, 2014 and2013. On August 28, 2014, the Company completed an acquisition of the rights to Tussionex ANDA from Cornerstone and CPI which was accounted for as an assetacquisition. Prior to the acquisition, the Company, Cornerstone and CPI shared profits generated by the sale and manufacture of the product under a developmentand manufacturing agreement, and Cornerstone had commercialization rights to the product. The Company paid $4.2 million to Cornerstone to buy out their rightsto commercialize and derive future profits from the product and entered into an agreement whereby Cornerstone transferred certain assets associated with theproduct to the Company. Legal fees of $90,000 associated with this buyout agreement have been capitalized as part of the purchase price. Additional estimatedearnout costs due to Cornerstone of $589,000, recorded at fair value by the Company based upon a valuation provided by a third party valuation firm, werecapitalized as part of the purchase price of this intangible asset. This earnout amount was revalued at December 31, 2014, resulting in a $167,000 increase in theestimated fair value of the earnout which is recorded in other income (expense), net in the Company's consolidated statements of operations. This earnout amountwas revalued at December 31, 2015, resulting in a $542,000 decrease in the estimated fair value of the earnout which is recorded in other income (expense), net inthe Company's consolidated statements of operations for the year ended December 31, 2015. This net decrease resulted primarily from new information regardingthe projected impact of the DEA's reclassification of Tussionex from a Schedule III controlled substance to a Schedule II controlled substance. In addition, theCompany paid $2.0 million to CPI to buy out their rights to future profits from the collaboration and entered into an agreement whereby CPI will continue tosupply a component of the product. Legal fees of $43,000 associated with this buyout agreement have been capitalized as part of the purchase price of thisintangible asset. These two intangible assets have an expected life of ten years and are being amortized on a straight-line basis beginning September 2014. Totalamortization expense related to these intangible assets was $687,000 and $229,000 for the years ended December 31, 2015 and December 31, 2014, respectively.As a result of the discontinuation of nutraceuticals operations in 2013, the Company determined that the customer relationships and trade name that were related tothat activity were fullyF-22 December 31, 2015 2014 (in thousands) Proprietary modified-release drug delivery technology $15,600 $15,600 Tussionex ANDA 4,829 4,829 CPI profit sharing 2,043 2,043 Other 284 284 22,756 22,756 Accumulated amortization (6,084) (4,589) $16,672 $18,167 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 9. Intangible assets (Continued)impaired and the remaining carrying value of $544,000 was charged to expense within discontinued operations during the year ended December 31, 2013 (seeNote 18). Aggregate amortization of intangible assets for each of the next five years and thereafter is as follows:Note 10. Other assets Other assets at the indicated dates consist of the following: Patents utilized in the manufacturing of the Company's generic Tussionex product which total $231,000 are being amortized over their expected useful life of10 years. For the years ended December 31, 2015 and December 31, 2014, $23,000 and $31,000 of patent amortization expense was recorded, respectively.Note 11. Income taxes The Company applies FASB ASC topic 740, "Income Taxes" or ASC 740 which addresses the determination of whether tax benefits claimed, or expected tobe claimed on a tax return should be recorded in the financial statements. Under ASC 740, our Company may recognize the tax benefit from an uncertain taxposition only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of theposition. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50%likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes,accounting in interim periods and requires increased disclosures.F-23Year ending December 31: December 31,2015 (in thousands) 2016 $1,496 2017 1,496 2018 1,496 2019 1,496 2020 1,496 Thereafter 9,192 $16,672 December 31, 2015 2014 (in thousands) Patents $2,273 $2,051 Deposits 197 176 $2,470 $2,227  Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 11. Income taxes (Continued) The Company is generally subject to tax examination for a period of three years after tax returns are filed. Therefore, the statute of limitations remains openfor tax years 2012 and forward. However, when a company has net operating loss carryovers, those tax years remain open until three years after the net operatinglosses are utilized. Therefore, the tax years remain open back to 2004. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. Thesignificant components of deferred income tax assets and liabilities consist of the following at December 31, 2015 and December 31, 2014: At December 31, 2015, and 2014, the Company has federal net operating loss carry-forwards of $122,075,000 and $86,551,000 and research and developmentcredits of $2,010,000 and $2,029,000, respectively, which begin to expire in 2024. The Company has state net operating loss carry-forwards of $278,000 and $0 forDecember 31, 2015 and December 31, 2014, respectively. Utilization of the net operating loss carry-forwards and credits may be subject to a substantial annuallimitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company hasperformed an analysis to determine the impact of any ownership change(s) under Section 382 of the Internal Revenue Code. The amount of federal net operatingloss that will expire unused due to the Section 382 limitation is $6,089,000. The amount of federal researchF-24 December 31, 2015 2014 (in thousands) Deferred Tax Assets: Net operating losses $37,809 $29,325 Accrued Expenses 317 392 Inventory 0 67 Share-based Compensation 388 76 R&D tax credit 1,660 2,029 Deferred lease liability 396 404 Property and equipment 581 518 Earnout Liability 73 200 Deferred Gain on Sale Leaseback 186 476 Litigation Costs 714 776 Allowances 623 181 Total deferred tax assets 42,747 34,444 Deferred Tax Liabilities: Inventory Reserve (19) — Capital lease liability (603) (560)Intangible assets (3,763) (3,990)State Deferreds (31) — Total deferred tax liabilities (4,416) (4,550)Valuation allowance (38,331) (29,894)Net deferred tax asset (liability) $— $— Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 11. Income taxes (Continued)and development credit that will expire unused is $350,000. The deferred tax assets for both carryforwards have been adjusted downward accordingly. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company has no accrued interest related to itsuncertain tax positions as they all relate to timing differences that would adjust the Company's net operating loss carryforward and do not require recognition. As aresult of these timing differences, at December 31, 2015 and December 31, 2014, the Company had gross unrecognized tax benefits related to uncertain taxpositions of $4,355,000 and $835,000, respectively. The Company has no other tax positions taken or expected to be taken that would significantly increase ordecrease unrecognized tax benefits within 12 months of the reporting date. Changes in unrecognized benefits in any given year are recorded as a component ofdeferred tax expense. A tabular rollforward of the Company's gross unrecognized tax benefits is below: The Company has recorded a valuation allowance of $38,331,000 at December 31, 2015 and $29,894,000 at December 31, 2014 to fully reserve its netdeferred tax assets. The Company has assessed the likelihood that the deferred tax assets will be realized and determined that it is more likely than not that all ofthe deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxableincome and tax planning strategies in making this assessment. Due to the uncertainty of realizing the deferred tax asset, the Company has placed a valuationallowance against the entire deferred tax asset. The change in the valuation allowance was an increase of $8,437,000 and $8,436,000 for the years endedDecember 31, 2015 and December 2014, respectively. A reconciliation of the Company's Federal statutory tax rate of 34% to the Company's effective income tax rate is as follows:F-25 December 31, 2015 2014 (in thousands) Beginning Balance $835 $— Increase/(Decrease) based on tax positions taken during a prior period — — Increase/(Decrease) based on tax positions taken during the current period 3,520 835 Ending Balance $4,355 $835 December 31, 2015 2014 U.S. Statutory Tax Rate 34% 34%R&D Credit 0% 2%Change in Valuation Allowance (26)% (41)%Deferred Tax Adjustments (7)% 0%Provision to Return and Other Adjustments (1)% 5%Tax Expense/(Benefit) 0% 0%Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 12. Long-term debt Long-term debt at the indicated dates consists of the following: Credit Agreement: Previously, the Company had a credit agreement entered into on August 20, 2012 (the "Credit Agreement") with a financial institution.The Credit Agreement provided for a four-year $10.0 million term loan, with an annual interest rate of 9.5% payable monthly. In addition, a $250,000 fee payableat maturity was being amortized using the effective interest method. The proceeds from the initial $10.0 million draw on the LSA were used to repay theoutstanding $10.0 million Credit Agreement balance and $697,000 of interest expense related to the