Item 7. Management’s Discussion and Analysis
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 our consolidated financial statements and related notes appearing elsewhere in this Form 10 - K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Form 10-K, including those set forth under “Forward-looking Statements” and “Risk Factors”, as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.
Overview
We are a specialty pharmaceutical company committed to being the leader in responsible pain management. 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
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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.
Outlook
We expect to continue to incur significant commercialization expenses related to marketing, manufacturing, distribution, selling and reimbursement activities. We are promoting Xtampza ER to approximately 11,000 health care professionals who write approximately 65% of the branded extended-release oral opioid prescriptions in the United States with a sales team of approximately 145 sales representatives and managers. 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 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. Substantially all of our net losses resulted from costs incurred in connection with selling, general and administrative costs associated with our operations and research and development programs.
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
Product Revenues
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 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 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
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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 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
Selling, general and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation and travel expenses for our employees in executive, finance, sales and marketing and administrative functions. Other selling, general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services, and expenses associated with obtaining and maintaining patents. As we continue to invest in the commercialization of our products, we expect our selling, general and administrative expenses to be substantial for the foreseeable future.
Interest Expense
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
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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 allowances. 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. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements appearing elsewhere in this on Form 10-K, we believe the following accounting policies to be most critical to the significant judgments and estimates used in the preparation of our consolidated financial statements.
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Revenue Recognition
Our accounting policy for revenue recognition will have a substantial impact on reported results and relies on certain estimates. Estimates are based on historical experience, current conditions and various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
Product Revenue
Our only source of revenue to date has been generated by sales of our products, which are primarily sold to distributors (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”). 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; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable. Therefore, product sales are recorded upon delivery net of estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, as well as estimated product returns.
Prior to the adoption of ASC 606 on January 1, 2018, we recognized revenue in accordance with ASC Topic 605, Revenue Recognition (“legacy GAAP”), or when there was persuasive evidence of an arrangement; when title and risk of loss had passed to the customer; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns were reasonably determinable; and when collectability was reasonably assured. The satisfaction of these criteria generally occurred upon delivery of products to customers, or the sell-in method of revenue recognition under legacy GAAP. In addition, we recognized the transaction price net of estimated chargebacks, rebates, sales incentives and allowance. 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.
Sales Deductions
Sales deductions consist primarily of provisions for (1) rebates and incentives, including managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances; (2) product returns, including return estimates for both the Nucynta Products and Xtampza ER; and (3) trade allowances and chargebacks, including fees for distribution service fees, prompt pay discounts, and chargebacks. We estimate the amount of variable consideration that should be included in revenue under the expected value method for all sales deductions other than trade allowances, which are estimated under the most likely amount method. These provisions reflect our best estimates of the amount of revenue to which we are entitled based on the terms of our contracts.
Provisions for rebates and incentives are based on the estimated amount of rebates and incentives to be claimed on the related sales from the period. As our rebates and incentives are based on products dispensed to patients, we are required to estimate the expected value of claims at the time of product delivery to distributors. Given that distributors sell the product to pharmacies, which in turn dispense the product to patients, claims can be submitted significantly after the related sales are recognized. Our estimates of these claims are based on the historical experience of existing or similar programs, including current contractual and statutory requirements, specific known market events and trends, industry data, and estimated distribution channel inventory levels. 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 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
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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. Accruals and related reserves are adjusted as new information becomes available, which generally consists of actual trade allowances and chargebacks processed relating to sales recognized in the period.
Intangible Assets
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. We test intangible assets for potential impairment whenever triggering events or circumstances present an indication of impairment. If the sum of expected undiscounted future cash flows of the intangible assets is less than the carrying amount of such assets, the intangible assets would be written down to the estimated fair value, calculated based on the present value of expected future cash flows.
As of December 31, 2020, our only intangible asset is related to the Nucynta Intangible Asset.
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
The following table summarizes the results of our operations for the years ended December 31, 2020 and 2019:
Years ended December 31,
2020
2019
(in thousands)
Product revenues, net
$
310,016
$
296,701
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
69,500
178,908
Intangible asset amortization
60,680
14,752
Total cost of products revenues
130,180
193,660
Gross profit
179,836
103,041
Operating expenses
Research and development
9,772
10,340
Selling, general and administrative
113,832
116,449
Total operating expenses
123,604
126,789
Income (loss) from operations
56,232
(23,748)
Interest expense
(28,882)
(909)
Interest income
232
1,935
Income (loss) before income taxes
27,582
(22,722)
Provision for income taxes
830
—
Net income (loss)
$
26,752
$
(22,722)
Comparison of the Years Ended December 31, 2020 and 2019
Product revenues, net were $310.0 million for the year ended December 31, 2020 (“2020”), compared to $296.7 million for the year ended December 31, 2019 (“2019”). 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 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 2020, Nucynta IR and ER
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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 (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 $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 $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;
● 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 until 2020. Historically, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public
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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.
