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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 168 added, 193 removed, 154 unchanged (70% of the section changed)

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We are a specialty pharmaceutical company committed to being the leader in responsible pain management.

Our first product, Xtampza ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone.

In April 2016, the FDA, approved our NDA for Xtampza ER for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.

In June 2016, we announced the commercial launch of Xtampza ER.

Our product portfolio also includes the Nucynta Products.

In December 2017, we entered into the Nucynta Commercialization Agreement with Assertio, pursuant to which we licensed the right to commercialize the Nucynta Products in the United States.

Nucynta ER is an extended-release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around the clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate.

Nucynta IR is an immediate-release formulation of tapentadol that is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults.

We closed the transactions contemplated by the Nucynta Commercialization Agreement, as amended, on January 9, 2018, and we began marketing and commercially selling the Nucynta Products in February 2018.

On February 13, 2020, we closed our acquisition of certain assets related to the Nucynta Products, including the right to commercialize the Nucynta Products in the United States and certain regulatory and supply chain assets (the “Nucynta Acquisition”), from Assertio for an aggregate purchase price of $375.0 million, subject to certain adjustments as set forth in that certain Asset Purchase Agreement, dated as of February 6, 2020, by and between us and Assertio (the “Nucynta Purchase Agreement”) .

Our portfolio includes Xtampza ER, an abuse-deterrent, extended-release, oral formulation of oxycodone, and Nucynta ER and Nucynta IR (collectively, the “Nucynta Products”), which are extended-release (“ER”) and immediate-release (“IR”) formulations of tapentadol.

Xtampza ER was approved by the FDA in April 2016 for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.

We commercially launched Xtampza ER in June 2016.

Nucynta ER is indicated for the management of pain severe enough to require daily, around the clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate.

Nucynta IR is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults.

We began shipping and recognizing product sales on the Nucynta Products on January 9, 2018 and began marketing the Nucynta Products in February 2018.

We initially licensed the right to commercialize the Nucynta Products in the United States through a Commercialization Agreement with Assertio Therapeutics, Inc.

(formerly known as Depomed) (“Assertio”) entered into in December 2017 (the “Nucynta Commercialization Agreement”).

On February 6, 2020, we entered into an Asset Purchase Agreement with Assertio (the “Nucynta Purchase Agreement”), pursuant to which we agreed to acquire from Assertio certain assets related to the Nucynta Products (the “Nucynta Acquisition”), including the license from Grünenthal GmbH (“Grünenthal”), for an aggregate purchase price of $375.0 million.

On February 13, 2020, we closed the Nucynta

Acquisition in accordance with the Nucynta Purchase Agreement.

Upon closing, the Nucynta Commercialization Agreement was effectively terminated.

Our prior royalty obligation to Assertio ceased and our only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal.

For the fiscal year ended December 31, 2020, we generated $310.0 million in net revenues, comprised of $128.0 million from sales of Xtampza ER and $182.0 million from sales of the Nucynta Products.

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We are promoting the Nucynta Products to the same health care professionals to whom we promote Xtampza ER, leveraging our existing sales organization.

We have historically paid royalty to Assertio on all revenues from the sale of Nucynta Products based on certain net sales thresholds.

We have never been profitable and have incurred net losses in each year since inception.

We incurred net losses of $22.7 million, $39.1 million and $74.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

We have historically paid royalties to Assertio on all revenues from the sale of Nucynta Products based on certain net sales thresholds.

Upon the closing of the Nucynta Acquisition and the termination of the Nucynta Commercialization Agreement (except for certain sections that survive in accordance with the Nucynta Purchase Agreement) in February 2020, our prior royalty obligation to Assertio ceased and our only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal.

We were historically not profitable and incurred net losses in each year since inception until 2020.

We generated net income of $26.8 million in the year ended December 31, 2020 and incurred a net loss of $22.7 million in the year ended December 31, 2019.

As of December 31, 2020, we had an accumulated deficit of $333.1 million.

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We believe that our cash and cash equivalents at December 31, 2020, together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

In December 2019, a novel strain of coronavirus began infecting people in China;

since then, the disease caused by that virus, COVID-19, has sickened millions of people across the world and in March 2020, the World Health Organization declared COVID-19 a pandemic.

The pandemic has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel.

As of the date of the filing of this Annual Report on Form 10-K, we expect the COVID-19 pandemic and actions taken to contain it to impact our revenue (due to fewer new patients beginning therapy with our products and adverse impact on our ability to promote our products due to closure or limited operations of many physicians’ offices) and have decreased certain operating expenses, including travel, marketing and expenses associated with participation in congresses that have been postponed.

We believe that the disruptions caused by COVID-19 will continue and there remains substantial uncertainty as to when such disruptions will cease (or ease).

Financial Operations Overview

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Product revenue through the year ended December 31, 2020 has been generated from product sales of Xtampza ER and the Nucynta Products.

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, product sales are recorded net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns upon delivery of products to customers.

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, product sales are recorded upon delivery of products to customers, net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns.