Credit Agreement in March 2014. The early prepayment of theCredit Agreement resulted in a $445,000 loss (due to recording the $98,000 prepayment penalty and writing off the $154,000 unamortized exit fee and the$193,000 of unamortized loan cost) reflected in interest expense for the year ended December 31, 2014. Senior debt: On March 28, 2014, the Company entered into a Loan and Security Agreement ("LSA") with Hercules Technology Growth Capital, Inc., orHercules, for a total commitment of $20.0 million, available in two tranches of $10.0 million. The first draw ("Tranche 1") was available immediately and thesecond draw was available upon the Company meeting certain regulatory or financial milestones. The Company received the initial $10.0 million tranche onMarch 28, 2014. This loan had an annual interest rate of 9.0%. The LSA also contained an end of term charge of 4.25% of the amount drawn, or a maximum of$850,000 total, also payable at the earliest to occur of (1) maturity, (2) the date we prepay our outstanding Secured Obligations, as defined therein, or (3) the datethe Secured Obligations become due and payable. In connection with the LSA, the Company issued a Hercules Warrant to purchase 60,000 shares of Series C atthe then current price of $5.00 per share, and the LSA provided for a Hercules Warrant for 60,000 shares of Series C at a price per share of $5.00 to be issued uponthe drawdown of the second tranche. The proceeds from the initial $10.0 million draw were used to repay the outstanding $10.0 million Credit Agreement balanceand $697,000 of interest expense related to the Credit Agreement in March 2014. The early prepayment of the Credit Agreement resulted in a $445,000 loss (due torecording the $98,000 prepayment penalty and writing off the $154,000 unamortized exit fee and the $193,000 of unamortized loan cost) reflected in interestexpense for the year ended December 31, 2014. On September 25, 2014, the Company entered into an amendment ("LSA Amendment") to the LSA which was accounted for as a loan modification. Theterms governing the $10.0 million previouslyF-26 December 31, 2015 2014 (in thousands) Senior debt, net of discount of $1,167 and $1,743 $24,895 $14,320 10% subordinated note payable to a related party 6,994 6,446 Capital leases, maturing through August 2017 2,355 4,008 34,244 24,774 Less current portion (7,973) (1,653)Long-term debt $26,271 $23,121 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 12. Long-term debt (Continued)drawn down under the LSA were not changed as a result of the LSA Amendment. The LSA Amendment modified, added or replaced the following key terms ofthe LSA:•Increased the maximum term loan amount from $20.0 million to $25.0 million, and modified the drawdown conditions for the remaining$15.0 million such that it is available in three $5.0 million tranches: $5.0 million being immediately available (which was drawn down immediatelyas "Tranche 2"), and two additional tranches being available upon meeting certain regulatory or financial milestones; •Adjusted the interest rate on $10.0 million of the remaining $15.0 million availability from 9.0% to 10.5%; the final $5.0 million tranche retains theoriginal 9.0% interest rate; •Extended the end of term charge to the additional $5.0 million of availability such that the total end of term charge was increased from $850,000 to$1,062,500, and modified the end of term charge so that the full amount based on total commitment is payable regardless of whether additionaltranches are actually drawn; and •Changed the interest and principal amortization dates if certain conditions are met to January 1, 2016 or May 1, 2016 if additional specifiedconditions are met. In addition, on September 25, 2014, the Company issued a Hercules Warrant to purchase 110,000 shares of its Series C at an exercise price of $5.00 pershare, and cancelled the remaining commitment to issue any further warrants due upon future draws. The proceeds from the loan agreement draw-downs with the related stock purchase warrants were allocated to the two elements based on the fair value of thewarrants at time of issuance and the remainder of the proceeds was allocated to the debt instrument portion of the transaction, resulting in a debt discount. Theportion of the proceeds so allocated to the warrants is accounted for as warrant liability and periodically adjusted to fair value through the statement of operations.The related debt discount and end of term charges are amortized to interest expense over the contractual term of the debt using the effective interest method. Thefair value of the 60,000 March 28, 2014 Hercules Warrants issued as part of the initial draw-down described above was $124,000 and the residual proceeds of$9,876,000 were allocated to the $10.0 million interest bearing note. The fair value of the 110,000 September 25, 2014 Hercules Warrants issued as part of thesecond draw-down described above was $248,000 and the residual proceeds of $4,752,000 were allocated to the $5.0 million interest bearing note. These warrants,known as the "Hercules Warrants", were recorded as a liability with a related debt discount to be amortized as interest over the term of the LSA. The HerculesWarrants became warrants for the purchase of 70,833 shares of common stock at a price of $12.00 per share upon the closing of the Company's IPO and weretherefore reclassified from warrant liability to Additional Paid in Capital within Stockholders' Equity (Deficit) at July 22, 2015. On March 13, 2015, the Company received an advance from the lender for a $5.0 million tranche ("Tranche 3") under the LSA Amendment as a result ofachievement of a certain regulatory milestone. In addition, on June 10, 2015, the Company received an advance from the lender for the final $5.0 million tranche("Tranche 4") under the LSA, as amended, prior to meeting the milestones associated with the final tranche. The Company met the Tranche 4 Milestones stated inthe LSA prior to July 31, 2015.F-27Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 12. Long-term debt (Continued) Pursuant to the LSA as amended, each draw or tranche is to be repaid in monthly installments, comprised of interest-only monthly payments until May 2016,when installments of interest and principal calculated over a thirty-month amortization period commence. A balloon payment of the entire principal balanceoutstanding on October 1, 2017 and all accrued but unpaid interest thereunder is due and payable on October 1, 2017. The interest rate is 9% per annum forTranche 1 and Tranche 4 and 10.5% per annum for Tranche 2 and Tranche 3. An end of term charge of $1.1 million is payable at the earliest to occur of(1) October 1, 2017, (2) the date the Company prepays its outstanding Secured Obligations, as defined therein, or (3) the date the Secured Obligations become dueand payable. The LSA, as amended, also contains certain financial and nonfinancial covenants, including limitations on the Company's ability to transfer assets, engage in achange of control, merge or acquire with or into another entity, incur additional indebtedness, repurchase or redeem stock or other equity interest other thanpursuant to employee stock repurchase plans or other similar agreements, make investments and engage in transactions with affiliates. Upon an event of default,Hercules may declare the unpaid principal amount of all outstanding loans and interest accrued under the LSA, as amended to be immediately due and payable,and exercise its security interests and other rights under the Credit Agreement. As of December 31, 2015 and December 31, 2014, the Company was in compliancewith the covenants under the LSA, as amended. End of term charge amortization totaled $311,000 and $128,000 for the years ended December 31, 2015 and 2014, respectively. Debt discount amortization tointerest expense for the senior debt totaled $265,000 and $140,000 for the years ended December 31, 2015 and December 31, 2014, respectively. As of July 22,2015, the fair values of the Hercules Warrants were remeasured and a 2015 cumulative change in fair value of approximately $157,000 was recorded in otherincome (expense), net in the Company's consolidated statements of operations for the year ended December 31, 2015. 