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. Failure to comply with these covenants would constitute an event of default under the Loan Agreement, notwithstanding our ability to meet its debt service obligations. 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, 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. The notes will mature on February 15, 2026, unless earlier repurchased, redeemed or converted. Before August 15, 2025, noteholders will have the right to convert their notes only upon the occurrence of certain events. From and after August 15, 2025, noteholders may convert their notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. 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 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.
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Cash flows
In this section, we discuss cash flows 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.
Years ended December 31,
2020
2019
Net cash provided by operating activities
$
93,942
$
27,783
Net cash used in investing activities
(373,772)
(6,438)
Net cash provided by (used in) financing activities
286,474
2,041
Net increase in cash, cash equivalents and restricted cash
$
6,644
$
23,386
Operating activities. 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 $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 $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 $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.
Funding requirements
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. However, we are subject to all the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
Certain economic or strategic considerations may cause us to seek additional cash through private or public debt or equity offerings. Such funds may not be available when needed, or, we may not be able to obtain funding on favorable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. 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
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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. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including:
● the generation of reasonable levels of revenue from products sales;
● the cost of growing and maintaining sales, marketing and distribution capabilities for our products;
● 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;
● the timing and costs associated with manufacturing our products, for commercial sale and clinical trials
● our need to expand our regulatory and compliance functions; and
● the effect of competing technological and market developments .
If we cannot capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020 that will affect our future liquidity:
Less than
More than
Total
1 year
1 - 3 years
3 - 5 years
5 years
(in thousands)
Operating lease obligations (1)
$
12,352
$
1,287
$
2,688
$
2,840
$
5,537
Term notes, including interest
189,878
63,834
113,247
12,797
—
Convertible senior notes, including interest
164,504
3,773
7,546
7,546
145,639
Purchase obligations (2)
6,000
3,000
3,000
—
—
Total
$
372,734
$
71,894
$
126,481
$
23,183
$
151,176
(1)
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.
(2)
Purchase obligations represent the minimum purchase obligations of up to $3.0 million per year with our contract manufacturer as of December 31, 2020. The disclosed amounts represent the maximum amount that could be payable under the minimum purchase obligations.
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.
Non-GAAP Financial Measures
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.
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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
Year ended
December 31,
December 31,
2020
2019
2020
2019
GAAP net income (loss)
$
6,958
$
(2,201)
$
26,752
$
(22,722)
Non-GAAP adjustments:
Stock-based compensation expense (1)
6,210
3,966
21,910
16,528
Intangible asset amortization (2)
16,795
3,688
60,680
14,752
Non-cash interest expense (3)
2,545
—
8,972
—
Nucynta royalty adjustment (4)
—
—
14,216
—
Provision for income taxes (5)
304
—
830
—
Total non-GAAP adjustments
$
25,854
$
7,654
$
106,608
$
31,280
Non-GAAP adjusted income
$
32,812
$
5,453
$
133,360
$
8,558
(1)
Represents stock-based compensation expense associated with our stock option, restricted stock unit and performance stock unit grants and our employee share purchase plan.
(2)
Represents amortization expense from the Nucynta Intangible Asset.
(3)
Represents non-cash interest expense recognized related to the accretion of debt discount and amortization of debt issuance costs.
(4)
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.
(5)
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; and
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● adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.
Three months ended
Year ended
December 31,
December 31,
2020
2019
2020
2019
GAAP net income (loss)
$
6,958
$
(2,201)
$
26,752
$
(22,722)
Adjustments:
Interest expense
7,737
211
28,882
909
Interest income
(3)
(383)
(232)
(1,935)
Provision for income taxes
304
—
830
—
Depreciation
281
196
870
731
Amortization
16,795
3,688
60,680
14,752
Stock-based compensation expense
6,210
3,966
21,910
16,528
Total adjustments
$
31,324
$
7,678
$
112,940
$
30,985
Adjusted EBITDA
$
38,282
$
5,477
$
139,692
$
8,263
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
2020
2020
2020
GAAP net income
$
450
$
8,058
$
11,286
$
6,958
Adjustments:
Interest expense
4,823
8,259
8,063
7,737
Interest income
(212)
(14)
(3)
(3)
Provision for income taxes
—
246
280
304
Depreciation
198
196
195
281
Amortization
10,295
16,795
16,795
16,795
Stock-based compensation expense
4,951
5,584
5,165
6,210
Total adjustments
$
20,055
$
31,066
$
30,495
$
31,324
Adjusted EBITDA
$
20,505
$
39,124
$
41,781
$
38,282
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
2019
2019
2019
GAAP net loss
$
(9,700)
$
(4,712)
$
(6,109)
$
(2,201)
Adjustments:
Interest expense
234
236
228
211
Interest income
(526)
(532)
(494)
(383)
Depreciation
184
171
180
196
Amortization
3,688
3,688
3,688
3,688
Stock-based compensation expense
4,263
4,162
4,137
3,966
Total adjustments
$
7,843
$
7,725
$
7,739
$
7,678
Adjusted EBITDA
$
(1,857)
$
3,013
$
1,630
$
5,477
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods presented, as defined under SEC rules.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.