Cost of Product Revenues

Cost of product revenues include amortization of the intangible asset acquired in connection with the Nucynta Commercialization Agreement (“Nucynta Intangible Asset”), royalty expense, the cost of active pharmaceutical ingredient, the cost of producing finished goods that correspond with revenue for the reporting period, as well as certain period costs related to freight, packaging, stability and quality testing.

Please refer to Note 4, License Agreements , and Note 9, Intangible Assets, for further detail around the Nucynta Intangible Asset and royalty expense.

Cost of product revenues include amortization of the intangible asset acquired in connection with the Nucynta Acquisition and the prior Nucynta Commercialization Agreement (“Nucynta Intangible Asset”), royalty expense, the cost of active pharmaceutical ingredient, the cost of producing finished goods that correspond with revenue for the reporting period, as well as certain period costs related to freight, packaging, stability and quality testing.

Please refer to

Note 4, License Agreements , and Note 9, Intangible Assets, for further detail around the Nucynta Intangible Asset and royalty expense.

Research and Development Expenses

Research and development expenses consist of development costs associated with our products, product platform technology and development of our product candidates.

These costs are expensed as incurred and include:

● compensation and employee-related costs, including stock-based compensation;

● costs associated with conducting our preclinical, clinical and regulatory activities, including fees paid to third-party professional consultants and service providers;

● costs incurred under clinical trial agreements;

● costs for laboratory supplies;

● costs to acquire, develop and manufacture preclinical study and clinical trial materials;

● facilities, depreciation and other expenses including allocated expenses for rent and maintenance of facilities.

We cannot determine with certainty the timing of initiation, the duration or the completion costs of future preclinical studies and clinical trials.

At this time, due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur and the timelines required for our products.

Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations.

In addition, we cannot forecast which products may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Our research and development has been focused primarily on developing our DETERx platform technology and Xtampza ER.

Accordingly, historically we have not tracked research and development costs by project.

In addition, we use our employee and infrastructure resources across multiple research and development projects.

Research and development expenses consist of costs associated with our research and development activities for our products.

These costs are expensed as incurred and include compensation and employee-related costs, including stock-based compensation;

costs associated with conducting our clinical and non-clinical activities, including clinical and non-clinical trials that we conduct for post-marketing requirements;

and costs for laboratory supplies, depreciation of lab equipment, and other expenses including allocated expenses for rent and maintenance of facilities.

Selling, General and Administrative Expenses

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Interest Expense

Interest expense consists primarily of non-cash interest costs related to our Nucynta Commercialization Agreement and cash interest costs from the Loan and Security Agreement with Silicon Valley Bank (“SVB”).

Interest expense consists primarily of cash and non-cash interest costs related to the term notes and convertible notes issued in connection with the Nucynta Acquisition.

Historically, interest expense has also related to the Nucynta Commercialization Agreement and cash interest costs from the Loan and Security Agreement with Silicon Valley Bank (“SVB”).

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Provision for Income Taxes

Provision for income taxes consists of state income tax for certain states that enacted changes in tax laws that prevent us from using our state-level NOLs to offset taxable income in 2020.

We did not record income tax expense in 2019 due to the utilization of federal and state NOLs carried forward to offset taxable income.

Critical Accounting Policies and Significant Judgments and Estimates

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements.

Estimates include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of our products, estimates utilized in the valuation of inventory, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, intangible assets and tax valuation reserves.

We base our estimates and assumptions on historical experience when available and on various factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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For the year ended December 31, 2020, in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), revenue for product sales is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

This generally

occurs upon delivery;

This generally occurs upon delivery;

when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable.

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Given that timing of recognition for product sales under legacy GAAP and ASC 606 occurred on the delivery of products to customers and there were no differences in transaction price under legacy GAAP and ASC 606, the adoption of Topic 606 did not have a material impact on our consolidated financial position, results of operations, equity or cash flows for the year ended December 31, 2018.

Prior to the third quarter of 2017, we recognized revenue when products were dispensed to end users, or the sell-through method of revenue recognition under legacy GAAP, as we did not have sufficient experience with product sales to estimate returns at the time product was sold to customers.

In the third quarter of 2017, we transitioned to the sell-in method of revenue recognition and recorded a cumulative one-time $4.4 million increase to revenues.

Sales Deductions

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Accruals and related reserves required for rebates and incentives are adjusted as new information becomes available, including actual claims.

If actual results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.

If actual results vary, we may need to adjust these estimates, which could have an effect on revenue and earnings in the period of the adjustment.

Provisions for product returns are based on product-level historical trends, as well as relevant market events and other factors.

For the Nucynta Products, estimates of product returns are primarily based on historical trends as the Nucynta Products have been commercially sold for a number of years.

For Xtampza ER, since the product has only been commercially sold since June 2016, estimates of product returns are based on a combination of historical returns processed to date, taking into consideration the expiration date of product upon delivery to customers, as well as forecasted customer buying patterns, shipment and prescription trends, channel inventory levels, and other specifically known market events and trends.

forecasted customer buying patterns, shipment and prescription trends, channel inventory levels, and other specifically known market events and trends.

Provisions for trade allowances and chargebacks are primarily based on customer-level contractual terms.

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We record the fair value of finite-lived intangible assets as of the transaction date.