10% subordinated related party note: The Company has an amended and restated subordinated note (the "Note") in the aggregate principal amount of$5.9 million that was issued by the Company to Essex Capital Corporation ("Essex"). Interest accrues and adds to the principal balance until such time as theCompany achieves positive EBITDA for three consecutive months. On July 19, 2014, the interest rate on the Note was reduced to 6% for the period from July 19,2014 through June 28, 2015 pursuant to an amendment to the Note entered into as consideration for the $128,000 payment made by the Company to Essex as partof the Settlement and Release of Claims Agreement with Essex and a third party (see Note 16). The Company recorded this amendment as a loan modification. AtDecember 31, 2015 and December 31, 2014, the aggregate principal amount of the Note was $5.9 million, and $1,059,000 and $511,000 in interest had beenaccrued through the years ended December 31, 2015 and 2014, respectively. Capital lease obligations to related party: As described in Notes 8 and 19, during the years ended December 31, 2014 and 2013, the Company entered intoagreements with a related party for the sale-leaseback of existing and newly acquired assets with a total capitalized cost of $795,000 and $5.5 million, respectively,which are classified as capital leases. The approximate imputed interest rate on these leases is 14.5% and interest expense on these leases was $467,000, $662,000and $474,000 for the years ended December 31, 2015, 2014 and 2013, respectively.F-28Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 12. Long-term debt (Continued) Future minimum capital lease payments are as follows: Future principal payments of long-term debt, including capital leases, are as follows:Note 13. Common stock and redeemable convertible preferred stock The following table summarizes the authorized, issued and outstanding shares of the Company by class of stock as of December 31, 2015 and 2014. Allshares have a par value of $0.001:F-29Year ending: December 31, (in thousands) 2016 $2,124 2017 473 Total minimum lease payments 2,597 Less amount representing interest 242 Future minimum lease payments $2,355 Year ending: December 31,2015 (in thousands) 2016 $7,973 2017 27,438 Future principal payments $35,411 Less unamortized debt discount (1,167)Less current portion of long-term debt (7,973)Total long-term debt $26,271 December 31, 2015 December 31, 2014 AuthorizedShares Issued andOutstandingShares AuthorizedShares Issued andOutstandingShares Common Stock 100,000,000 16,025,155 35,000,000 938,859 Preferred Stock 5,000,000 — — — Series A Preferred Stock — — 1,170,000 1,170,000 Series B Preferred Stock — — 4,000,000 3,113,099 Series B-1 Preferred Stock — — 8,830,000 5,461,802 Series C Preferred Stock — — 13,500,000 8,753,547 Total Shares Issued 16,025,155 19,437,307 Treasury Stock (9,197) (55,905)Total Outstanding Shares 16,015,958 19,381,402 Total Authorized Shares 105,000,000 62,500,000 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 13. Common stock and redeemable convertible preferred stock (Continued) Prior to the Company's IPO, the Company had classified its classes of redeemable convertible preferred stock as mezzanine equity based upon the terms andconditions which contain various redemption and conversion features. The Company evaluated its redeemable convertible preferred stock for potential embedded derivatives. In doing so, the Company first concluded that thenature of the host contract was more equity than debt like. The embedded conversion features were determined not to be derivatives as net settlement did not exist.Additionally, the conversion features are clearly and closely related to an equity host contract. Consideration was also given to whether a beneficial conversionfeature should be recognized in additional paid in capital for the intrinsic value of the conversion feature at the issuance date. None was recognized given that theeffective conversion price exceeded the value of the common stock on that date. The redemption feature was deemed not to be a derivative since settlement wouldbe gross. In connection with the sale of shares of the Company's Series B-1 Redeemable Convertible Preferred Stock ("Series B-1"), the Series B-1 investors alsoreceived warrants to purchase 389,474 shares of common stock at an exercise price of $.0024 per share ("Series B-1 warrants"). In 2013, 520 shares of commonstock were issued as a result of the exercise of certain of the Series B-1 warrants. There were no exercises of Series B-1 warrants in 2014. During the year endedDecember 31, 2015, the Company issued a total of 286,968 shares of its common stock upon the exercise of Series B-1 warrants held by several investors at anexercise price of $0.0024 per share. As of December 31, 2015, Series B-1 warrants to purchase 50,158 shares of common stock remained outstanding, and expirein 2016. In February and March 2014, the Company closed on additional Series C financings totaling 1,986,586 shares, raising $9.9 million. On December 31, 2014,the Company closed on an additional Series C financing which included the issuance of a warrant to purchase one additional share of Series C at a purchase priceof $5.00 per share for every two purchased shares of Series C provided the investor purchased its pro-rata share of the Series C. In the event that the Company'sSeries C is converted into common stock or another class of the Company's stock (called "Conversion Stock") during the warrant exercise period, then the warrantswill become exercisable for the Conversion Stock and the exercise price of those warrants shall be ratably adjusted. The December 2014 Series C financingresulted in the issuance of 1,499,935 shares and 749,967 warrants (see warrant liability section below) and raised $7.5 million. Between December 2014 andFebruary 25, 2015, the Company closed on additional Series C financings totaling 4,124,871 shares and 1,947,185 warrants, raising a total of $20.6 million, ofwhich 2,624,936 shares and 1,197,218 warrants were issued and $13.1 million was received after December 31, 2014. From June 30, 2015 through July 27, 2015,the Company issued a total of 1,000,000 shares of its Series C to several investors upon the exercise of warrants held by those investors at an exercise price of$5.00 per share, for an aggregate exercise price of $5 million.Reverse Stock Split On July 10, 2015, the Company filed an amendment to its amended and restated certificate of incorporation, effecting a 1-for-2.4 reverse stock split of theCompany's issued and outstanding shares of common stock as approved by the board of directors on July 9, 2015. All issued and outstanding common stock andper share amounts contained in the Company's financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.F-30Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 13. Common stock and redeemable convertible preferred stock (Continued)Authorized Shares In connection with the closing of the Company's IPO on July 28, 2015, the Company amended and restated its certificate of incorporation to authorize5,000,000 shares of preferred stock, par value $0.001 per share, and 100,000,000 shares of common stock, par value $0.001 per share.Public Offerings and Related Transactions On July 28, 2015, the Company closed its IPO whereby the Company sold 5,520,000 shares of common stock, at a public offering price of $15.00 per share,which includes 720,000 shares of common stock resulting from the underwriters' exercise of their over-allotment option at the IPO price on July 23, 2015.Proceeds from the Company's IPO, net of underwriting discounts and commissions and other offering costs, were $75.0 million. Upon the closing of the Company'sIPO, all of the Company's Preferred Shares converted into shares of the Company's Common Stock, all such Preferred Shares were retired and cancelled and shallnot be reissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receive undeclaredaccumulated dividends. Each of the following occurred in connection with the closing of the Company's IPO on July 28, 2015:•the conversion of all outstanding shares of convertible preferred stock into 9,217,983 shares of the Company's common stock; •the conversion of the Hercules Warrants to purchase 170,000 shares of Series C into warrants to purchase 70,833 shares of the Company's commonstock and the resultant reclassification of the warrant liability to Additional Paid in Capital within Stockholders' Equity (Deficit); and •the net exercise of outstanding Series C warrants issued in conjunction with the Series C financing to purchase 947,185 shares of Series C for78,926 shares of the Company's common stock. In accordance with the conversion provision of the Company's Third Amended and Restated Certificate of Incorporation, as amended, which was triggeredupon the Company's IPO, all rights with respect to the Preferred Shares of the Company were terminated, including redemption rights. Prior to the closing of theCompany's IPO, the rights and preferences of the preferred stock were as follows: Dividends: Dividends could not be paid on the common stock unless equivalent or larger dividends had been paid to holders of the Series C, Series B-1,Series B and Series A Redeemable Convertible Preferred Stock ("Series A") on an as-if converted basis and other financial tests, as defined, had been met. Fromand after the date of the issuance of the Series B-1 until the retirement and cancellation of Series B-1 in conjunction with the Company's IPO, dividends at the rateper annum of 8% of the Series B-1 original issuance price of $5.00 were accrued on such shares of Series B-1. Dividends accrued from day to day, whether or notdeclared, and were cumulative. The accruing dividends were to be payable in additional shares of Series B-1, valued at the Series B-1 original issuance price,unless the board of directors of the Company elected to pay all or any portion of the accruing dividends in cash. In accordance with the conversion provision of theCompany's Third Amended and Restated Certificate of Incorporation, as amended, which was triggered upon the Company's IPO, all rights with respect to thePreferred Shares of the Company were terminated,F-31Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 13. Common stock and redeemable convertible preferred stock (Continued)including the right to receive undeclared dividends. The Series B-1 cumulative dividends were never declared by the Company's board of directors. Voting: The holders of Series C, Series B-1, Series B and Series A were entitled to cast the number of votes equal to the number of whole shares of commonstock into which such shares of preferred stock held by such holder were convertible. Liquidation: In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series C then outstandingwere entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment could be made to the holders of Series B-1, Series B, Series A or common stock, an amount per share equal to their original issuance price of $5.00 per share, plus any declared but unpaid dividends. The holders of Series B-1 and Series B then outstanding were then entitled to be paid out of the assets of the Company available for distribution to itsstockholders, before any payment could be made to the holders of Series A or common stock, an amount per share equal to their original issuance price of $5.00per share, plus any declared but unpaid dividends, plus any accrued dividends for the Series B-1. In addition to the payments above, the holders of Series B-1 then outstanding were then entitled to be paid an additional amount out of the assets of theCompany available for distribution to its stockholders, before any payment could be made to the holders of Series A or common stock, an amount per share equalto their original issuance price of $5.00 per share. The holders of Series A then outstanding were then entitled to be paid out of the assets of the Company available for distribution to its stockholders, beforeany payment could be made to the holders of common stock, an amount per share equal to their original issuance price of $5.00 per share, plus any declared butunpaid dividends. If there were any residual amounts available to be paid out of the assets of the Company, such amounts were to be distributed ratably to the holders ofSeries B, Series B-1 and Series C shares and the holders of the common stock. Although holders of Series A received no ratable residual distribution, such holderscould exercise their option and convert to common shares, thereby also receiving a ratable distribution of any such residual amounts available to be paid out. Redemption: Prior to the retirement and cancellation of the Company's Preferred Shares as a result of the IPO, the holders of a majority of the outstandingshares of Series C, Series B-1 and Series B, voting together as a single class, could require the Company to redeem the Series C, Series B-1 and Series B at theiroriginal purchase price of $5.00 per share in three annual installments by giving a sixty-day notice at any time on or after March 31, 2017. On March 25, 2014, theCompany amended the initial redemption date, extending it to November 1, 2017. On each redemption date, the Company was to redeem, on a pro rata basis inaccordance with the number of shares of Series C, Series B-1 and Series B owned by each holder, that number of outstanding shares of Series C, Series B-1 andSeries B. If the Company did not have sufficient funds legally available to redeem on any redemption date, the Company was to redeem a pro rata portion of eachholder's Series C, Series B-1 and Series B out of funds legally available. The Series C, Series B-1 and Series B were to be redeemable on November 1, 2017, their carrying value was being accreted to the minimum redemption valueof $5.00 per share or $43,768,000,F-32Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 13. Common stock and redeemable convertible preferred stock (Continued)$27,309,000 and $15,565,000, respectively, over the period from issuance through November 1, 2017 using the effective interest method for issuances throughDecember 31, 2014. Due to the additional issuances of Series C prior to the IPO, the Series C was accreted to the increased minimum redemption value of $5.00per share, or $57,642,000, over the period from issuance through the IPO effective date using the effective interest method. The amount of accretion recorded in2015, 2014 and 2013 for Series C amounted to $607,000, $87,000 and $78,000, respectively. The amount of accretion recorded in 2015, 2014 and 2013 forSeries B-1 was $370,000, $679,000 and $756,000, respectively. The amount of accretion recorded in 2015, 2014 and 2013 for Series B amounted to $192,000,$352,000 and $394,000, respectively. In accordance with the conversion provision of the Company's Third Amended and Restated Certificate of Incorporation, as amended, which was triggeredupon the Company's IPO, all rights with respect to the Preferred Shares of the Company were terminated, including redemption rights. Warrant liability: In connection with the December 2014 $7.5 million additional Series C financing (see above) the Company issued warrants to purchasean aggregate 749,967 shares of the Series C. The proceeds from the December 2014 additional Series C financing with stock purchase warrants were allocated tothe two elements based on the fair value of the Series C warrants at time of issuance. The remainder of the proceeds was allocated to the redeemable convertiblepreferred instrument portion of the transaction, resulting in a discount. The portion of the proceeds so allocated to the warrants is accounted for as a warrantliability and periodically adjusted to fair value through the statement of operations. The related preferred stock discount is amortized as preferred stock accretion toredemption value over the remaining term until the redemption date using the effective interest method. The fair value of the 749,967 Series C Warrants was$1,335,000, with the residual $6,108,000, net of legal fees of $57,000, allocated to the 1,499,935 shares of Series C as of Deceember 31, 2014. The proceeds from the 2015 additional Series C financing with stock purchase warrants were allocated to the two elements based on the fair value of theSeries C warrants at time of issuance. The remainder of the proceeds was allocated to the redeemable convertible preferred instrument portion of the transaction,resulting in a discount. The portion of the proceeds so allocated to the warrants is accounted for as a warrant liability and periodically adjusted to fair value throughthe statement of operations. The related preferred stock discount is amortized as preferred stock accretion to redemption value over the remaining term until theredemption date using the effective interest method. The fair value of the 1,197,218 Series C warrants was $2,131,000, with the residual $10,916,000, net of legalfees of $78,000, allocated to the 2,624,936 shares of Series C. On the IPO effective date of July 22, 2015, the Series C warrant fair values were remeasured for a final time and an increase in fair value of approximately$1,698,000 has been recorded in other income (expense), net in the Company's consolidated statements of operations for year ended December 31, 2015. Upon theclosing of the Company's IPO, all of the shares of the Company's redeemable convertible preferred stock ("Preferred Shares") were retired and cancelled and shallnot be reissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receive undeclaredaccumulated dividends. On the IPO closing date, all outstanding shares of redeemable preferred stock converted into 9,217,983 shares of common stock and allremaining outstanding Series C warrants issued in conjunction with purchases of Series C were net exercised at the IPO price for 78,926 shares of common stock.F-33Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 14. Stock options, restricted stock and performance stock options In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan ("2015 Plan") which became effective immediatelyprior to the closing of the IPO and initially had 767,330 shares of common stock reserved for issuance. On January 1, 2016 and each January 1 thereafter, thenumber of shares of common stock reserved and available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of sharesof stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the administrator of the 2015 Plan (the"Evergreen Provisions"). The 2015 Plan superseded the Neos Therapeutics, Inc. 2009 Equity Plan ("2009 Plan"), originally adopted in November 2009 and whichhad 1,375,037 shares for reserved and available for issuance. Effective upon closing of the IPO, the board of directors determined not to grant any further awardsunder the 2009 Plan. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to vesting, satisfiedwithout the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be added to the shares of common stock available under the2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company's capitalization. The 2015 Plan isadministered by the Company's compensation committee. The Company's compensation committee has full power to select, from among the individuals eligiblefor awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditionsof each award, subject to the provisions of the 2015 Plan. The Company's compensation committee may delegate authority to grant certain awards to theCompany's chief executive officer. The exercise price per share for the stock covered by a stock option granted shall be determined by the administrator at the timeof grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised options under the 2015 Plan expire after the earlier of10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment. The 2009 Plan allowed the Company to grant options to purchase shares of the Company's common stock. Options were granted to officers, employees,nonemployee directors and consultants, and independent contractors of the Company. The Company also granted performance based awards to selectedmanagement. The performance options vest over a three-year period based on achieving certain operational milestones. Unexercised options under the 2009 Planexpire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days aftertermination of employment. All terminated options are available for reissuance under the 2015 Plan. Since the inception of the 2015 Plan through December 31,2015, 1,389 shares related to forfeited 2009 Plan options and 9,197 shares of surrendered restricted stock were transferred into the shares available under the 2015Plan. As of December 31, 2015, 166,040 shares of common stock remain available for grant under the 2015 Plan. The Company estimates the fair value of all stock option awards on the grant date by applying the Black-Scholes option pricing valuation model. Theapplication of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. Prior to theIPO, given the absence of an active market for the Company's common stock prior to its IPO, the Company's board of directors was required to estimate the fairvalue of its common stock at the time of each option grant primarily based upon valuations performed by a third party valuation firm.F-34Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 14. Stock options, restricted stock and performance stock options (Continued) The weighted-average key assumptions used in determining the fair value of options granted during the periods indicated are as follows: Total compensation cost that has been charged to general and administrative expense related to stock options was $1,087,000, $120,000 and $52,000 for theyears ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, there was $7.5 million of unrecognized compensation cost, adjusted forestimated forfeitures, related to unamortized stock options compensation which is expected to be recognized over 3.1 years. For the year ended December 31,2015, the Company issued 38,307 shares of the Company's common stock upon the exercise of outstanding stock options and received proceeds of $74,000 andrealized no tax benefit from the exercised stock options. For the year ended December 31, 2014, the Company issued 13,408 shares of the Company's commonstock upon the exercise of outstanding stock options and received proceeds of $4,000 and realized no tax benefit from the exercised of stock options A summary of outstanding and exercisable options as of December 31, 2015 and 2014, and changes during the periods then ended is presented below:F-35 Year Ended December 31, 2015 2014 2013 Estimated dividend yield 0% 0% 0%Expected stock price volatility 60% 60% 60%Weighted-average risk-free interest rate 1.60% 1.77% 1.23%Expected life of option in years 5 5 5 Weighted-average option fair value at grant $9.723 $2.884 $1.305 Number ofOptions Weighted-AverageExercise Price IntrinsicValue (in thousands) Outstanding at January 1, 2013 175,866 $0.844 Granted 187,267 2.550 Exercised (5,275) 0.305 Expired, forfeited or cancelled (31,796) 1.208 Outstanding at December 31, 2013 326,062 $1.797 $363 Exercisable at December 31, 2013 109,906 $1.000 $210 Granted 237,486 5.684 Exercised (13,408) 0.324 Expired, forfeited or cancelled (38,365) 1.206 Outstanding at December 31, 2014 511,775 $3.684 $2,883 Exercisable at December 31, 2014 150,109 $1.467 $1,179 Granted 883,537 18.789 Exercised (38,307) 1.928 Expired, forfeited or cancelled (4,722) 2.547 Outstanding at December 31, 2015 1,352,283 $13.607 $964 Exercisable at December 31, 2015 229,000 $3.385 $2,504  Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 14. Stock options, restricted stock and performance stock options (Continued) The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2015 was 8.9 and 7.3 years, respectively. The optionexercise price for all options granted in the year ended December 31, 2015 ranged from $9.32 to $25.50 per share. Restricted stock: Under the 2009 Plan, the Company grants restricted stock awards to members of its management and selected members of the board ofdirectors. Restricted stock awards are recorded as deferred compensation and amortized into compensation expense, on a straight-line basis over a defined vestingperiod ranging from 1 to 48 months. For the year ended December 31, 2013, the Company issued 149,244 shares of restricted stock at a grant date fair value of $2.55 per share. Of these shares,7,195 vested immediately and the remaining 142,049 of these shares vest over 48 months in four equal tranches on the anniversary of the issue date. The Companydid not issue any shares of restricted stock for the years ended December 31, 2015 or December 31, 2014. During the years ended December 31, 2015, 2014 and2013, $94,000, $90,000 and $47,000, respectively, of restricted stock compensation cost has been charged to general and administrative expenses. AtDecember 31, 2015, there was $162,000 of unrecognized compensation cost related to restricted stock which will be recognized over 1.8 years. In 2014, theCompany settled certain vested restricted stock awards which were settled having a value of $266,000 in cash, and the Company realized a tax benefit of $90,000.On October 16, 2015, the Company settled certain vested restricted stock awards which were settled having a value of $658,000 in cash, and the company realizeda tax benefit of $224,000. On October 16, 2015, 9,197 shares of restricted stock were surrendered by the holder to the Company to cover taxes associated withvesting of restricted stock. The fair value of such shares was determined to be $18.54 per share, the closing price of the Company's stock on such date. TheCompany had 71,025 and 106,537shares of unvested restricted stock with a weighted average fair value of $2.55 as of December 31, 2015 and 2014, respectively.F-36Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 14. Stock options, restricted stock and performance stock options (Continued) A summary of the status of the Company's nonvested restricted stock as of December 31, 2015 and December 31, 2014, and changes during the periods endedDecember 31, 2015 and December 31, 2014, is presented below:Note 15. Treasury stock The Company has the authority to repurchase common stock from former employees, officers, directors or other persons who performed services for theCompany at the lower of the original purchase price or the then-current fair market value. In 2013, the Company repurchased 55,905 shares of common stock atthe original purchase price of $0.002. On February 19, 2015, the Company's board of directors approved the cancellation of the Company's 55,905 shares oftreasury stock which had been repurchased at the original purchase price of $0.002 in 2013. On October 16, 2015, 9,197 shares of restricted stock weresurrendered by the holder to the Company to cover taxes associated with vesting of restricted stock and such shares were added back into the treasury stock of theCompany.Note 16. Commitments and contingencies Defined contribution plans: The Company has a 401(k) investment plan covering substantially all employees. Employees are allowed to contributeannually up to 50% of their compensation, to a maximum of $17,500. Employees who have attained age 50 before the end of the plan year are eligible to makecatch up contributions of up to $5,500. Through December 31, 2014, the Company was required to make a matching contribution to the 401(k) plan of 50%, to alimit of 6%, of the participant's annual compensation, which was paid in the first quarter of 2015. Effective January 1, 2015, the Company amended its qualified 401(k) savings plan to provide a Company matching contribution on the first 3% of anemployee's salary and to match 1/2% of the next 2% of an employee's salary, for a total possible match of 4%, subject to statutory limitations as prescribed by law.F-37 Number ofShares Weighted-AverageGrant DateFair Value Nonvested at January 1, 2013 70,342 $0.510 Granted 149,244 2.550 Vested (21,633) 1.499 Forfeited (55,904) 0.390 Nonvested at January 1, 2014 142,049 $2.550 Granted — — Vested (35,512) 2.550 Forfeited — — Nonvested at December 31, 2014 106,537 $2.550 Granted — — Vested (35,512) 2.550 Forfeited — — Nonvested at December 30, 2015 71,025 $2.550 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 16. Commitments and contingencies (Continued) For the years ended December 31, 2015, 2014 and 2013, the Company recorded $186,000, $82,000 and $91,000, respectively, of expense for 401(k)contributions. Operating leases: The Company leases its Grand Prairie office space and manufacturing facility under an operating lease which expires in 2024. Inaddition, the Company executed in December 2015, a 60-month lease for office space in Blue Bell, Pennsylvania for its commercial operations which is planned tocommence on May 1, 2016. Total future minimum lease payments under these operating leases with noncancelable terms are as follows: The Company accounts for rent expense on long-term operating leases on a straight-line basis over the life of the lease resulting in a deferred rent balance of$1,166,000 and $1,189,000 at December 31, 2015 and December 31, 2014, respectively. The Company is also liable for a share of operating expenses for bothpremises as defined in the lease agreements. The Company's share of these operating expenses for the Grand Prairie facility was $237,000, $251,000 and $208,000for the years ended December 31, 2015, 2014 and 2013, respectively. Rent expense for these leases, excluding the share of operating expenses, was $884,000,$896,000 and $879,000 for the years ended December 31, 2015, 2014 and 2013, respectively. The Company did not have a share of operating expenses for thePennsylvania lease in 2015. Cash incentive bonus plan: In July 2015, the Company adopted the Senior Executive Cash Incentive Bonus Plan ("Bonus Plan"). The Bonus Plan providesfor cash payments based upon the attainment of performance targets established by