Intangible assets are then amortized over their estimated useful lives using either the straight-line method, or if reliably determinable, based on the pattern in

which the economic benefit of the asset is expected to be utilized.

Intangible assets are then amortized over their estimated useful lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized.

We test intangible assets for potential impairment whenever triggering events or circumstances present an indication of impairment.

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Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.

For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Annual Report on Form 10-K for the year ended December 31, 2019.

Comparison of the Years Ended December 31, 2020 and 2019

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Product revenues, net

Costs and expenses

Cost of product revenues

Cost of product revenues (excluding intangible asset amortization)

Intangible asset amortization

Total cost of products revenues

Operating expenses

Research and development

Selling, general and administrative

Total costs and expenses

Loss from operations

Total operating expenses

Income (loss) from operations

Interest expense

Interest income

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Comparison of the Years Ended December 31, 2020 and 2019

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The $13.3 million increase related to an increase in revenue for Xtampza ER of $23.0 million, offset by a decrease in revenue for the Nucynta Products of $9.7 million.

For 2019, Xtampza ER product revenues, net were $105.0 million, compared to $69.4 million for 2018.

For 2020, Xtampza ER revenue was $128.0 million, compared to $105.0 million for 2019.

The increase in revenue for Xtampza ER was primarily related to an increase in sales volume due to increasing demand.

For 2019, Nucynta IR and ER product revenues, net were $117.7 million and $74.0 million, respectively, compared to $129.9 million and $81.1 million, respectively, for 2018.

For 2020, Nucynta IR and ER

revenue was $116.3 million and $65.7 million, respectively, compared to $117.7 million and $74.0 million, respectively, for 2019.

The decrease in revenue for the Nucynta Products was primarily related to lower sales volume, partially offset by an increase in price.

Cost of product revenues was $193.7 million for 2019, compared to $165.7 million for 2018.

The $28.0 million increase was primarily related to the recognition of royalty expense for the Nucynta Products, as royalty expense in 2019 was recognized as incurred under the terms of the Nucynta Commercialization Agreement as amended in November 2018, while the expense for 2018 was recognized on a straight-line basis through the amortization of the Nucynta Intangible Asset.

Cost of product revenues (excluding intangible asset amortization) was $69.5 million for 2020, compared to $178.9 million for 2019.

The $109.4 million decrease was primarily related to a decrease in royalty expense for the Nucynta Products.

In 2019, we recognized $118.6 million in sales-based royalty expense due to Assertio under the terms of the Nucynta Commercialization Agreement, representing a full year of royalty expense compared to $14.2 million in 2020, when our sales-based royalty obligations to Assertio ceased upon closing of the Nucynta Acquisition on February 13, 2020.

Intangible asset amortization was $60.7 million for 2020, compared to $14.8 million for 2019.

The $45.9 million increase was primarily related to the Nucynta Acquisition, in which $367.1 million of consideration was allocated to the existing intangible asset as incremental cost in 2020.

The intangible asset is being amortized on a straight-line basis over its estimated useful life of approximately six years.

Research and development expenses were $9.8 million for 2020, compared to $10.3 million for 2019.

The $1.6 million increase was primarily related to an increase in salaries, wages and benefits, including stock-based compensation expense.

The $568,000 decrease was primarily related to a decrease in trial related costs.

Selling, general and administrative expenses were $113.8 million for 2020, compared to $116.4 million for 2019.

The $2.6 million decrease was primarily related to:

● a decrease in sales, marketing and consulting costs of $8.1 million, primarily due to higher one-time costs incurred in 2018 to commercialize the Nucynta Products ;

● a decrease in salaries, wages and benefits of $3.3 million, primarily due to lower incentive compensation expense and lower average employee headcount ;

● a decrease in fees and permits, including post-marketing requirements, of $1.3 million;

● a n increase in rent expense of $1.3 million, primarily related to us taking possession of our new corporate headquarters in mid-2018 and e ntering into vehicle leases for our field-based employees starting in 2019 ;

● a decrease in sales, marketing and consulting costs of $4.1 million, primarily due to lower costs incurred in 2020 to support the ongoing commercialization of our products;

● a decrease in travel, trainings, conferences, and meetings of $3.6 million, primarily due to the restrictions imposed in response to the COVID-19 outbreak;

● a decrease in audit, legal, and other professional fees of $2.7 million, primarily due to lower litigation costs;

partially offset by

● an increase in other fees of $2.6 million, primarily due to certain states recently enacting excise taxes on the sale of opioids;

Interest expense was $909,000 for 2019, compared to $20.1 million for 2018.

The decrease was primarily due to $19.3 million of interest expense recognized in 2018 associated with the minimum royalty payments related to the Nucynta Commercialization Agreement.

In November 2018, the minimum royalty payments were eliminated upon the execution of the Third Amendment to the Nucynta Commercialization Agreement.

Interest income was $1.9 million for 2019, compared to $1.7 million for 2018.

The $248,000 increase was primarily due to higher interest rates earned on money market funds.

Comparison of the Years Ended December 31, 2018 and 2017

Product revenues, net were $280.4 million for 2018, compared to $28.5 million for the year ended December 2017 (“2017”).