the Company's compensation committee. The payment targets will be related tofinancial and operational measures or objectives with respect to the Company, or corporate performance goals, as well as individual targets. The Company hasrecorded $552,000 of compensation expense for the year ended December 31, 2015 under the Bonus Plan.Note 17. License agreements On July 23, 2014, the Company entered into a Settlement Agreement and an associated License Agreement with Shire LLC for a non-exclusive license tocertain patents for certain activities with respect to the Company's new drug application No. 204326 for an extended-release orally disintegrating amphetaminepolistirex tablet ("Neos NDA"). Under the terms of the agreement, the Company is required to pay a lump sum, non-refundable license fee of an amount less than$1.0 million no later than 30 days after receiving regulatory approval by the FDA of the Neos NDA (see Note 21 for subsequent payment). The Company will alsopay a single digit royalty on net sales of the subject product during the life of the patents. The license fee will be capitalized and amortized over the life ofF-38Year ending December 31, (in thousands) 2016 1,003 2017 1,102 2018 1,105 2019 1,107 2020 1,161 Thereafter 4,274 Future minimum lease payments $9,752 Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 17. License agreements (Continued)the patents. The royalties will be recorded as cost of goods sold in the same period as the net sales upon which they are calculated.Note 18. Discontinued operations In March 2013, the Company discontinued the manufacturing of nutraceuticals for third parties in order to concentrate on the manufacture of extended-releasepharmaceutical products. In accordance with Topic ASC, 360-10, the results of operations for the contract manufacturing of nutraceuticals has been excluded fromcontinuing operations and reported as discontinued operations for the prior period. The components of discontinued operations which relate to contractmanufacturing of nutraceuticals are as follows:Note 19. Related party transactions At December 31, 2015 and December 31, 2014, the Company was obligated under a $5,935,000 long-term subordinated note ("Note") that was issued by theCompany to Essex. See Note 12 for further details. On July 21, 2014, the Company, Essex and a third party entered into a Settlement Agreement and Release ofClaims Agreement resolving certain issues and disputes whereby Essex paid $256,000 to the third party, the Company paid Essex $128,000 and Essex agreed toreduce the interest rate on the Note from 10% to 6% for the July 19, 2014 through July 31, 2015 period. The third party released both Essex and the Company fromany and all claims. As described in Note 12, in 2012, the Company negotiated financing arrangements with a related party that provided for the sale-leaseback of up to$6.5 million of the Company's property and equipment. In 2013, the Company executed four transactions totaling $5.5 million and in March 2014, the Companycompleted the final tranche of the sale-leaseback arrangement, raising an additional $795,000. During 2014 and 2013 the Company contracted for approximately $112,000 and $499,000, respectively, in consulting and testing services with a companyaffiliated with the Company's Chairman of the board of directors. As the Company's Chairman is no longer affiliated with this consulting and testing servicescompany, there are no such related party transactions in 2015. The cost of the acquired services was negotiated at arm's length and priced at commerciallyavailable ratesNote 20. Selected Quarterly Financial Data (Unaudited) The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of theresults of the interim periods. Operating results for these periods are not necessarily indicative of the operating results for a full year. Historical results are notnecessarily indicative of results to be expected in future periods. Selected quarterlyF-39 2013 (in thousands) Revenue $943 Direct costs 836 Impairment of intangible assets 544 Net loss from discontinued operations $(437)Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 20. Selected Quarterly Financial Data (Unaudited) (Continued)financial data for years ended December 31, 2015 and 2014, are as follows (in thousands, except share and per share amounts):F-40 Quarter Ended March 31,2014 June 30,2014 September 30,2014 December 31,2014 Net Sales $292 $55 $(25)$436 Gross loss (513) (583) (807) (693)Net Loss $(5,165)$(5,588)$(5,239)$(4,857)Preferred Stock Accretion to Redemption Value (317) (265) (268) (268)Preferred Stock Dividends (539) (544) (551) (551)Net loss attributable to common stock $(6,021)$(6,397)$(6,058)$(5,676)Weighted average common shares outstanding used to compute netloss per share, basic and diluted(2) 871,282 873,060 878,929 881,309 Net loss per share of common stock, basic and diluted(1): $(6.91)$(7.33)$(6.89)$(6.44) Quarter Ended March 31,2015 June 30,2015 September 30,2015 December 31,2015 Net Sales $428 $1,484 $221 $1,659 Gross loss (667) (175) (858) (55)Net Loss $(6,556)$(5,753)$(9,368)$(9,104)Preferred Stock Accretion to Redemption Value (484) (586) (99) — Preferred Stock Dividends (539) (544) (138) — Net loss attributable to common stock $(7,579)$(6,883)$(9,605)$(9,104)Weighted average common shares outstanding used to compute netloss per share, basic and diluted(2)(3) 885,237 887,397 12,403,182 15,933,315 Net loss per share of common stock, basic and diluted(1): $(8.56)$(7.76)$(0.77)$(0.57)(1)Loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly loss per share may notnecessarily equal the total for the year. (2)In connection with the IPO, the Company's Board of Directors approved a 1-for-2.4 reverse stock split of the Company's common stockwhich also resulted in a proportional adjustment to the conversion ratios of the preferred stock and the preferred stock warrants. Allreferences to common stock and per share amounts in these condensed financial statements and accompanying footnotes have beenretroactively adjusted for all periods presented to give effect to this reverse stock split.Table of ContentsNeos Therapeutics, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 20. Selected Quarterly Financial Data (Unaudited) (Continued)Note 21. Subsequent events Events occurring after December 31, 2015 and through the date on which these consolidated financial statements were issued were evaluated for anysubsequent events requiring recognition or disclosure and have been incorporated into these consolidated financial statements. Between January 1 and March 17, 2016, the Company issued 19,090 shares of its common stock to several investors upon the exercise of Series B-1 warrantsheld by those investors at an exercise price of $0.0024 per share (see Note 13). On January 1, 2016, in accordance with the Evergreen Provisions of the 2015 Plan, the Company added 800,797 shares to the option pool, increasing the totalnumber of shares reserved and available for issuance under the 2015 Plan to 966,837 shares. On January 27, 2016, the Company received approval from the FDA for its Adzenys XR-ODT product and paid the lump sum, non-refundable license fee ofan amount less than $1.0 million on February 26, 2016 (see Note 17).F-41(3)Between June 30, 2015 and July 27, 2015, the Company issued a total of 1,000,000 shares of its Series C redeemable convertible preferredstock to several existing investors upon the exercise of warrants to purchase Series C preferred stock held by those investors at an exerciseprice of $5.00 per share, for an aggregate exercise price of $5.0 million. On the IPO closing date, all outstanding shares of redeemablepreferred stock converted into 9,217,983 shares of common stock and all remaining outstanding Series C warrants issued in conjunctionwith purchases of Series C preferred stock were net exercised at the IPO price for 78,926 shares of common stock. Upon the closing of theCompany's IPO, all of the shares of the Company's redeemable convertible preferred stock were retired and cancelled and shall not bereissued as shares of such series, and all rights and preferences of those Preferred Shares were cancelled including the right to receiveundeclared accumulated dividends. On July 28, 2015, the Company closed its initial public offering whereby the Company sold 5,520,000shares of common stock, at a public offering price of $15.00 per share, which includes 720,000 shares of common stock resulting from theunderwriters' exercise of their over-allotment option at the IPO price on July 23, 2015. These transactions produced a significant increase inthe number of shares outstanding which will impact the year-over-year comparability of the Company's loss per share calculations.Table of Contents Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the city of Grand Prairie, State of Texas, on the 18th day of March 2016. Power of Attorney We, the undersigned directors and officers of Neos Therapeutics, Inc. (the "Company"), hereby severally constitute and appoint Vipin Garg and RichardEisenstadt, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our names in thecapacities indicated below, to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documentsin connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authorityto do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute orsubstitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act, this report has been signed by the following persons in the capacities and on the dates indicated. NEOS THERAPEUTICS, INC. By: /s/ VIPIN GARG Vipin Garg