The $251.9 million increase was primarily related to sales of the Nucynta Products pursuant to the Nucynta Commercialization Agreement consummated in January 2018.

For 2018, the Nucynta Products product revenues, net were $211.0 million.

In addition, Xtampza ER product revenues, net were $69.4 million for 2018, which represents a $40.9 million increase compared 2017.

The increase in Xtampza ER product revenues, net was primarily due to an increase in sales volume due to increasing demand.

Cost of product revenues was $165.7 million for 2018, compared to $2.6 million for 2017.

The $163.1 million increase was primarily related to $109.8 million of amortization expenses associated with the intangible asset related to the Nucynta Commercialization Agreement.

The remaining increase was primarily related to volume of product sales in 2018.

Research and development expenses were $8.7 million for 2018, compared to $8.6 million for 2017.

The $89,000 increase was primarily related to an increase in salaries, wages and benefits of $1.0 million, primarily due to increases in employee headcount and stock-based compensation expense.

This was partially offset by a $670,000 decrease in development manufacturing expenses following the termination of the Onsolis License and Development Agreement in 2017.

Selling, general and administrative expenses were $126.8 million for 2018, compared to $92.8 million for 2017.

The $34.0 million increase was primarily related to:

● a n increase in salaries, wages and benefits of $14.0 million, primarily due to increases in employee headcount, including an increase in stock-based compensation expense of $5.3 million;

● an increase in sales and marketing costs of $10.8 million, primarily related to the Nucynta Products and continued support of Xtampza ER;

● an increase in PDUFA related expenses of $2.7 million, primarily due to the acquisition of the Nucynta Products;

● an increase in audit, legal, and other professional fees of $3.2 million;

● an increase in regulatory costs, including consulting and subscriptions, of $2.1 million, primarily due to the acquisition of the Nucynta Products;

● an increase in consulting fees of $1.6 million;

● an increase in insurance expense of $1.7 million, primarily due to an increase in product liability insurance;

● a decrease of $1.8 million due to the impairment charge relating to the termination of the Onsolis License and Development Agreement with BDSI in 2017.

Interest expense was $20.1 million for 2018.

This includes $19.3 million of non-cash interest expense associated with the minimum royalty payments related to the Nucynta Commercialization Agreement, which was entered into during 2018, and interest expense on our term loan of $849,000.

Interest income was $1.7 million for 2018, compared to $582,000 for 2017.

The $1.1 million increase was primarily due to higher interest rates on money market funds.

● an increase in salaries, wages and benefits of $1.9 million, primarily due to stock-based compensation expense, wage increases and incentive compensation expense;

● an increase in fees and permits, including fees associated with our pariticpation in the opioid PMR consoritum, of $1.2 million;

● an increase in insurance of $917,000, primarily due to higher premiums;

● an increase in subscriptions, licenses and support of $648,000;

● an increase in rent expense of $436,000, primarily related to higher expenses with vehicle leases for our field-based employees.

Interest expense was $28.9 million for 2020, compared to $909,000 for 2019.

The $28.0 million increase was primarily due to interest expense recognized in 2020 associated with the term notes and convertible notes issued in connection with the Nucynta Acquisition.

Interest income was $232,000 for 2020, compared to $1.9 million for 2019.

The $1.7 million decrease was primarily due to lower interest rates earned on money market funds.

Provision for income taxes was $830,000 for 2020, compared to none for 2019.

The increase was primarily due to state income tax expense as, in 2020, certain states enacted changes in tax laws that prevent us from using our state-level NOLs to offset taxable income.

In addition, we continue to generate more taxable income from sales of our products in states in which we do not have sufficient state-level NOLs to fully offset state taxable income.

We did not record income tax expense in 2019 due to the utilization of federal and state NOLs carried forward to offset taxable income.

Liquidity and Capital Resources

Sources of liquidity

We have incurred net losses and negative cash flows from operations since inception.

Historically, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public offerings of common stock, and commercial bank debt.

We have incurred net losses and negative cash flows from operations since inception until 2020.

Historically, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public

offerings of common stock and convertible notes, and commercial bank debt.

As of December 31, 2020, we had $174.1 million in cash and cash equivalents.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of December 31, 2019 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

Equity Financing

In March 2017, we entered into a Controlled Equity Offering Sales Agreement (the “ATM Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to $60.0 million.

During the year ended December 31, 2017, we sold an aggregate of 3,126,998 shares of common stock under the ATM Sales Agreement at an average gross sales price of $11.36 per share, generating net proceeds of $34.3 million after deduction of underwriting discounts and commissions and expenses payable by us.

No shares were sold under the ATM Sales Agreement during the years ended December 31, 2019 or 2018.

The ATM Sales Agreement expired in October 2019.

Silicon Valley Bank Term Loan Facility

From August 2012 until February 2020, we maintained a term loan facility with SVB, which was amended in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement.

Under the amended term loan (“Consent and Amendment”), we had a term loan facility in an amount of $11.5 million, which replaced our previously existing term loan facility.

The proceeds of the Consent and Amendment were used to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the previously existing term loan.

The Consent and Amendment also provided SVB’s consent with respect to the Nucynta Commercialization Agreement.

The Consent and Amendment bore interest at a rate per annum of 0.75% above the prime rate (as defined in the agreement governing the Consent and Amendment).

We were eligible to repay the Consent and Amendment in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing in January 2020.

All outstanding principal and accrued and unpaid interest under the Consent and Amendment, and all other outstanding obligations with respect to the Consent and Amendment, were due and payable in full in December 2022.

We were eligible to prepay the Consent and Amendment, in full but not in part, with a prepayment fee of (i) 3.0% of the outstanding principal balance prior to January 2019, (ii) 2.0% of the outstanding principal balance following January 2019 and prior to January 2020 and (iii) 1.0% of the outstanding principal balance following January 2020, plus, in each case, a final payment fee of $719,000.

In November 2018, we entered into an amended and restated Loan and Security Agreement with SVB (“Amended Term Loan”) that superseded our original loan agreement and subsequent amendments with SVB.

The Amended Term Loan updated the loan documentation between us and SVB, and modified the minimum liquidity ratio to be at least 1.5 to 1.0, along with other non-material changes.

The Amended Term Loan did not modify our borrowings, interest rates, or repayment terms.

Any amounts outstanding during the continuance of any event of default under the Amended Term Loan will bear additional interest at the per annum rate of 5.0%.

In January 2020, and in anticipation of consummation of the Nucynta Acquisition and related financing activities, we repaid all of our outstanding indebtedness under the Amended Term Loan.

Financing Relating to the Nucynta Acquisition

2020 Term Loan

On February 6, 2020, in connection with the execution of the Nucynta Purchase Agreement, we, together with our subsidiary, Collegium Securities Corporation, entered into a Loan Agreement with BioPharma Credit PLC, as collateral agent and lender;

and BioPharma Credit Investments V (Master) LP, as lender (the “2020 Loan Agreement”).

The 2020 Loan Agreement provides for a $200.0 million secured term loan (the “2020 Term Loan”), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement.

The 2020 Term Loan will mature on the 48-month anniversary of the closing of the Nucynta Acquisition, and is guaranteed by our material domestic subsidiaries and is also secured by substantially all of our material domestic assets.

The 2020 Term Loan will bear interest at a rate based upon LIBOR (subject to a LIBOR floor of 2.0%), plus a margin of 7.5% per annum.

We are required to repay the 2020 Term Loan by making equal quarterly payments.

Borrowing Arrangements and Equity Offerings

The following transactions represent the material changes in borrowing arrangements and equity offerings that were previously disclosed in our most recent Annual Report.

Pharmakon Term Notes

On February 6, 2020, in connection with the execution of the Nucynta Purchase Agreement, we, together with our subsidiary, Collegium Securities Corporation, entered into the Loan Agreement with BioPharma Credit PLC, as collateral agent and lender;

and BioPharma Credit Investments V (Master) LP, as lender.

The Loan Agreement provides for a $200.0 million secured term loan (the “term notes”), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement.

The term notes will mature on the calendar quarter end immediately following the 48-month anniversary of the closing of the Nucynta Acquisition, and is guaranteed by our material domestic subsidiaries and is also secured by substantially all of our material domestic assets.

The term notes will bear interest at a rate based upon LIBOR (subject to a LIBOR floor of 2.0%), plus a margin of 7.5% per annum.

We are required to repay the term notes by making equal quarterly payments.

The Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that require us to maintain $200.0 million in annual net sales and covenants that limit our ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary course of business.

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The Loan Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Loan Agreement and execution upon the collateral securing obligations under the Loan Agreement.

As of December 31, 2020, the Company was in compliance with all of its covenants.

2026 Convertible Notes

On February 13, 2020, we issued 2.625% convertible senior notes due 2026 (the “convertible notes”), in the aggregate principal amount of $143.8 million, in a public offering registered under the Securities Act of 1933, as amended.

On February 13, 2020, in connection with the execution of the Nucynta Purchase Agreement, we issued 2.625% convertible senior notes due 2026 (the “convertible notes”), in the aggregate principal amount of $143.8 million, in a public offering registered under the Securities Act of 1933, as amended.

The proceeds were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement.

The convertible notes are senior, unsecured obligations and will accrue interest at a rate of 2.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020.

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The initial conversion rate is 34.2618 shares of common stock per $1,000 principal amount of notes, which represents an initial conversion price of approximately $29.19 per share of common stock.

The initial conversion price represents a premium of approximately 35% over the last reported sale of $21.62 per share of our common stock on February 10, 2020.

The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events.

Silicon Valley Bank Term Loan Facility

From August 2012 until January 2020, we maintained a term loan facility with Silicon Valley Bank, which was amended in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement.

Under the amended term loan, we had a term loan facility in an amount of $11.5 million, which replaced our previously existing term loan facility.

The proceeds were used to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the previously existing term loan.

In January 2020, in anticipation of consummation of the Nucynta Acquisition and related financing activities, we repaid all of our outstanding indebtedness under the amended term loan.

In this section, we discuss cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019.

in our Annual Report on Form 10-K for the year ended December 31, 2019.