Chief Executive OfficerSignature Title Date /s/ VIPIN GARGVipin Garg Chief Executive Officer and Director (PrincipalExecutive Officer) March 18, 2016/s/ RICHARD EISENSTADTRichard Eisenstadt Chief Financial Officer (Principal Financial andAccounting Officer) March 18, 2016/s/ ALAN HELLERAlan Heller Director March 18, 2016/s/ GREG ROBITAILLEGreg Robitaille Director March 18, 2016/s/ BETH HECHTBeth Hecht Director March 18, 2016/s/ BRYANT FONGBryant Fong Director March 18, 2016Table of ContentsSignature Title Date /s/ JOHN SCHMIDJohn Schmid Director March 18, 2016/s/ PAUL EDICKPaul Edick Director March 18, 2016Table of Contents SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS(in thousands) Balance atbeginningof period Additonscharged tocosts andexpenses Otheradditions Deductions Balanceat endof period For the year ended December 31, 2015 Allowance for chargebacks (1) $190 $5,359 $— $(4,609)$940 Allowance for cash discounts (1) 14 194 — (109) 99 Reserve for wholesaler fees (2) 117 914 — (670) 361 Reserve for returns (2) 212 242 — (25) 429 Government rebates (2) 9 103 — (2) 110 For the year ended December 31, 2014 Allowance for chargebacks (1) — 202 — (12) 190 Allowance for cash discounts (1) — 18 — (4) 14 Reserve for wholesaler fees (2) — 122 — (5) 117 Reserve for returns (2) — 212 — — 212 Government rebates (2) — 9 — — 9 (1)Shown as a reduction of accounts receivable and gross sales. (2)Shown as accrued expenses and a reduction of gross sales.Table of Contents Exhibit index Exhibit indexExhibitnumber Description of exhibit 3.1 Fourth Amended and Restated Certificate of Incorporation of the Registrant, as amended and currently in effect(Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q (001-37508), filed with the SEC onSeptember 4, 2015, incorporated herein by reference). 3.2 Amended and Restated Bylaws of the Registrant, as amended and currently in effect (Filed as an Exhibit to theRegistrant's quarterly report on Form 10-Q (001-37508), filed with the SEC on September 4, 2015, incorporatedherein by reference). 4.1 Form of common stock certificate (Filed as an Exhibit to the Registrant's registration statement on Form S-1(333-205106), filed with the SEC on July 13, 2015, incorporated herein by reference). 4.2 Form of warrant to purchase common stock (Filed as an Exhibit to the Registrant's registration statement onForm S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 10.1 Amended and Restated Investors' Rights Agreement, dated as of June 9, 2015 (Filed as an Exhibit to theRegistrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporatedherein by reference). 10.2*Amendment and Waiver, dated as of February 5, 2016, amending the Amended and Restated Investors' RightsAgreement of the Registrant. 10.3+Neos Therapeutics, Inc. 2009 Equity Plan (Filed as an Exhibit to the Registrant's registration statement onForm S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 10.4+Form of option agreements under 2009 Equity Plan (Filed as an Exhibit to the Registrant's registration statementon Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 10.5+Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan and forms of option agreements thereunder (Filedas an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on July 13,2015, incorporated herein by reference). 10.6+Senior Cash Incentive Bonus Plan (Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q (001-37508), filed with the SEC on November 13, 2015, incorporated herein by reference). 10.7+Form of Indemnification Agreement between the Registrant and each of its executive officers and directors(Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC onJuly 13, 2015, incorporated herein by reference). 10.8 Third Amended and Restated Subordinated Promissory Note, dated as of December 31, 2013, issued to EssexCapital Corporation, as amended (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). Table of ContentsExhibitnumber Description of exhibit 10.9†Loan and Security Agreement, by and between the Registrant, Hercules Technology III, L.P. and HerculesTechnology Growth Capital, Inc., in its capacity as administrative agent for itself and Hercules TechnologyIII, L.P. dated as of March 28, 2014, as amended (Filed as an Exhibit to the Registrant's registration statement onForm S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 10.10†Settlement Agreement, by and between the Registrant and Shire LLC, dated as of July 23, 2014 (Filed as anExhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015,incorporated herein by reference). 10.11†License Agreement, by and between the Registrant and Shire LLC, dated as of July 23, 2014 (Filed as an Exhibitto the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015,incorporated herein by reference). 10.12 Commercial Lease Agreement, by and between Riverside Business Green, L.P., and Neos Therapeutics, LP,dated as of June 29, 1999, as amended (Filed as an Exhibit to the Registrant's registration statement on Form S-1(333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 10.13†Supply Agreement, by and between the Registrant and Coating Place, Inc., dated as of August 28, 2014 (Filed asan Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 26,2015, incorporated herein by reference). 10.14†Asset Purchase Agreement, by and between the Registrant and Cornerstone BioPharma, Inc., dated as ofAugust 28, 2014 (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filedwith the SEC on June 19, 2015, incorporated herein by reference). 10.15+Amended and Restated Employment Agreement, by and between the Registrant and Vipin Garg, dated as ofJuly 10, 2015 (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed withthe SEC on July 13, 2015, incorporated herein by reference). 10.16+Amended and Restated Employment Agreement, by and between the Registrant and Richard Eisenstadt, dated asof July 10, 2015 (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filedwith the SEC on July 13, 2015, incorporated herein by reference). 10.17+Amended and Restated Employment Agreement, by and between the Registrant and Thomas McDonnell, datedas of July 10, 2015 (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filedwith the SEC on July 13, 2015, incorporated herein by reference). 21.1 Subsidiaries of the Registrant (Filed as an Exhibit to the Registrant's registration statement on Form S-1 (333-205106), filed with the SEC on June 19, 2015, incorporated herein by reference). 23.1*Consent of RSM US LLP. 24.1*Power of Attorney (included on signature page). 31.1*Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2*Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Table of ContentsExhibitnumber Description of exhibit 32.1*Certification of Principal Executive Officer and Principal 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*XBRL Instance Document. 101.SCH*XBRL Taxonomy Extension Schema Document. 101.CAL*XBRL Taxonomy Extension Calculation Document. 101.DEF*XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB*XBRL Taxonomy Extension Labels Linkbase Document. 101.PRE*XBRL Taxonomy Extension Presentation Link Document.*Filed herewith. †Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and this exhibit has beensubmitted separately to the SEC. +Indicates a management contract or compensatory plan.Exhibit 10.2 EXECUTION VERSION NEOS THERAPEUTICS, INC. AMENDMENT AND WAIVER This Amendment and Waiver, effective as of February 5, 2016 (the “Amendment”), is executed by the undersigned Investors and Neos Therapeutics, Inc.,a Delaware corporation (the “Company”). Reference is hereby made to that certain Amended and Restated Investor Rights Agreement, dated as of June 9, 2015(the “Rights Agreement”), by and among the Company and the investors listed on Exhibit A thereto (each, an “Investor”). Capitalized terms used herein that arenot otherwise defined shall have the meaning ascribed thereto in the Rights Agreement. WHEREAS, Section 6.6 of the Rights Agreement may be amended or terminated and the observance of any term thereof may be waived (either generallyor in a particular instance and either retroactively or prospectively) only by a written instrument executed by (i) the Company and (ii) the holders of a majority ofthe then outstanding shares of Series B Preferred Stock, Series B-l Preferred Stock and Series C Preferred Stock, acting together as a single class held by theInvestors. WHEREAS, there are no outstanding shares of Series B Preferred Stock, Series B-l Preferred Stock and Series C Preferred Stock since all such sharesautomatically converted into shares of Common Stock of the Company upon the consummation of the IPO; WHEREAS, the Company and the Investors intended for any waiver or amendment of the Rights Agreement pursuant to Section 6.6 followingconversion of the Series B Preferred Stock, Series B-l Preferred Stock and Series C Preferred Stock to require the approval of (i) the Company and (ii) the holdersof a majority of the Registrable Securities then outstanding which are held by Investors who held shares of Series B Preferred Stock, Series B-l Preferred Stockand Series C Preferred Stock immediately prior to the consummation of the IPO; WHEREAS, the Company and, to the extent required, the undersigned Investors wish, on behalf of themselves and all other Investors, to amendSection 6.6 of the Rights Agreement to clarify that the Rights Agreement may be amended by the (i) Company and (ii) the holders of a majority of the RegistrableSecurities then outstanding which are held by Investors who held shares of Series B Preferred Stock, Series B-l