Years ended December 31,

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

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Cash provided by operating activities was $93.9 million in 2020, compared to cash provided by operating activities of $27.8 million in 2019.

The $141.6 million decrease was primarily due to lower non-cash adjustments related to the Nucynta Commercialization Agreement, as in 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019 royalty payments were conditional on net sales and therefore classified as outflows from operating activities.

Further, there was lower amortization from the Nucynta Intangible Asset in 2019 compared to 2018 as a result of the Third Amendment to the Nucynta Commercialization Agreement and non-cash interest was reduced to zero.

In addition, cash provided by operating activities decreased due to changes in the working capital accounts, partially offset by a benefit from the change in net loss.

Cash provided by operating activities was $169.4 million in 2018, compared to cash used by operating activities of $67.0 million in 2017.

The $236.4 million increase in cash provided by operating activities was primarily due to the non-cash adjustments related to the Nucynta Commercialization Agreement.

While payments made for guaranteed minimum royalties are classified as financing activities, the amortization from the Nucynta Intangible Asset of $109.8 million and the non-cash interest expense related to the guaranteed minimum royalties of $19.3 million are classified as adjustments to cash provided by operating activities.

In addition, cash provided by operating activities increased due to a benefit from changes in the working capital accounts and due to a benefit from the change in net loss.

The benefit from the change in the working capital accounts was primarily driven by a benefit from accrued rebates, returns and discounts of $106.6 million, partially offset by the change in accounts receivable $68.2 million.

These changes are directly related to the significant increase in product revenues in 2018, as the provisions for rebates, returns and discounts are recognized in the same period in which product is delivered to wholesalers, while payment for rebates, returns and discounts is generally based on prescriptions and actual returned product.

The $66.1 million increase in cash provided by operating activities was primarily due to higher net income as adjusted for non-cash adjustments related to the Nucynta Acquisition, which resulted in higher intangible asset amortization and higher non-cash interest expense from the term notes and convertible notes.

These increases were partially offset by decreases in working capital accounts.

Investing activities.

Cash used in investing activities was $6.4 million in 2019 and $24.4 million in 2018.

The $18.0 million decrease in cash used in investing activities was primarily related to the Nucynta Commercialization Agreement, as in 2018 we made a one-time upfront payment of $18.9 million to Assertio to consummate the Nucynta Commercialization Agreement.

This decrease was offset by an increase of $961,000 paid for purchases of property, plant, and equipment primarily for the dedicated production suite at our contract manufacturing organization in 2019.

Cash used in investing activities was $24.4 million in 2018 and $1.0 million in the year ended 2017.

The increase in cash used in investing activities was primarily due to a payment of $18.9 million to Assertio upon closing of the Nucynta Commercialization Agreement and $5.5 million paid for purchases of property, plant, and equipment for our corporate headquarters and dedicated production suite at our contract manufacturing organization.

Cash used in investing activities was $373.8 million in 2020, compared to cash provided by investing activities of $6.4 million in 2019.

The $367.4 million increase in cash used in investing activities was primarily related to the Nucynta Acquisition.

The remaining change is primarily related to the timing of purchases of property, plant, and equipment primarily for the dedicated production suite at our contract manufacturing organization.

Financing activities.

Cash provided by financing activities was $2.0 million in 2019, compared to cash used in financing activities of $117.2 million in 2018.

The $119.2 million increase in cash provided by financing activities was primarily related to the Nucynta Commercialization Agreement.

In 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019, royalty payments were conditional on net sales and therefore classified as outflows from operating activities.

The guaranteed minimum royalty payments paid in 2018 were partially offset by term loan proceeds of $10.0 million.

Cash provided by financing activities was $286.5 million in 2020, compared to cash provided by financing activities of $2.0 million in 2019.

The $284.5 million increase in cash provided by financing activities was primarily related to net proceeds from the term notes of $192.1 million and issuance of the convertible notes of $138.3 million, both of which were issued in 2020.

This increase was partially offset by term note repayments of $37.5 million and the SVB term loan repayment of $11.5 million.

The remaining change is primarily related to changes in proceeds from the issuance of shares under our employee stock purchase plan and proceeds from exercises of stock options, offset by payments made for employee restricted stock tax withholdings.

Cash used in financing activities was $117.2 million in 2018, compared to cash provided by financing activities of $33.5 million in 2017.

The increase in cash used by financing activities was primarily due to an increase in cash used in the repayment of minimum royalty payments associated with the Nucynta Commercialization Agreement for the Nucynta Products of $132.0 million, offset by proceeds received from our term loan of $10.0 million, and proceeds received from the exercise of stock options of $4.3 million.

The remaining change is primarily due to higher payments made for employee restricted stock tax withholdings.

Funding requirements

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Any of these events could significantly harm our business, financial condition and prospects.

Our forecast that our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors.