Preferred Stock and Series C Preferred Stockimmediately prior to the consummation of the IPO; WHEREAS, Section 2.2 of the Rights Agreement provides that in the event the Company determines to register any of its stock or other securities underthe Securities Act, in connection with a public offering of such securities, the Company shall, subject to the terms and limitations in the Rights Agreement, includein such registration Registrable Securities owned by each holder to the extent requested by such holder (the “Registration Rights”); WHEREAS, the Company is requesting to the extent required that pursuant to Section 6.6 of the Rights Agreement, as amended by this Amendment, theInvestors constituting the holders of a majority of the Registrable Securities then outstanding which are held by Investors who held shares of Series B PreferredStock, Series B-l Preferred Stock and Series C Preferred Stock immediately prior to the consummation of the IPO, as of the date hereof, waive their RegistrationRights, rights to notices and any related rights with respect to the currently contemplated registration of common stock to be issued by the Company pursuant to aregistration statement on Form S-1 filed by the Company on January 29, 2016 and one or more additional registration statements pursuant to Rule 462(b) of theSecurities Act with respect thereto (collectively, the “Registration”);  WHEREAS, the undersigned Investor wishes, on behalf of itself and, to the extent applicable, all other holders, to waive its Registration Rights pursuantto Section 6.6 of the Rights Agreement and any related rights with respect to the Registration; and NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and, to theextent required, the undersigned investors hereby agree as follows: 1. The first paragraph of Section 6.6 of the Rights Agreement is hereby deleted in its entirety and replaced as follows: “6.6 Amendment, Termination and Waivers. This Agreement may be amended or terminated and the observance of any term hereof may bewaived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument executed by (i) theCompany and (ii) the holders of a majority of the Registrable Securities then outstanding which are held by Investors who held shares ofSeries B Preferred Stock, Series B-l Preferred Stock and Series C Preferred Stock immediately prior to the consummation of the IPO.Notwithstanding the foregoing:” 2. Section 2.12 of the Rights Agreement is hereby deleted in its entirety and replaced as follows: “2.12 Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities inany registration pursuant to Section 2.1 or Section 2.2 shall terminate upon the earlier of (a) such time as Rule 144 or another similar exemptionunder the Securities Act is available for the sale of all of such Holder’s shares without limitation during a three-month period withoutregistration, and (b) the fifth anniversary of the IPO.” 3. The Company and, to the extent required, the undersigned Investors, pursuant to the terms of the Rights Agreement, as amended by thisAmendment, hereby waives, and agrees to waive, on behalf of themselves and, to the extent applicable, all other holders, any and all rights under the RightsAgreement with respect to the Registration, including, without limitation, the Registration Rights, any rights to receive notice of the Registration or notice of theRegistration Rights and any rights to include any Registrable Securities in the Registration. 4. Each undersigned Investor hereby certifies with respect to itself that the number of shares of Common Stock of the Company set forth on thesignature page hereto represent all of the outstanding capital stock of the Company owned by such Investor as of the date hereof. 5. Except as expressly provided herein, all other terms and conditions in the Rights Agreement shall remain in full force and effect, and thisAmendment shall be effective as of the date hereof. [Signature Page to Follow]  NEOS THERAPEUTICS, INC. By:/s/Richard EisenstadtName:Richard I. EisenstadtTitle:Chief Financial Officer [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: /s/Jack SchulerNumber of Shares Owned: 1,071,652Name:Jack W. Schuler1,044,578 from B, B-1, CDate:February 1, 2016 If an entity, use the following: ENTITY NAME: /s/Jack SchulerNumber of Shares Owned: 41,665Name:JS Grandchildren 2010 Continuation TrustTitle:Date:February 1, 2016 ENTITY NAME: /s/Jack SchulerNumber of Shares Owned: 41,665Name:Schuler Grandchildren LLCDate:February 1, 2016 ENTITY NAME: /s/Jack SchulerNumber of Shares Owned: 41,665Name:Tanya Eve Schuler TrustDate:February 1, 2016 ENTITY NAME: /s/Jack SchulerNumber of Shares Owned: 41,665Name:Therese Heidi Schuler TrustDate:February 1, 2016 ENTITY NAME: /s/Jack SchulerNumber of Shares Owned: 41,665Name:Hans Schuler TrustDate:February 1, 2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: ENTITY NAME: JOHN PATIENCE TRUST By:/s/John PatienceNumber of Shares Owned: 467,848 B, B-1, CName:John PatienceTitle:TrusteeDate:2/1/2016 ENTITY NAME: PATIENCE ENTERPRISE L.P. By:/s/John PatienceNumber of Shares Owned: 229,166 B, B-1, CName:John PatienceTitle:TrusteeDate:2/1/2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: /s/Alan HellerNumber of Shares Owned: 212,789 from B, B-1, CName:Alan HellerDate:2-1-16 If an entity, use the following: ENTITY NAME: By:Number of Shares Owned:Name:Title:Date: [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver] INVESTOR: If an individual, use the following: /s/ Greg RobitailleNumber of Shares Owned: 22,115 from B/B1/CName:Greg RobitailleDate:Feb. 1, 2016 If an entity, use the following: ENTITY NAME: By:Number of Shares Owned:Name:Title:Date: [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: ENTITY NAME: Burrill Life Sciences Capital Fund III, L.P. By:/s/Caley CasteleinNumber of Shares Owned: 1,282,737Name:Caley CasteleinTitle:Managing Director of the General PartnerDate:2/1/2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: ENTITY NAME: SIU Capital LLC By:/s/ Ralph IannelliNumber of Shares Owned:Name:Ralph IannelliTitle:ManagerDate:2/2/2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: ENTITY NAME: Esssex Capital Corporation By:/s/ Ralph IannelliNumber of Shares Owned:Name:Chief Executive OfficerTitle:ManagerDate:2/2/2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: ENTITY NAME: KF Investment Partners L.P. By:/s/ Ralph IannelliNumber of Shares Owned:Name:Ralph IannelliTitle:General PartnerDate:2/2/2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver]  INVESTOR: If an individual, use the following: Number of Shares Owned:Name:Date: If an entity, use the following: Presidio Partners 2007, L.P.By: Presidio Partners 2007, GP, L.P.,Its General PartnerBy: Presidio Partners 2007, GP, LLC,Its General Partner By:/s/ James WatsonNumber of Shares Owned: 1,636,372Name:James F. WatsonTitle:ManagerDate:February 3,2016 Presidio Partners 2007 (Parallel, L.P.)By: Presidio Partners 2007, GP, L.P.,Its General PartnerBy: Presidio Partners 2007, GP, LLC,Its General Partner By:/s/ James WatsonNumber of Shares Owned: 41,956Name:James F. WatsonTitle:ManagerDate:February 3,2016 [Signature Page to Neos Therapeutics, Inc. Registration Rights Waiver] QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statement No. 333-205937 on Form S-8 of Neos Therapeutics, Inc. and subsidiaries of our reportdated March 17, 2016, relating to our audits of the consolidated financial statements and the financial statement schedule appearing in the Annual Report onForm 10-K of Neos Therapeutics, Inc. and subsidiaries for the year ended December 31, 2015./s/ RSM US LLPNew York, New YorkMarch 17, 2016QuickLinksExhibit 23.1Consent of Independent Registered Public Accounting FirmQuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002 I, Vipin Garg, certify that: 1. I have reviewed this Annual Report on Form 10-K of Neos Therapeutics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: March 18, 2016 By: /s/ VIPIN GARGVipin GargPresident and Chief Executive Officer(Principal Executive Officer)QuickLinksExhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002 I, Richard Eisenstadt, certify that: 1. I have reviewed this Annual Report on Form 10-K of Neos Therapeutics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reportingDate: March 18, 2016 By: /s/ RICHARD EISENSTADTRichard EisenstadtChief Financial Officer (Principal Financial Officer)QuickLinksExhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Vipin Garg, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, theAnnual Report on Form 10-K of Neos Therapeutics, Inc. for the period ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financialcondition and results of operations of Neos Therapeutics, Inc.I, Richard Eisenstadt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge,the Annual Report on Form 10-K of Neos Therapeutics, Inc. for the period ended December 31, 2015 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of Neos Therapeutics, Inc.The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934,as amended (Exchange Act), and are not to be incorporated by reference into any filing of Neos Therapeutics, Inc. under the Securities Act of 1933, as amended,or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing./s/ VIPIN GARGVipin GargPresident and Chief Executive Officer(Principal Executive Officer)March 18, 2016 /s/ RICHARD EISENSTADTRichard EisenstadtChief Financial Officer(Principal Financial Officer)March 18, 2016 QuickLinksExhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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