Our forecast that our financial resources will be adequate to support our operations is a forward-looking statement and

involves risks and uncertainties, and actual results could vary as a result of a number of factors.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

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● the cost of growing and maintaining sales, marketing and distribution capabilities for our products;

● the cost of patent infringement litigation, including our litigation with each of Purdue and Teva, relating to Xtampza ER and the Nucynta Products, which may be expensive to defend;

● the cost of patent infringement litigation, including our litigation with Purdue, relating to Xtampza ER and the Nucynta Products, which may be expensive to defend;

● the cost of litigation related to opioid marketing and distribution practices;

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Operating lease obligations (1)

Term notes, including interest

Convertible senior notes, including interest

Purchase obligations (2)

Operating lease obligations represent future minimum lease payments under our non-cancelable operating lease in effect as of December 31, 2019, reflecting remaining lease payments for space at our current headquarters in Stoughton, Massachusetts.

Operating lease obligations represent future minimum lease payments under our non-cancelable operating lease in effect as of December 31, 2020, primarily reflecting remaining lease payments for space at our current headquarters in Stoughton, Massachusetts.

Purchase obligations represent the minimum purchase obligations of up to $3.0 million per year with our contract manufacturer as of December 31, 2020.

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We also have employment agreements with executive officers that would require us to make severance payments to them if we terminate their employment without cause or the executives resign for good cause.

These payments are contingent upon the occurrence of various future events, and the amounts payable under these provisions depend upon the level of compensation at the time of termination of employment, are therefore not calculable at this time, and, as a result, we have not included any such amounts in the table above.

Nucynta Commercialization Agreement

As more fully described in Note 4, License Agreements , and Note 9, Intangible Assets , to the consolidated financial statements in January 2018, we closed the Nucynta Commercialization Agreement with Assertio, which initially required us to make annual minimum royalty payments of $537.0 million, which consisted of scheduled payments of $132.0 million in 2018, $135.0 million in 2019, $135.0 million in 2020, and $135.0 million in 2021.

The guaranteed minimum royalty payments were a contractual obligation incurred at the closing of the transaction and were included as a component of the accumulated cost of the acquired intangible asset.

As a result, we included the present value of the guaranteed minimum royalty payments as a component of the Nucynta Intangible Asset recognized upon closing and recorded a corresponding asset acquisition obligation of $482.3 million.

In November 2018, we entered into an amendment to the Commercialization Agreement to adjust the royalty structure, as well as other changes more fully described in Note 4, License Agreements , and Note 9, Intangible Assets , to the consolidated financial statements.

The amendment eliminated the guaranteed minimum royalty payments in years 2019, 2020, and 2021, and instead added a conditional obligation to make royalty payments based on net sales for years 2019, 2020, and 2021.

As such, we remeasured the guaranteed minimum royalty obligation as of the amendment date.

This remeasurement resulted in a $369.6 million decrease to the asset acquisition obligation and a corresponding reduction to the Nucynta Intangible Asset.

In the year ended December 31, 2018, we paid the $132.0 million of guaranteed minimum royalty payments owed for 2018 and classified such payments as financing outflows in our statement of cash flows.

Cost of product revenues recognized in the year ended December 31, 2018 included $109.8 million of amortization expense related to the Nucynta Intangible Asset.

In addition, in the year ended December 31, 2018, we recognized $19.3 million of non-cash interest expense related to the guaranteed minimum royalty payments.

In the year ended December 31, 2019, royalties paid under the Commercialization Agreement were classified as operating outflows in our statement of cash flows as such payments were conditional upon net sales.

We also recognized such royalties as a component of costs of product revenues in our statement of operations, in addition to $14.8 million of ongoing amortization expense related to the remeasured Nucynta Intangible Asset.

We expect amortization expense for the Nucynta Intangible Asset for the years ended December 31, 2020, and 2021 to be $14.8 million, and $14.8 million, respectively.

On February 13, 2020, we closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement.

Upon the closing of the transactions contemplated by the Nucynta Purchase Agreement, the Commercialization Agreement terminated with the exception of certain provisions thereof which survive pursuant to the terms of the Nucynta Purchase Agreement, and our payment obligations to Assertio thereunder ceased.

Nucynta Purchase Agreement

On February 6, 2020, we entered into the Nucynta Purchase Agreement with Assertio, pursuant to which we agreed to acquire from Assertio certain assets related to the Nucynta franchise for an aggregate purchase price of $375.0 million (the “Purchase Price”), subject to certain closing and post-closing adjustments as described in the Nucynta Purchase Agreement.

In connection with the Nucynta Acquisition, we also agreed to assume certain contracts, liabilities and obligations related to the Nucynta Products.

From and after the closing of the Nucynta Purchase Agreement, we will pay royalties directly to Grünenthal GmbH at a rate of 14% of net sales of the Products;

such royalty payment obligation will replace our previous obligation to pay a royalty rate of 14% of net sales of the Nucynta Products to Grünenthal, subject to a guaranteed royalty of $34.0 million when net sales are between $180.0 million and $243.0 million.

The Nucynta Purchase Agreement contains customary representations, warranties and covenants, and indemnification provisions subject to specified limitations.

We closed the transactions contemplated by the Nucynta Purchase Agreement on February 13, 2020.

Non-GAAP Financial Measures

To supplement our financial results presented on a GAAP basis, we have included information about non-GAAP adjusted income/loss.

We internally use this non-GAAP financial measure to understand, manage and evaluate the Company as we believe it represents the performance of our core business.

Because this non-GAAP financial measure is an important internal measure for the Company, we believe that the presentation of the non-GAAP financial measure provides analysts, investors and lenders insight into management’s view and assessment of the Company’s ongoing operating performance.

In addition, we believe that the presentation of this non-GAAP financial measure, when viewed with our results under GAAP and the accompanying reconciliation, provides supplementary information that may be useful to analysts, investors, lenders, and other third parties in assessing the Company’s performance and results from period to period.

We report this non-GAAP financial measure in order to portray the results of our major operations – commercializing innovative, differentiated products for people suffering from pain – prior to considering certain income statement elements.

This non-GAAP financial measure should be considered in addition to, and not a substitute for, or superior to, net income or other financial measures calculated in accordance with GAAP.

The Non-GAAP financial measure is not based on any standardized methodology prescribed by GAAP and represents GAAP net income/loss adjusted to exclude stock-based compensation expense, amortization expense for the Nucynta intangible asset, non-cash interest expense recognized on the Nucynta minimum royalty payments, and minimum royalty payments due and payable in connection with the Nucynta Commercialization Agreement.

Any non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, a non-GAAP measure used by other companies.

To supplement our financial results presented on a GAAP basis, we have included information about non-GAAP adjusted income and adjusted EBITDA.

We use these non-GAAP financial measures to understand, manage and evaluate the Company as we believe they represent the performance of our core business.

Because these non-GAAP financial measures are important internal measures for the Company, we believe that the presentation of these non-GAAP financial measures provides analysts, investors, lenders and other third parties insight into management’s view and assessment of the Company’s ongoing operating performance.

In addition, we believe that the presentation of these non-GAAP financial measures, when viewed with our results under GAAP and the accompanying reconciliation, provide supplementary information that may be useful to analysts, investors, lenders, and other third parties in assessing the Company’s performance and results from period to period.

We report these non-GAAP financial measures to portray the results of our major operations prior to considering certain income statement elements.

These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, net income or other financial measures calculated in accordance with GAAP.

Non-GAAP Adjusted Income

Non-GAAP adjusted income is not based on any standardized methodology prescribed by GAAP and represents GAAP net income (loss) adjusted to exclude stock-based compensation expense, amortization expense, non-cash interest expense, certain royalty costs recognized in connection with the Nucynta Commercialization Agreement and the provision for income taxes.

Non-GAAP adjusted income as used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

Three months ended

Years ended December 31,

GAAP net (loss) income

GAAP net income (loss)

Non-GAAP adjustments:

Stock-based compensation expense (1)

Nucynta related amortization expense (1)

Nucynta non-cash interest expense (2)

Nucynta minimum royalty payment due (3)

Intangible asset amortization (2)

Non-cash interest expense (3)

Nucynta royalty adjustment (4)

Provision for income taxes (5)

Total non-GAAP adjustments

Non-GAAP adjusted income (loss)

Non-GAAP adjusted income

Represents stock-based compensation expense associated with our stock option, restricted stock unit and performance stock unit grants and our employee share purchase plan.

Represents amortization expense from the Nucynta Intangible Asset.

Represents non-cash interest expense recognized related to the accretion of debt discount and amortization of debt issuance costs.

Represents non-recurring adjustment for royalty expense recognized in 2020 prior to the closing of the Nucynta Asset Purchase Agreement in February 2020.

The royalty expense was included as a reduction to the base purchase price for the Nucynta Asset Purchase Agreement and, upon closing, the Company was discharged of any unpaid royalties due to Assertio.

Represents current provision for estimated income taxes.

Adjusted EBITDA

Adjusted EBITDA represents GAAP net income (loss) adjusted to exclude interest expense, interest income, income tax expense, depreciation, amortization, and stock-based compensation.

Adjusted EBITDA as used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

There are several limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent, such as:

● adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA;

● we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

● adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;

● adjusted EBITDA does not reflect provision for income taxes or the cash requirements to pay taxes;

● adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

Three months ended

GAAP net income (loss)

Interest expense

Interest income

Provision for income taxes

Stock-based compensation expense

Total adjustments

Adjusted EBITDA

First Quarter

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Fourth Quarter

GAAP net loss

Non-GAAP adjustments:

GAAP net income

Interest expense

Interest income

Provision for income taxes

Stock-based compensation expense

Nucynta related amortization expense (1)

Total non-GAAP adjustments

Non-GAAP adjusted income (loss)

Total adjustments

Adjusted EBITDA

First Quarter

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Fourth Quarter

GAAP net income (loss)

Non-GAAP adjustments:

GAAP net loss

Interest expense

Interest income

Stock-based compensation expense

Nucynta related amortization expense (1)

Nucynta non-cash interest expense (2)

Nucynta minimum royalty payment due (3)

Total non-GAAP adjustments

Non-GAAP adjusted loss

(1) Represents amortization expense of the Nucynta Intangible Asset.

(2) Represents non-cash interest expense associated with the minimum royalty payments of the Nucynta Commercialization Agreement.

(3) Represents minimum royalty payment due and payable in connection with the Nucynta Commercialization Agreement.

Total adjustments

Adjusted EBITDA

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis