Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as
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such term is defined in Rules 13a 15(f) and 15d 15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2020, the end of our most recent fiscal year.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the fiscal quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Collegium Pharmaceutical, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 25, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 25, 2021
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Item 9B. Other Information
Not applicable.
PART II I
Item 10. Director s, Executive Officers, and Corporate Governance
Other than the information regarding our executive officers provided in Part I of this report under the heading “Business—Executive Officers of the Registrant,” the information required to be furnished pursuant to this item is incorporated herein by reference to our definitive proxy statement for the 2021 Annual Meeting of the Shareholders.
Our Board of Directors has adopted a Code of Ethics applicable to all of our employees, executive officers and directors. The Code of Ethics is available on our website at www.collegiumpharma.com. Our Board of Directors is responsible for overseeing compliance with the Code of Ethics, and our Board of Directors or an appropriate committee thereof must approve any waivers of the Code of Ethics for employees, executive officers or directors. Disclosure regarding any amendments to the Code of Ethics, or any waivers of its requirements, will be made on our website.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference from our definitive proxy statement for the 2021 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated herein by reference from our definitive proxy statement for the 2021 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference from our definitive proxy statement for the 2021 Annual Meeting of Shareholders.
Item 14. Principa l Accountant Fees and Services
The information required by this Item 14 is incorporated herein by reference from our definitive proxy statement for the 2021 Annual Meeting of Shareholders.
PART I V
Item 15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements
See Part II, Item 8 for the Consolidated Financial Statements required to be included in this Form 10 - K.
Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
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Exhibit s
Exhibit Number
Exhibit Description
2.1†
Agreement and Plan of Merger, dated July 10, 2014, by and between Collegium Pharmaceutical, Inc., a Delaware corporation, and Collegium Pharmaceutical, Inc., a Virginia corporation. (1)
3.1†
Third Amended and Restated Articles of Incorporation of Collegium Pharmaceutical, Inc. (14)
3.2†
Amended and Restated Bylaws of Collegium Pharmaceutical, Inc. (4)
4.1†
Warrant to Purchase Stock, dated November 8, 2018, issued by Collegium Pharmaceutical, Inc. to Assertio Therapeutics, Inc. (9)
4.2†
Indenture, dated as of February 13, 2020, between Collegium Pharmaceutical, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. (12)
4.3†
First Supplemental Indenture, dated as of February 13, 2020, between Collegium Pharmaceutical, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. (12)
4.4†
Form of certificate representing the 2.625% Convertible Senior Notes due 2026 (included as Exhibit A to Exhibit 4.3) (12)
4.5
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed herewith).
10.1†
Office Lease agreement by and between Campanelli-Trigate 100 TCD Stoughton, LLC, and Collegium Pharmaceutical, Inc as of March 23, 2018. (6)
10.2+†
2015 Employee Stock Purchase Plan. (2)
10.3+†
Performance Bonus Plan. (3)
10.4(a)+†
Amended and Restated 2014 Stock Incentive Plan. (2)
10.4(b)+†
Form of Incentive Stock Option Agreement under the Amended and Restated 2014 Stock Incentive Plan. (2)
10.4(c)+†
Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2014 Stock Incentive Plan. (2)
10.4(d)+†
Form of Restricted Stock Award Agreement under the Amended and Restated 2014 Stock Incentive Plan. (2)
10.4(e)+†
Form of Performance Share Unit Agreement under the Amended and Restated 2014 Stock Incentive Plan. (10)
10.5†
Form of Indemnification Agreement. (3)
10.6+†
Amended & Restated Employment Agreement, dated December 28, 2020, by and between Paul Brannelly and Collegium Pharmaceutical, Inc. (16)
10.7+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Collegium Pharmaceutical, Inc. and Joseph Ciaffoni. (16)
10.8+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Shirley Kuhlmann and Collegium Pharmaceutical, Inc. (16)
10.9+†
Letter Agreement dated June 4, 2018, by and between Collegium Pharmaceutical, Inc. and Michael T. Heffernan. (7)
10.10+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Collegium Pharmaceutical, Inc. and Scott Dreyer. (16)
10.11+†
Amended & Restated Employment Agreement, effective as of December 27, 2020, by and between Richard Malamut, M.D. and Collegium Pharmaceutical, Inc. (16)
10.12+†
Amended & Restated Employment Agreement, effective as of December 29, 2020, by and between Alison Fleming, Ph.D. and Collegium Pharmaceutical, Inc. (16)
10.13*†
Commercialization Agreement, by and among, Assertio, Inc., Collegium Pharmaceutical, Inc. and Collegium NF, LLC, dated as of December 4, 2017. (5)
10.14†
Amendment dated January 9, 2018 to Commercialization Agreement by and among Assertio, Inc. and Collegium Pharmaceutical, Inc. and Collegium NF, LLC. (5)
10.15†
Amendment No. 2 to Commercialization Agreement, dated August 29, 2018, by and among Collegium Pharmaceutical, Inc., Collegium NF, LLC, and Assertio Therapeutics, Inc. (8)
10.16†
Amendment No. 3 to Commercialization Agreement, dated November 8, 2018, by and among Collegium Pharmaceutical, Inc., Collegium NF, LLC, and Assertio Therapeutics, Inc. (9)
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10.17†
Purchase Agreement, dated as of February 6, 2020, by and between Collegium Pharmaceutical, Inc. and Assertio Therapeutics, Inc. (11)
10.18†
Loan Agreement, dated as of February 6, 2020, by and among the Company, its subsidiaries, BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender. (11)
10.19†
First Amendment to Loan Agreement, dated as of February 24, 2020, by and among the Company, its subsidiaries, BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender. (13)
10.20†
Second Amendment to Loan Agreement, dated as of May 27, 2020, by and among the Company, Collegium Securities Corporation, BioPharma Credit PLC, as collateral agent, BPCR Limited Partnership, as lender, and BioPharma Credit Investments V (Master) LP, as lender. (14)
10.21†
License Agreement (U.S.), dated as of January 13, 2015, by and among Grünenthal GmbH, Janssen Research & Development, LLC, Assertio Therapeutics, Inc. and Collegium Pharmaceutical, Inc. (13)
10.22†
Consent Agreement, dated January 30, 2020, by and among Grünenthal GmbH, Assertio Therapeutics, Inc. and Collegium Pharmaceutical, Inc. (13)
10.23†
Settlement Agreement, dated September 29, 2020, by and among Collegium Pharmaceutical, Inc. and Teva Pharmaceuticals USA, Inc. (15)
21.1
Subsidiaries of Collegium Pharmaceutical, Inc.
23.1
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
31.1
Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2
Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1
Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.
32.2
Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.
101
The following financial information from this Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2020, 2019, (ii) Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2020, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†Previously filed.
+Indicates management contract or compensatory plan.
* Certain portions of the exhibits that are not material and would be competitively harmful if publicly disclosed have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. Copies of the unredacted exhibits will be furnished to the Commission upon request.
(1) Previously filed as an exhibit to the registrant’s Registration Statement on Form S-1 (File No. 333-203208) filed with the Commission on April 2, 2015.
(2) Previously filed as an exhibit to the registrant’s Registration Statement on Form S-8 (File No. 333-207744) filed with the Commission on November 2, 2015.
(3) Previously filed as an exhibit to the registrant’s Registration Statement on Form S-1/A (File No. 333-203208) filed with the Commission on April 27, 2015.
(4) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on December 4, 2017.
(5) Previously filed as an exhibit to the registrant’s Annual Report on Form 10-K filed with the Commission on March 7, 2018.
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(6) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 filed with the Commission on May 9, 2018.
(7) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on June 4, 2018.
(8) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 filed with the Commission on November 8, 2018.
(9) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on November 8, 2018.
(10) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 filed with the Commission on May 8, 2019.
(11) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on February 10, 2020.
(12) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2020.
(13) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 filed with the Commission on May 7, 2020.
(14) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 filed with the Commission on August 5, 2020.
(15) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on September 30, 2020.
(16) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on December 30, 2020.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLLEGIUM PHARMACEUTICAL, INC.
By: /s/ Joseph Ciaffoni.
Joseph Ciaffoni
Chief Executive Officer
Signature
Title
Date
/s/ Joseph Ciaffoni
Joseph Ciaffoni
President and Chief Executive Officer (Principal Executive Officer) and Director
February 25, 2021
/s/ Paul Brannelly
Paul Brannelly
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
February 25, 2021
/s/ Michael T. Heffernan, R.Ph.
Michael T. Heffernan, R.Ph.
Chairman of the Board
February 25, 2021
/s/ Rita Balice-Gordon, Ph.D.
Rita Balice-Gordon, Ph.D.
Director
February 25, 2021
/s/ Garen G. Bohlin
Garen G. Bohlin
Director
February 25, 2021
/s/ John A. Fallon, M.D.
John A. Fallon, M.D.
Director
February 25, 2021
/s/ John G. Freund, M.D.
John G. Freund, M.D.
Director
February 25, 2021
/s/ Gwen Melincoff
Gwen Melincoff
Director
February 25, 2021
/s/ Gino Santini
Gino Santini
Director
February 25, 2021
/s/ Theodore R. Schroeder
Theodore R. Schroeder
Director
February 25, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated
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COLLEGIUM PHARMACEUTICAL, INC.
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements
Pages
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019
F-4
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2020, 2019 and 2018
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
F-7
Notes to Consolidated Financial Statements
F-8
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Collegium Pharmaceutical, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Sales Deductions – Xtampza ER Product Return Reserves — Refer to Note 3 to the financial statements
Critical Audit Matter Description
Revenue is stated net of certain sales deductions, including provisions for product returns. Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s consolidated balance sheets.
Estimating the provision for product returns of Xtampza ER, a product that was first shipped in 2016, requires significant judgment by management. Management’s model for estimating returns is based on historical returns, while also considering levels of inventory in the channel, purchasing, shipment and prescription trends, production dates and expiration dates . Given the limited history of production lots of Xtampza ER, for which the right of return has been terminated or lapsed, coupled with the level of estimation uncertainty involved, our audit in this area required a high degree of auditor judgment and an increased extent of effort.
F-2
Table of Contents
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Revenue Sales Deductions – Xtampza ER Product Return Reserves included the following, among others:
• We tested the effectiveness of controls over the calculation of the provision for product return, including Management’s controls over product return and product revenue data.
• We evaluated the Company’s methodology and significant assumptions made in developing the provision for product return, including testing the completeness and accuracy of the underlying data used by management that serves as the basis for their product return estimates.
• We tested the mathematical accuracy of management’s calculation of the provision for product return.
• We tested the reasonableness of management’s provision for product return by comparing the assumptions used in the projections to external market sources, information produced by the entity and corroboration with management outside of accounting and finance.
• We evaluated management’s ability to accurately forecast product returns activity by performing a retrospective review, comparing prior period product return estimates to actual returns processed in the subsequent year to identify potential bias or unanticipated trends in the determination of product return reserves.
• We developed independent estimates of the provision for product returns using historical sales and returns activity, product dating and expiration dates and independent estimates of product inventory in the channel and compared our estimates to management’s estimates.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 25, 2021
We have served as the Company's auditor since 2016.
F-3
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED BALANCE SHEET S
(In thousands, except share and per share data)
December 31,
2020
2019
Assets
Current assets
Cash and cash equivalents
$
174,116
$
170,019
Accounts receivable
83,320
72,953
Inventory
15,614
9,643
Prepaid expenses and other current assets
4,838
3,105
Total current assets
277,888
255,720
Property and equipment, net
18,988
11,854
Operating lease assets
8,391
9,047
Intangible asset, net
335,904
29,503
Restricted cash
2,547
—
Other noncurrent assets
123
178
Total assets
$
643,841
$
306,302
Liabilities and shareholders' equity
Current liabilities
Accounts payable
$
10,016
$
6,247
Accrued expenses
24,656
33,480
Accrued rebates, returns and discounts
156,554
157,549
Current portion of term notes payable
47,495
3,833
Current portion of operating lease liabilities
730
656
Total current liabilities
239,451
201,765
Term notes payable, net of current portion
110,019
7,667
Convertible senior notes
99,575
—
Operating lease liabilities, net of current portion
8,765
9,438
Total liabilities
457,810
218,870
Commitments and contingencies (see Note 11)
Shareholders’ equity:
Preferred stock, $ 0.001 par value; authorized shares - 5,000,000 at December 31, 2020 and December 31, 2019; issued and outstanding shares - none at December 31, 2020 and December 31, 2019
—
—
Common stock, $ 0.001 par value; authorized shares - 100,000,000 at December 31, 2020 and December 31, 2019; issued and outstanding shares - 34,612,054 at December 31, 2020 and 33,678,840 at December 31, 2019
35
34
Additional paid-in capital
519,143
447,297
Accumulated deficit
( 333,147 )
( 359,899 )
Total shareholders’ equity
186,031
87,432
Total liabilities and shareholders’ equity
$
643,841
$
306,302
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATION S
(In thousands, except share and per share data)
Years ended December 31,
2020
2019
2018
Product revenues, net
$
310,016
$
296,701
$
280,413
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
69,500
178,908
55,843
Intangible asset amortization
60,680
14,752
109,834
Total cost of products revenues
130,180
193,660
165,677
Gross profit
179,836
103,041
114,736
Operating expenses
Research and development
9,772
10,340
8,661
Selling, general and administrative
113,832
116,449
126,760
Total operating expenses
123,604
126,789
135,421
Income (loss) from operations
56,232
( 23,748 )
( 20,685 )
Interest expense
( 28,882 )
( 909 )
( 20,130 )
Interest income
232
1,935
1,687
Income (loss) before income taxes
27,582
( 22,722 )
( 39,128 )
Provision for income taxes
830
—
—
Net income (loss)
$
26,752
$
( 22,722 )
$
( 39,128 )
Earnings (loss) per share — basic
$
0.78
$
( 0.68 )
$
( 1.19 )
Weighted-average shares — basic
34,407,959
33,453,844
32,953,808
Earnings (loss) per share — diluted
$
0.76
$
( 0.68 )
$
( 1.19 )
Weighted-average shares — diluted
35,151,353
33,453,844
32,953,808
The accompanying notes are an integral part of these consolidated financial statements.
F-5
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUIT Y
(In thousands, except share data)
Additional
Total
Common Stock
Paid-In
Accumulated
Shareholders’
Shares
Amount
Capital
Deficit
Equity
Balance at December 31, 2017
32,770,678
$
33
$
402,096
$
( 298,049 )
$
104,080
Exercise of common stock options
349,777
—
4,255
—
4,255
Issuance for employee stock purchase plan
86,929
—
1,117
—
1,117
Vesting of RSUs
85,119
—
—
—
—
Shares withheld for employee taxes upon vesting of RSUs
( 26,874 )
—
( 560 )
—
( 560 )
Stock-based compensation
—
—
13,778
—
13,778
Issuance of warrant
—
—
8,043
—
8,043
Net loss
—
—
—
( 39,128 )
( 39,128 )
Balance at December 31, 2018
33,265,629
$
33
$
428,729
$
( 337,177 )
$
91,585
Exercise of common stock options
201,308
—
2,046
—
2,046
Issuance for employee stock purchase plan
74,142
1
816
—
817
Vesting of RSUs
196,139
—
—
—
—
Shares withheld for employee taxes upon vesting of RSUs
( 58,378 )
—
( 822 )
—
( 822 )
Stock-based compensation
—
—
16,528
—
16,528
Net loss
—
—
—
( 22,722 )
( 22,722 )
Balance at December 31, 2019
33,678,840
$
34
$
447,297
$
( 359,899 )
$
87,432
Exercise of common stock options
637,924
1
6,656
—
6,657
Issuance for employee stock purchase plan
67,512
—
758
—
758
Vesting of RSUs
335,524
—
—
—
—
Shares withheld for employee taxes upon vesting of RSUs
( 107,746 )
—
( 2,255 )
—
( 2,255 )
Stock-based compensation
—
—
21,910
—
21,910
Equity component of 2020 Convertible Notes, net of issuance costs of $ 1,773
—
—
44,777
—
44,777
Net income
—
—
—
26,752
26,752
Balance at December 31, 2020
34,612,054
$
35
$
519,143
$
( 333,147 )
$
186,031
The accompanying notes are an integral part of these consolidated financial statements
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW S
(In thousands)
Years ended December 31,
2020
2019
2018
Operating activities
Net income (loss)
$
26,752
$
( 22,722 )
$
( 39,128 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization expense
60,680
14,752
109,834
Depreciation expense
870
731
1,074
Stock-based compensation expense
21,910
16,528
13,778
Non-cash lease expense
57
313
—
Non-cash interest expense for amortization of debt discount and issuance costs
8,972
—
—
Non-cash interest expense for Nucynta asset acquisition
—
—
19,281
Changes in operating assets and liabilities:
Accounts receivable
( 10,367 )
4,993
( 68,231 )
Inventory
( 8,270 )
( 1,826 )
219
Prepaid expenses and other assets
( 1,598 )
2,037
( 166 )
Accounts payable
3,769
( 5,903 )
6,465
Accrued expenses
( 7,838 )
6,056
18,995
Accrued rebates, returns and discounts
( 995 )
12,766
106,593
Operating lease assets and liabilities
—
734
—
Other long-term liabilities
—
( 676 )
676
Net cash provided by operating activities
93,942
27,783
169,390
Investing activities
Purchase of intangible asset
( 368,226 )
—
( 18,877 )
Purchases of property and equipment
( 5,546 )
( 6,438 )
( 5,477 )
Net cash used in investing activities
( 373,772 )
( 6,438 )
( 24,354 )
Financing activities
Proceeds from issuances of common stock from employee stock purchase plans
758
817
1,117
Proceeds from the exercise of stock options
6,577
2,046
4,255
Payments made for employee restricted stock tax withholdings
( 2,255 )
( 822 )
( 560 )
Proceeds from issuance of term note, net of issuance costs of $ 2,456
192,117
—
—
Proceeds from convertible senior notes, net of issuance costs of $ 5,473
138,277
—
—
Repayment of term notes
( 37,500 )
—
—
Repayment of term loan
( 11,500 )
—
—
Proceeds from issuance of common stock from public offerings, net of issuance costs of $-, $- and $ 30 , respectively
—
—
( 30 )
Proceeds from term loan amendment, net of repayment of amended term loan
—
—
10,021
Repayment of asset acquisition obligations
—
—
( 132,000 )
Net cash provided by (used in) financing activities
286,474
2,041
( 117,197 )
Net increase in cash, cash equivalents and restricted cash
6,644
23,386
27,839
Cash, cash equivalents and restricted cash at beginning of period
170,019
146,633
118,794
Cash, cash equivalents and restricted cash at end of period
$
176,663
$
170,019
$
146,633
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents
174,116
170,019
146,633
Restricted cash
2,547
—
—
Total cash, cash equivalents and restricted cash
$
176,663
170,019
146,633
Supplemental disclosure of cash flow information
Cash paid for offering costs
$
—
$
—
$
30
Cash paid for interest
$
18,967
$
709
$
582
Cash paid for income taxes
$
483
$
—
$
—
Supplemental disclosure of non-cash activities
Acquisition of property and equipment in accounts payable and accrued expenses
$
293
$
134
$
3,261
Accrued royalties discharged upon closing of asset acquisition
$
1,145
—
—
Inventory used in the construction and installation of property and equipment
$
2,299
—
—
Receivable from stock option exercises in other current assets
$
80
$
—
$
—
Operating lease assets assumed
$
—
$
9,957
$
—
Operating lease liabilities assumed
$
—
$
10,691
$
—
Liabilities assumed from Nucynta asset acquisition included in accrued rebates, returns and discounts
$
—
$
—
$
22,406
Liabilities assumed from Nucynta asset acquisition included as a reduction to accounts receivable
$
—
$
—
$
254
Warrant issued in connection with Nucynta asset acquisition
$
—
$
—
$
8,043
The accompanying notes are an integral part of these consolidated financial statements.
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COLLEGIUM PHARMACEUTICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. NATURE OF BUSINESS
Organization
Collegium Pharmaceutical, Inc. (the “Company”) was incorporated in Delaware in April 2002 and then reincorporated in Virginia in July 2014. The Company has its principal operations in Stoughton, Massachusetts. The Company is a specialty pharmaceutical company committed to being the leader in responsible pain management. The Company’s first product, Xtampza ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone. In April 2016, the United States Food and Drug Administration (the “FDA”) approved the Company’s new drug application (“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, the Company announced the commercial launch of Xtampza ER.
The Company’s product portfolio also includes Nucynta ER and Nucynta IR (the “Nucynta Products”). In December 2017, the Company entered into a Commercialization Agreement (the “Nucynta Commercialization Agreement”) with Assertio Therapeutics, Inc. (formerly known as Depomed) (“Assertio”), pursuant to which the Company acquired the right to commercialize the Nucynta Products in the United States. The Company began shipping and recognizing product sales on the Nucynta Products on January 9, 2018 and began marketing the Nucynta Products in February 2018. 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.
On February 6, 2020, the Company entered into an Asset Purchase Agreement with Assertio (the “Nucynta Purchase Agreement”), pursuant to which the Company 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 $ 375,000 , subject to certain closing and post-closing adjustments as described in the Nucynta Purchase Agreement. On February 13, 2020, the Company closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement. Upon closing, the Nucynta Commercialization Agreement was effectively terminated. Following the closing, the Company's prior royalty obligation to Assertio ceased and the Company’s only remaining royalty obligation is to pay 14 % of net sales of the Nucynta Products directly to Grünenthal.
In December 2019, a novel strain of coronavirus began infecting people in China; since then, the disease caused by 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. The travel restrictions and “social distancing” recommendations resulting from the spread of COVID-19 have impacted the Company’s sales professionals’ ability to travel to and meet with healthcare providers in person. The Company periodically reviews its accounting estimates in light of changes in circumstances, facts and experience. As of the date of the filing of this Annual Report on Form 10-K, the COVID-19 pandemic and actions taken to contain it have impacted revenue (due to fewer new patients beginning therapy with the Company’s products and adverse impact on the Company’s ability to promote products due to closure or limited operations of many physicians’ offices) and decreased certain operating expenses, including travel, marketing and expenses associated with participation in congresses that have been postponed. The Company believes that the disruptions caused by COVID-19 will continue and there remains substantial uncertainty as to when such disruptions will cease (or ease).
The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to continue successfully commercializing products, changing market conditions for products and development of competing
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products, changing regulatory environment and reimbursement landscape, litigation related to opioid marketing and distribution practices, manufacture of adequate commercial inventory, inability to secure adequate supplies of active pharmaceutical ingredients, key personnel retention, protection of intellectual property, and patent infringement litigation.
Liquidity
The Company believes that its cash and cash equivalents at December 31, 2020, together with expected cash inflows from the commercialization of its products, will enable the Company to fund its operating expenses, debt service and capital expenditure requirements under its current business plan for the foreseeable future.
The Company has experienced net losses since its inception, and as of December 31, 2020, had an accumulated deficit of $ 333,147 . A successful transition to sustainable profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements include the accounts of Collegium Pharmaceutical, Inc. as well as the accounts of its subsidiaries Collegium Securities Corp. (a Massachusetts corporation), incorporated in December 2015, and Collegium NF LLC (a Delaware limited liability company), incorporated in December 2017, both wholly owned subsidiaries requiring consolidation. The consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues, costs and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. Estimates in the Company’s consolidated financial statements include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of products, estimates of useful lives with respect to intangible assets, accounting for stock based compensation, contingencies, impairment of intangible assets and tax valuation allowances. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates under different assumptions or conditions.
Fair Value Measurements
Disclosures of fair value information about financial instruments are required, whether or not recognized in the balance sheet, for financial instruments with respect to which it is practicable to estimate that value. Fair value measurements and disclosures describe the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
Level 1 inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 inputs:
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 inputs:
Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability
Transfers are calculated on values as of the transfer date. There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2020 and 2019.
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The following tables present the Company’s financial instruments carried at fair value using the lowest level input applicable to each financial instrument at December 31, 2020 and 2019.
Significant
Quoted Prices
other
Significant
in active
observable
unobservable
markets
inputs
inputs
Total
(Level 1)
(Level 2)
(Level 3)
December 31, 2020
Money market funds, included in cash equivalents
$
45,069
$
45,069
$
—
$
—
December 31, 2019
Money market funds, included in cash equivalents
$
94,841
$
94,841
$
—
$
—
The Company’s convertible senior notes fall into the Level 2 category within the fair value level hierarchy. The fair value was determined using broker quotes in a non-active market for valuation. As of December 31, 2020, the convertible senior notes had a fair value of approximately $ 139,643 and a net carrying value of $ 99,575 .
The Company’s term notes fall into the Level 2 category within the fair value level hierarchy and the fair value was determined using quoted prices for similar liabilities in active markets, as well as inputs that are observable for the liability (other than quoted prices), such as interest rates that are observable at commonly quoted intervals.
As of December 31, 2020, and December 31, 2019, the carrying amounts of the cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued rebates, returns and discounts, and term notes payable reasonably approximated their estimated fair values.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash deposits primarily with one reputable and nationally recognized financial institution. In addition, as of December 31, 2020, the Company’s cash equivalents were invested in money market funds. The Company has not experienced any material losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the financial institutions in which those deposits are held.
Three customers comprised 10% or more of the Company’s accounts receivable balance as of December 31, 2020. These customers comprised 46 %, 34 % and 17 % of the accounts receivable balance, respectively. The same three customers comprised 10% or more of the Company’s revenue during the year ended December 31, 2020. These customers comprised 34 %, 31 % and 31 % of revenue, respectively. To date, the Company has not experienced any losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balance is collectible as of December 31, 2020. The Company has no financial instruments with off-balance sheet risk of loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash in readily available checking and savings accounts and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.
The Company’s cash equivalents, which consist of money market funds, are measured at fair value on a recurring basis. As of December 31, 2020 and 2019, the carrying amount of cash equivalents was $ 45,069 and $ 94,841 , respectively, which approximates fair value and was determined based upon Level 1 inputs. Money market funds are valued using quoted market prices with no valuation adjustments applied. Accordingly, these securities are categorized as Level 1.
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Restricted Cash
Restricted cash is reported as non-current unless the restrictions are expected to be released in the next twelve months. As of December 31, 2020, the Company had restricted cash of $ 2,547 , which represents cash held in a depository account at a financial institution to collateralize conditional stand by letters of credit for the Company’s corporate credit card program, its lease of its corporate headquarters, and its leases of vehicles for its field-based employees. The Company had no restricted cash as of December 31, 2019.
Inventory
Inventories are stated at the lower of cost or net realizable value. Inventory costs consist of costs related to the manufacturing of the Company’s products, which are primarily the costs of contract manufacturing and active pharmaceutical ingredient. The Company determines the cost of its inventories on a specific identification basis, and removes amounts from inventories on a first-in, first-out basis. If the Company identifies excess, obsolete or unsalable items, inventories are written down to their realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand and the expected shelf-life of the inventory components. As of December 31, 2020, cumulative estimates of excess inventory recorded as a component of cost of product revenues were immaterial.
The Company outsources the manufacturing of Xtampza ER and the Nucynta Products to contract manufacturers that produce the finished product. In addition, the Company currently relies on a sole supplier for the active pharmaceutical ingredient in Xtampza ER and the Nucynta Products. Accordingly, the Company has concentration risk associated with its commercial manufacturing of Xtampza ER and the Nucynta Products.
The Company has capitalized $ 15,614 of inventory as of December 31, 2020. The Company expects sales of the capitalized units to occur during the next twelve months.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost. Maintenance and repair costs are expensed as incurred. Costs which materially improve or extend the lives of existing assets are capitalized. Property and equipment are depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:
Asset Category
Estimated Useful Life
Computers and office equipment
3 - 5 years
Laboratory equipment
5 years
Furniture and fixtures
7 years
Manufacturing equipment
5 - 13 years
Leasehold improvements
Lesser of remaining lease term and estimated useful life
Costs for capital assets not yet placed into service have been capitalized as construction-in-progress, and will be depreciated in accordance with the above guidelines once placed into service.
Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recorded in the statements of operations.
Intangible Assets
The Company records 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. The Company tests intangible assets for
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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.
Revenue Recognition
The Company’s revenue to date is from sales of the Company’s products, which are primarily sold to distributors, which in turn sell the product to pharmacies for the treatment of patients. In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), the Company recognizes revenue 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. Please see Note 3 for further detail.
Research and Development Costs
Research and development costs are charged to expense as incurred and consist of costs incurred to further the Company’s research and development activities. These costs 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 the Company conducts 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.
Patent Costs
Costs related to filing and pursuing patent applications are recorded as selling, general and administrative expense as incurred since the recoverability of such expenditures is uncertain.
Advertising and Product Promotion Costs
Advertising and product promotion costs are included in selling, general and administrative expenses and were $ 5,368 , $ 9,527 and $ 17,497 in the years ended December 31, 2020, 2019, and 2018 respectively. Advertising and product promotion costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for grants of stock options, restricted stock units and performance share units to employees, as well as to the Board of Directors, based on their grant date fair value and recognizes compensation expense over their vesting period, net of actual forfeitures. For employee awards with service conditions, the Company recognizes compensation expense on a straight-line basis. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company estimates restricted stock units based on the fair value of the underlying common stock as determined by management. For awards with performance conditions, the Company estimates the number of shares that will vest based upon the probability of achieving performance metrics.
Income Taxes
The Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence,
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including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and the absence of carryback available from results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future, in excess of its net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company will recognize interest and penalties related to uncertain tax positions within income tax expense. Any accrued interest and penalties will be included within the related tax liability. As of December 31, 2020 and December 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations.
Earnings per Share
Earnings per share is calculated by dividing the net income (loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period, as determined in accordance with the treasury stock accounting method. For purposes of the diluted net loss per share calculation, stock options, warrants, unvested restricted stock units and performance share units are considered potentially dilutive securities. Because the Company has reported a net loss for the years ended December 31, 2019 and 2018, diluted net loss per common share is the same as basic net loss per common share for those periods.
Embedded Derivatives
The Company accounts for derivative financial instruments as either equity or liabilities in accordance with Accounting Standards Codification Topic 815, Derivatives and Hedging , based on the characteristics and provisions of each instrument. Embedded derivatives are required to be bifurcated from the host instruments and recorded at fair value if the derivatives are not clearly and closely related to the host instruments on the date of issuance. The Company’s term notes and convertible notes (see Note 12) contain certain features that, in accordance with ASC 815, are not clearly and closely related to the host instrument and represent derivatives that are required to be re-measured at fair value each reporting period. The Company determined that the estimated fair value of the derivatives at issuance and as of December 31, 2020 were not material based on a scenario-based cash flow model that uses unobservable inputs that reflect the Company’s own assumptions. Should the Company’s assessment of the probabilities around these scenarios change, including due to changes in market conditions, there could be a change to the fair value.
Reclassifications
The Company has reclassified certain amounts in its Consolidated Statements of Operations for the years ended December 31, 2019 and 2018 to conform to the 2020 presentation. Specifically, the Company disaggregated previously reported cost of product revenues of $ 193,660 for the year ended December 31, 2019 into the captions Cost of product revenues (excluding intangible asset amortization) of $ 178,908 and Intangible asset amortization of $ 14,752 . In addition, the Company disaggregated previously reported cost of product revenues of $ 165,677 for the year ended December 31, 2018 into the captions Cost of product revenues (excluding intangible asset amortization) of $ 55,843 and Intangible asset amortization of $ 109,834 . The reclassifications relate to the presentation of the Company’s gross profit and amortization expense and were made to provide the readers of the Company’s consolidated financial statements with additional insight into how the Company and its management view and evaluate its performance and profitability. This reclassification within the consolidated statements of operations for the years ended December 31, 2019 and 2018 had no impact on previously reported total consolidated revenues or consolidated results of operations.
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Recently Adopted Accounting Pronouncements
New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates.
The Company adopted Accounting Standard Updated (“ASU”) 2016-13, Financial Instruments – Credit Losses (ASC Topic 326) : Measurement of Credit Losses on Financial Instruments , which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to issuance, the FASB issued ASUs 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03 to provide additional guidance on the adoption of ASU 2016-13. The Company adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting , to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The new standard became effective immediately and may be applied prospectively to contracts and transactions through December 31, 2022. Subsequent to issuance, the FASB issued ASU 2021-01 in January 2021 to refine and clarify some its guidance on ASU 2020-04. Upon the transition of the Company’s contracts and transactions to new reference rates in connection with reference rate reform, the Company will prospectively apply the standard and disclose the effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The amendments in ASU 2019-12 affect a wide variety of income tax accounting standards with the objective of reducing their complexity. The new standard is effective for annual and interim periods beginning after December 15, 2020. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU 2020-06 aim to reduce the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The new standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the standard’s effect on the Company’s consolidated financial statements.
Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated financial statements upon future adoption.
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3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company’s revenue to date is from sales of the Company’s products, which are primarily sold to distributors (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”).
Revenue Recognition
In accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), the Company recognizes revenue 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. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Performance Obligations
The Company determined that performance obligations are satisfied and revenue is recognized when a customer takes control of the Company’s product, which occurs at a point in time. This generally occurs upon delivery of the products to customers, at which point the Company recognizes revenue and records accounts receivable. Payment is typically received 30 to 90 days after satisfaction of the Company’s performance obligations. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the assets is one year or less.
Transaction Price and Variable Consideration
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to sales deductions, including (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 Xtampza ER and the Nucynta Products; and, (3) trade allowances and chargebacks, including fees for distribution service fees, prompt pay discounts, and chargebacks. The Company will estimate the amount of variable consideration that should be included in the transaction price 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 the expected amount of consideration to which the Company is entitled based on the terms of the contract. In addition, the Company made a policy election to exclude from the measurement of the transaction price all taxes that are assessed by a governmental authority that are imposed on revenue-producing transactions.
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 the Company’s rebates and incentives are based on products dispensed to patients, the Company is 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. The Company’s 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, the Company may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.
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Provisions for product returns are based on product-level historical trends, as well as relevant market events and other factors. 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 the 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. 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.
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.
The amount of variable consideration that is included in the transaction price may be constrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. In general, performance obligations do not include any estimated amounts of variable consideration that are constrained. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known
The following tables summarize activity in each of the Company’s product revenue provision and allowance categories for the years ended December 31, 2020 and 2019, respectively:
Trade
Rebates and
Product
Allowances and
Incentives (1)
Returns (2)
Chargebacks (3)
Balance at December 31, 2018
$
129,318
$
15,465
$
14,841
Provision related to current period sales
263,315
14,991
65,155
Changes in estimate related to prior period sales
( 2,865 )
—
—
Credits/payments made
( 259,867 )
( 2,808 )
( 65,679 )
Balance at December 31, 2019
$
129,901
$
27,648
$
14,020
Provision related to current period sales
326,280
10,900
75,554
Changes in estimate related to prior period sales
( 539 )
—
( 403 )
Credits/payments made
( 322,867 )
( 14,769 )
( 70,116 )
Balance at December 31, 2020
$
132,775
$
23,779
$
19,055
(1) Provisions for rebates and incentives includes managed care rebates, government rebates and co-pay program incentives. Provisions for rebates and incentives are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Consolidated Balance Sheets.
(2) Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Consolidated Balance Sheets.
(3) Provisions for trade allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks. Trade allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Consolidated Balance Sheets.
As of December 31, 2020, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.
Disaggregation of Revenue
The Company disaggregates its product revenue, net from contracts with customers into the categories included in the
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table below. These categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors :
Year ended December 31,
2020
2019
2018
Xtampza ER
$
127,984
$
105,012
$
69,383
Nucynta Products (1)
182,032
191,689
211,030
Total product revenues, net
$
310,016
$
296,701
$
280,413
For the year ended December 31, 2020, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $ 116,318 and $ 65,714 respectively. For the year ended December 31, 2019, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $ 117,680 and $ 74,009 , respectively. For the year ended December 31, 2018, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $ 129,917 and $ 81,113 , respectively.
4. LICENSE AGREEMENTS
The Company periodically enters into license agreements to develop and commercialize its products. As of December 31, 2019, the Company’s only license agreement was the Nucynta Commercialization Agreement. Upon the closing of the Nucynta Acquisition in February 2020, the Nucynta Commercialization Agreement was effectively terminated.
On January 9, 2018 (the “Nucynta Commercialization Closing Date”), the Company consummated the transactions contemplated by the Nucynta Commercialization Agreement, pursuant to which Assertio agreed to grant a sublicense of certain of its intellectual property related to the Nucynta Products for commercialization in the United States. The Company began recording revenues from sales of the Nucynta Products on the Nucynta Commercialization Closing Date and began commercial promotion of the Nucynta Products in February 2018. Pursuant to the Nucynta Commercialization Agreement, the Company paid a one-time, non-refundable license fee of $ 10,000 to Assertio on the Nucynta Commercialization Closing Date, $ 6,223 for transferred inventory and $ 1,987 as reimbursement for prepaid expenses. The Company also assumed the existing liabilities of the Nucynta Products, including $ 22,660 related to sales of Nucynta Products that occurred prior to the Nucynta Commercialization Closing Date. The Nucynta Commercialization Agreement initially required the Company to pay a guaranteed minimum royalty of $ 135,000 per year through December 2021, payable in quarterly payments of $ 33,750 , prorated in 2018 for the Nucynta Commercialization Closing Date, as well as a variable royalty based on annual net sales over $ 233,000 . Beginning January 2022 and for each year of the Nucynta Commercialization Agreement term thereafter, the Company was required to pay a variable royalty on annual net sales of the Nucynta Products, but without a guaranteed minimum.
Effective August 2018, the Company entered into a Second Amendment to the Nucynta Commercialization Agreement to clarify the mechanism for transferring title of products to be sold by the Company pursuant to the agreement and various related matters. The Second Amendment did not have an impact on the Company’s financial statements.
Effective November 2018, the Company entered into the Third Amendment to the Nucynta Commercialization Agreement to adjust the royalty structure and termination clauses. Pursuant to the amended Nucynta Commercialization Agreement, the $ 135,000 guaranteed minimum annual royalties were eliminated, and the Company was no longer required to secure its royalty payment obligations with a standby letter of credit. Beginning on January 1, 2019, the Company was conditionally obligated to make royalty payments to Assertio conditional upon net sales and based on the following royalty structure for the period between January 1, 2019 and December 31, 2021:
(i) 65 % of annual net sales of the Nucynta Products up to $ 180,000 , plus
(ii) 14 % of annual net sales of the Nucynta Products between $ 180,000 and $ 210,000 , plus
(iii) 58 % of annual net sales of the Nucynta Products between $ 210,000 and $ 233,000 , plus
(iv) 20 % of annual net sales of the Nucynta Products between $ 233,000 and $ 258,000 , plus
(v) 15 % of annual net sales of the Nucynta Products in excess of $ 258,000 .
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The Third Amendment did not modify the royalties payable on sales of the Nucynta Products on and after January 1, 2022, which remained as contemplated by the Nucynta Commercialization Agreement as in effect on January 9, 2018, based on the following royalty structure:
(i) 58 % of annual net sales of the Nucynta Products up to $ 233,000 , plus
(ii) 25 % of annual net sales of the Nucynta Products between $ 233,000 and $ 258,000 , plus
(iii) 17.5 % of annual net sales of the Nucynta Products in excess of $ 258,000 .
In addition, prior to January 1, 2022, if the annual net sales of the Nucynta Products were in the range of $ 180,000 to $ 243,000 , the Company would have been required to pay a supplemental royalty to Assertio, for ultimate payment to Grünenthal GmbH, not to exceed a maximum of 4.9 % of net sales of the Nucynta Products. If annual net sales of Products were less than $ 180,000 in any 12-month period through January 1, 2022, or if they were less than $ 170,000 in any 12-month period commencing on January 1, 2022, then Assertio would have had the right to terminate the Nucynta Commercialization Agreement without penalty. The Amendment further provided that the Company did not have a right to terminate the Nucynta Commercialization Agreement prior to December 31, 2021. The Company would have been required to pay a $ 5,000 termination fee to Assertio in connection with any termination by the Company with an effective date between December 31, 2021 and December 31, 2022. In connection with execution of the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company (the “Warrant”) at an exercise price of $ 19.20 per share. The Warrant will expire in November 2022 and includes customary adjustments for changes in the Company’s capitalization.
Upon the closing of the Nucynta Acquisition, the Nucynta Commercialization Agreement was effectively terminated and the Company’s royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company no longer pays royalties to Assertio and the Company’s only remaining royalty obligation is to pay 14 % of net sales of the Nucynta Products directly to Grünenthal.
The assets acquired, liabilities assumed, and equity interests issued by the Company in connection with the Nucynta Commercialization Agreement are further described in Note 9.
5. EARNINGS PER SHARE
Basic net earnings per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock, plus potentially dilutive securities outstanding for the period, as determined in accordance with the treasury stock accounting method. Potentially dilutive securities
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outstanding include stock options, unvested restricted stock units, performance share units, warrants, and shares related to the convertible senior notes, but are only included to the extent that their addition is dilutive.
The following table presents the computations of basic and dilutive earnings (loss) per common share:
Years ended December 31,
2020
2019
2018
Numerator:
Net income (loss)
$
26,752
$
( 22,722 )
$
( 39,128 )
Denominator:
Weighted-average shares outstanding — basic
34,407,959
33,453,844
32,953,808
Effect of dilutive securities:
Stock options
431,524
—
—
Restricted stock units
271,542
—
—
Performance share units
27,002
—
—
Employee stock purchase plan
567
—
—
Warrants
12,759
—
—
Weighted average shares outstanding — diluted
35,151,353
33,453,844
32,953,808
Earnings (loss) per share — basic
$
0.78
$
( 0.68 )
$
( 1.19 )
Earnings (loss) per share — diluted
$
0.76
$
( 0.68 )
$
( 1.19 )
The Company has the option to settle the conversion obligation for its convertible senior notes due in 2026 in cash, shares or a combination of the two. Since the Company intends to settle the principal amount of the convertible senior notes in cash, the Company used the treasury stock method for determining the potential dilution in the diluted earnings per share computation.
The following table presents dilutive securities excluded from the calculation of diluted earnings per share:
Years ended December 31,
2020
2019
2018
Stock options
2,294,961
3,955,887
3,585,856
Restricted stock units
4,809
849,679
514,603
Performance share units
211,618
99,400
—
Warrants
—
1,041,667
1,041,667
Convertible senior notes
4,925,134
—
—
Unvested restricted stock
—
—
3,018
For performance share units, these securities were excluded from the calculation of diluted earnings per share as the performance-based or market-based vesting conditions were not met as of the end of the reporting period. For all other securities, these securities were excluded from the calculation of diluted earnings per share as their inclusion would have had an antidilutive effect.
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6. INVENTORY
Inventory consisted of the following:
As of December 31,
2020
2019
Raw materials
$
3,514
$
795
Work in process
1,096
1,427
Finished goods
11,004
7,421
Total inventory
$
15,614
$
9,643
During the years ended December 31, 2020, 2019 and 2018, the aggregate charges to date related to excess inventory were immaterial. These expenses were recorded as a component of cost of product revenues. During the year ended December 31, 2020, inventory used in the construction and installation of property and equipment was $ 2,299 . During the years ended December 31, 2019 and 2018, inventory used in the construction and installation of property and equipment was immaterial.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
As of December 31,
2020
2019
Prepaid regulatory fees
$
3,280
$
1,222
Prepaid insurance
656
414
Prepaid development costs
392
474
Other prepaid expenses
450
854
Other current assets
60
141
Prepaid expenses and other current assets
$
4,838
$
3,105
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of December 31,
2020
2019
Computers and office equipment
$
1,429
$
1,453
Laboratory equipment
1,299
1,220
Furniture and fixtures
1,073
1,066
Manufacturing equipment
14,119
987
Leasehold improvements
541
541
Construction-in-process
3,583
8,875
Total property and equipment
22,044
14,142
Less: accumulated deprecation
( 3,056 )
( 2,288 )
Property and equipment, net
$
18,988
$
11,854
Depreciation expense related to property and equipment amounted to $ 870 , $ 731 and $ 1,074 for the years ended December 31, 2020, 2019 and 2018, respectively. During the years ended December 31, 2020, 2019 and 2018, the Company disposed of fully depreciated assets of $ 102 , $ 280 and $ 905 , respectively. The Company did not have any gains or losses from the retirement, sale or disposal of property and equipment during the years ended December 31, 2020, 2019, or 2018.
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9. INTANGIBLE ASSETS
As of December 31, 2020 and 2019, the Company’s only intangible asset (“Nucynta Intangible Asset”) is related to the Nucynta Acquisition and the Nucynta Commercialization Agreement. The gross carrying amount and accumulated amortization of the Nucynta Intangible Asset were as follows:
As of December 31,
2020
2019
Gross carrying amount
$
521,170
$
154,089
Accumulated amortization
( 185,266 )
( 124,586 )
Intangible asset, net
$
335,904
$
29,503
Nucynta Acquisitions
In February 2020, the Company entered into the Nucynta Purchase Agreement with Assertio, pursuant to which the Company acquired certain intellectual property and manufacturing rights related to the Nucynta Products, including U.S. commercialization rights, U.S. manufacturing rights, and inventory, for an aggregate purchase price of $ 375,000 , subject to certain closing and post-closing adjustments. The Company also agreed to assume certain regulatory and supply chain contracts, and obligations related to Nucynta Products (see Note 4). In February 2020, the Company entered into a loan agreement (see Note 10) and issued convertible senior notes (see Note 10) to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement.
The consideration transferred in the asset acquisition was measured at cost, including transaction costs, assets transferred by the Company, and royalty obligations discharged by the seller. The table below represents the costs accumulated to acquire the commercial rights for the Nucynta Products based on the terms of the Nucynta Purchase Agreement, as amended:
Acquisition consideration:
Base purchase price
$
375,000
Cash paid for inventory
6,030
Transaction costs
6,297
Reduction for 2020 cash transferred to Assertio under the prior Nucynta Commercialization Agreement (1)
( 13,071 )
Reduction for accrued royalty obligation discharged upon closing (1)
( 1,145 )
Total acquisition consideration:
$
373,111
(1) Represents $ 14,216 total reduction to the base purchase price comprising of $ 13,071 of cash payments transferred to Assertio under the prior Nucynta Commercialization Agreement as well as a reduction for $ 1,145 of discharged pre-acquisition accrued royalties based on sales from January 1, 2020 through closing.
The Company then allocated the consideration transferred to the individual assets acquired on a relative fair value basis as summarized in the table below:
Assets acquired:
Nucynta Intangible Asset
$
367,081
Inventory
6,030
Total consideration allocated to assets acquired:
$
373,111
The Company concluded that the consideration allocable to the Nucynta Intangible Asset for the additional intellectual
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property and manufacturing rights it acquired as part of the Nucynta Acquisition were incremental costs associated with the pre-existing intangible asset from the former Nucynta Commercialization Agreement, as such costs result in probable future economic benefits. Specifically, the additional intellectual property rights acquired in the Nucynta Acquisition enable the Company to eliminate royalty obligations otherwise payable to Assertio under the former Nucynta Commercialization Agreement.
Nucynta Commercialization Agreement
The Company determined that the Nucynta Commercialization Agreement, which closed in January 2018, should be accounted for as an asset acquisition in accordance with ASC Topic 805-50 , as substantially all of the fair value of the gross assets acquired was concentrated in the sublicense of the Nucynta Products, which is a single identifiable asset. The Company concluded that the fair value estimates of the assets surrendered, liabilities incurred, and equity interests issued were more clearly evident than the fair value of the assets received, and therefore followed a cost accumulation model to determine the consideration transferred in the asset acquisition.
Under the original terms of the Nucynta Commercialization Agreement, the Company was obligated to make guaranteed annual minimum royalty payments of $ 537,000 to Assertio, which consisted of scheduled payments of $ 132,000 in 2018, $ 135,000 in 2019, $ 135,000 in 2020, and $ 135,000 in 2021. Due to the nature of the guaranteed minimum royalty payment obligation and the fact that it was required to be settled in cash, the Company determined that the future minimum royalty payments represented a liability that should be recorded at its fair value as of the Nucynta Commercialization Closing Date. The Company calculated the fair value of the future minimum royalty payments to be $ 482,300 using a discount rate of 5.7 %. The discount rate was determined based on a review of observable market data relating to similar liabilities. The Company determined the $ 54,700 discount should be recognized as interest expense in the Statement of Operations using the effective interest method and over the repayment period from January 9, 2018 through December 2021. Prior to the Third Amendment to the Nucynta Commercialization Agreement in November 2018, the Company recognized interest expense of $ 19,281 relating to the minimum royalty payments and amortization expense of $ 107,662 related to the intangible asset.
Effective November 8, 2018 (the “Third Amendment Date”), the Company entered into the Third Amendment to the Nucynta Commercialization Agreement, which eliminated the guaranteed minimum royalty payment obligations for years 2019, 2020 and 2021. As a result, the Company remeasured the remaining contractual obligation as of the Third Amendment Date and recorded a reduction of the acquired intangible asset and obligation. As of December 31, 2018, the Company had paid all of the $ 132,000 of minimum royalty payment obligation owed under the Nucynta Commercialization Agreement for 2018. In connection with the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company at an exercise price of $ 19.20 per share. The Company estimated the fair value of the warrant on the date of issuance to be approximately $ 8,043 using the Black-Scholes option-pricing model. See Note 14 for further detail regarding the warrant issued to Assertio.
Effective February 13, 2020, upon the closing of the Nucynta Acquisition, the Nucynta Commercialization Agreement was effectively terminated and the Company’s royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company no longer pay royalties to Assertio and the Company’s only remaining royalty obligation is to pay 14 % of net sales of the Nucynta Products directly to Grünenthal.
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A summary of the gross carrying amount, accumulated amortization, and net book value of the Nucynta Intangible Asset from the execution of the Nucynta Commercialization Agreement through period end are as follows:
Gross Carrying Value
Accumulated Amortization
Net Book Value
Intangible Asset, net
Cost basis as of acquisition date
$
515,627
$
—
$
515,627
Amortization expense from acquisition date through Third Amendment Date
—
( 107,662 )
( 107,662 )
Adjustment due to the remeasurement of liability as of Third Amendment Date
( 369,581 )
—
( 369,581 )
Additional costs incurred as of Third Amendment Date (1)
8,043
—
8,043
Amortization expense from Amendment Date through fiscal year end
—
( 2,172 )
( 2,172 )
Balance as of December 31, 2018
$
154,089
$
( 109,834 )
$
44,255
Amortization expense
—
( 14,752 )
( 14,752 )
Balance as of December 31, 2019
$
154,089
$
( 124,586 )
$
29,503
Amortization expense through Nucynta Acquisition
—
( 1,754 )
( 1,754 )
Additional cost incurred from Nucynta Acquisition
367,081
—
367,081
Amortization expense from Nucynta Acquisition through period end
—
( 58,926 )
( 58,926 )
Balance as of December 31, 2020
$
521,170
$
( 185,266 )
$
335,904
(1) Represents fair value of warrant issued in connection with the Amendment to the Nucynta Commercialization Agreement.
Amortization
The Company has been amortizing the Nucynta Intangible Asset over its useful life, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company had initially determined that the useful life for the intangible asset was approximately 4.0 years from the Nucynta Commercialization Closing Date on the basis of the majority of the cash flows expected to be realized for future product sales under the Nucynta Commercialization Agreement. The Nucynta Acquisition significantly impacted the timing and amount of future cash inflows from the sales of the Nucynta Products, and, therefore, the Company considered it to be a triggering event to remeasure the expected useful life of the Nucynta Intangible Asset. The Company determined that the useful life for the Nucynta Intangible Asset was approximately 5.9 years from the closing date of the Nucynta Acquisition and accordingly, the intangible asset will be amortized prospectively over its revised useful life. The Company will recognize amortization expense as a component of cost of product revenues in the Consolidated Statement of Operations on a straight-line basis over its useful life as it approximates the period of economic benefits expected to be realized from future cash inflows from sales of the Nucynta Products. Prior to the Nucynta Acquisition, the Company had recognized $ 126,340 of amortization expense related to the Nucynta Intangible Asset. As the accumulated cost basis of the Nucynta Intangible Asset was increased with the Nucynta Acquisition, the Company will continue to prospectively amortize the resulting net intangible asset on a straight-line basis over the remaining useful life.
The following table presents amortization expense recognized for the years ended December 31, 2020, 2019, and 2018:
Years ended December 31,
2020
2019
2018
Nucynta amortization expense included in cost of product revenues
$
60,680
$
14,752
$
109,834
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As of December 31, 2020, the remaining amortization period is approximately 5.0 years and is expected to be recognized in the following periods:
Years ended December 31,
Amortization Expense
2021
67,181
2022
67,181
2023
67,181
2024
67,181
2025
67,180
Remaining amortization expense:
$
335,904
10. ACCRUED EXPENSES
Accrued expenses consisted of the following:
As of December 31,
2020
2019
Accrued royalties
$
12,954
$
21,893
Accrued bonuses
4,571
4,047
Accrued product taxes and fees
1,817
—
Accrued incentive compensation
1,417
1,650
Accrued interest
1,415
473
Accrued payroll and related benefits
892
1,154
Accrued audit and legal
445
308
Accrued sales and marketing
261
775
Accrued other operating costs
884
3,180
Total accrued expenses
$
24,656
$
33,480
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company may face legal claims or actions in the normal course of business. Except as disclosed below, the Company is not currently a party to any litigation and, accordingly, does not have any amounts recorded for any litigation related matters.
Xtampza ER Litigation
The Company filed the NDA for Xtampza ER as a 505(b)(2) application, which allows the Company to reference data from an approved drug listed in the FDA’s Orange Book, in this case OxyContin. The 505(b)(2) process requires that the Company certify to the FDA that the Company does not infringe any of the patents listed for OxyContin in the Orange Book, or that the patents are invalid. The process also requires that the Company notify Purdue Pharma, L.P (“Purdue”), as the holder of the NDA, and any other Orange Book-listed patent owners that it has made such a certification. On February 11, 2015, the Company made the required certification documenting why Xtampza ER does not infringe any of the 11 Orange Book listed patents for OxyContin, five of which have been invalidated in court proceedings, and provided the required notice to Purdue. Under the Drug Price Competition and Patent Term Restoration Act of 1984, Purdue had the option to sue the Company for infringement and receive a stay of up to 30 months before the FDA could issue a final approval for Xtampza ER, unless the stay was earlier terminated.
In response to these actions, Purdue sued the Company for infringement in the District of Delaware on March 24, 2015 asserting infringement of three of Purdue’s Orange Book-listed patents (Patent Nos. 7,674,799, 7,674,800, and
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7,683,072) and a non-Orange Book-listed patent (Patent No. 8,652,497), and accordingly, received a 30-month stay of FDA approval.
The Delaware court transferred the case to the District of Massachusetts. After the Company filed a partial motion for judgment on the pleadings relating to the Orange Book-listed patents, the District Court of Massachusetts ordered judgment in the Company’s favor on those three patents, and dismissed the claims asserting infringement of those patents with prejudice. Upon dismissal of those claims, the 30-month stay of FDA approval was lifted. As a result, the Company was able to obtain final approval for Xtampza ER and launch the product commercially.
Purdue subsequently filed two follow-on lawsuits asserting infringement of two patents that had been late-listed in the Orange Book and therefore could not trigger any stay of FDA approval: Purdue filed suit asserting infringement of Patent No. 9,073,933 in November 2015, and asserted infringement of Patent No. 9,522,919 in April 2017. In addition, Purdue filed suit on two patents that had not been listed in the Orange Book, filing suit in June 2016 asserting infringement of Patent No. 9,155,717 and in September 2017, asserting infringement of Patent No. 9,693,961.
On March 13, 2018, the Company filed a Petition for Post-Grant Review (“PGR”) of the ʼ961 patent with the Patent Trial and Appeal Board (“PTAB”). The PGR argues that the ʼ961 patent is invalid for lack of a written description, for lack of enablement, for indefiniteness, and as being anticipated by prior art. The PTAB held oral argument on the proceedings on July 10, 2019 and was scheduled to issue a decision on the patentability of the ʼ961 patent by no later than October 4, 2019. On September 15, 2019, Purdue commenced a voluntary case under chapter 11 of title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On September 24, 2019, Purdue gave the PTAB notice of its bankruptcy filing and sought the imposition of an automatic stay of the PGR proceedings. On October 2, 2019, the PTAB extended the one-year period for issuing its decision by up to six months .
In October 2017, and in response to the filing of the Company’s Supplemental NDA (“sNDA”) seeking to update the drug abuse and dependence section of the Xtampza ER label, Purdue filed another suit asserting infringement of the ʼ933 and ʼ919 patent. The Company filed a motion to dismiss that action, and the Court granted its motion on January 16, 2018.
The suits that remain pending were consolidated by the District of Massachusetts, which has ruled that the Xtampza ER formulation does not infringe the ‘497 and ʼ717 patents. As a result, only the ʼ933, the ʼ919, and the ʼ961 patents remain in dispute. On October 16, 2018, the Company filed a motion to stay proceedings in the district court on the ‘961 patent pending the PGR. Purdue has made a demand for monetary relief but has not quantified its alleged damages. Purdue has also requested a judgment of infringement, an adjustment of the effective date of FDA approval, and an injunction on the sale of the Company’s products accused of infringement. The Company has denied all claims and has requested a judgment that the remaining asserted patents are invalid and/or not infringed; the Company is also seeking a judgment that the case is exceptional and has requested an award of the Company’s attorneys’ fees for defending the case.
A claim construction hearing was held on June 1, 2017. On November 21, 2017, the Court issued its claim construction ruling, construing certain claims of the ʼ933, ʼ497, and ʼ717 patents. No trial date has been scheduled. On September 18, 2019, Purdue gave the Court notice of its bankruptcy filing and sought the imposition of an automatic stay of the proceedings. On September 20, 2019, the matter was stayed pending further order of the Court.
On September 1, 2020, the Bankruptcy Court entered an Order Granting Motions for Relief from the Automatic Stay, lifting the automatic stays in both the District of Massachusetts and PTAB proceedings. The Company appealed the Bankruptcy Court’s Order, in part, and that appeal is stayed, on consent by Purdue, pending the outcome of the PTAB proceedings and any appeal thereto. On September 11, 2020, Purdue filed a motion to terminate the PTAB action on the basis that those proceedings had gone beyond the 18-month statutory period. The Company opposed Purdue’s motion and the parties are awaiting PTAB’s decision. In light of the PTAB proceeding, the entirety of District of Massachusetts proceedings, beyond the single ’961 patent that is also the subject of the PTAB proceeding, had been stayed. During a January 22, 2021 hearing, Purdue asked the District of Massachusetts Court to lift the stay as to the ʼ933 and ʼ919 patents, and advised the Court of its intention to file another patent litigation concerning U.S. Patent No. 10,407,434. The Court set a briefing schedule through mid-March and a hearing for March 18, 2021.
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If the stay is lifted, the Company plans to defend this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.
Nucynta Litigation
On February 7, 2018, Purdue filed a patent infringement suit against the Company in the District of Delaware. Specifically, Purdue argues that the Company’s sale of immediate-release and extended-release Nucynta infringes U.S. Patent Nos. 9,861,583, 9,867,784, and 9,872,836. Purdue has made a demand for monetary relief in its complaint but has not quantified its alleged damages.
On December 6, 2018, the Company filed an Amended Answer asserting an affirmative defense for patent exhaustion. On December 10, 2018, the Court granted the parties’ stipulation for resolution of the Company’s affirmative defense of patent exhaustion and stayed the action, with the exception of briefing on and resolution of the Company’s Motion for Judgment on the Pleadings related to patent exhaustion and any discovery related to that Motion. Also, on December 10, 2018, the Company filed a Rule 12(c) Motion for Judgment on the Pleadings, arguing that the Purdue’s claims were barred by the doctrine of patent exhaustion. On June 18, 2019, the Court heard oral argument on the Company’s Rule 12(c) Motion for Judgment on the Pleadings. On June 19, 2019, the Court issued an order stating that “judgment in Collegium’s favor is warranted under the doctrine of patent exhaustion to the extent Collegium’s alleged infringing activities resulted from sales that fall within the scope of that covenant.” The Court explained, however, that based on the current record, it was not possible “to determine whether title of the Nucynta Products was transferred to Collegium” from sales authorized by Purdue’s covenant not to sue. The Court ordered discovery on this issue and the case remained “stayed with the exception of discovery and briefing on and resolution of the Company’s anticipated motion for summary judgment based on patent exhaustion.”
On September 19, 2019, Purdue gave the Court notice of its bankruptcy filing and sought the imposition of an automatic stay of the proceedings. The Nucynta litigation is subject to the automatic bankruptcy stay.
Pending resolution of the bankruptcy action, the Company plans to defend this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.
Teva Litigation
Presently, the Company has nineteen patents listed in the FDA Orange Book as covering the Company’s abuse-deterrent product and methods of using it to treat patients: Patents Nos. 7,399,488; 7,771,707; 8,449,909; 8,557,291; 8,758,813; 8,840,928; 9,044,398; 9,248,195; 9,592,200; 9,682,075; 9,737,530, 9,763,883; 9,968,598; 10,004,729; 10,188,644; 10,525,052; 10,525,053; 10,646,485; and 10,668,060 (the “Orange Book Patents”).
Teva filed an ANDA seeking FDA approval to market generic extended-release oxycodone capsule products (the “proposed ANDA products”). Teva also filed certifications with the FDA that its proposed ANDA products will not infringe the Orange Book Patents and/or that the Orange Book Patents are invalid. Teva sent the Company a Notice Letter indicating that it had made such certification to the FDA.
On February 22, 2018—within the 45-day period that gives the Company a 30-month stay of FDA approval of Teva’s ANDA while the parties have an opportunity to litigate—the Company sued Teva in the District of Delaware on eleven of the twelve Orange Book Patents that were listed at that time. Teva responded to the complaint on May 14, 2018, denying infringement by Teva’s proposed ANDA products and asserting counterclaims of non-infringement and invalidity of the asserted patents. The Company answered Teva’s counterclaims on June 4, 2018.
The Company listed two additional patents in the Orange Book in 2018 and Teva amended its ANDA to include certifications to the FDA of non-infringement and invalidity with respect to those patents. Teva notified the Company of its certification and the Company filed a second lawsuit in the District of Delaware, asserting those two patents, on November 30, 2018. Teva responded to the complaint on January 11, 2019 denying infringement by Teva’s proposed
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ANDA products, and asserting counterclaims of non-infringement and invalidity of the asserted patents. The Company answered Teva’s counterclaims on February 1, 2019. The court consolidated the second suit with the first suit, and thus both suits are proceeding on the same schedule.
The parties briefed claim construction and the court heard argument on April 12, 2019. On September 11, 2019, the Court issued a Report and Recommendation construing two of the six terms or sets of terms that are in dispute. The remaining terms will be addressed in one or more forthcoming Report and Recommendations. Fact discovery was scheduled to close on September 20, 2019 and expert discovery was scheduled to close on January 24, 2020.
The Company listed an additional patent in the Orange Book in January 2019 and Teva amended its ANDA to include certifications to the FDA of non-infringement and invalidity with respect to that patent. Teva notified us of its certification and the Company filed a third lawsuit in the District of Delaware, asserting the additional Orange Book Patent, on May 9, 2019. Teva responded to the complaint on June 6, 2019, denying infringement by Teva’s proposed ANDA products, and asserting counterclaims of non-infringement and invalidity of the asserted patent. The Company answered Teva’s counterclaims on June 27, 2019. The parties filed a proposed Scheduling Order, which the Court entered on September 4, 2019.
On September 20, 2019, the parties jointly agreed to stay both litigations.
The Company listed four additional patents in the Orange Book in first half of 2020, which brings the total number of Orange Book Patents for Xtampza ER to nineteen .
Teva and the Company have entered into a Settlement Agreement and License Agreement to resolve the case. On October 7, 2020, the Court entered a Consent Judgment and Order of Permanent Inunction that dismissed with prejudice all affirmative defenses, claims, and counterclaims which have or could have been raised by Teva. The Order states that Teva would infringe each of the Litigated Patents by using, making, offering to sell, selling, and/or importing Teva’s ANDA product in or into the United States. It further states that the Litigated Patents, and all claims contained therein, are valid and enforceable, solely with respect to the Teva ANDA and Teva ANDA Product. It further stated that, except as authorized and licensed by the Company under the License, Teva, its officers, agents, employees, affiliates, successors and all persons in active concert or participation with Teva, are permanently enjoined from using, making, offering for sale, or selling in the United States, or importing into the United States, Teva’s ANDA Product and/or inducing or assisting others to use, make, offer for sale, or sell in the United States, or import into the United States, Teva’s ANDA Product.
On September 29, 2020, the Company entered into a settlement agreement with Teva resolving the patent litigation in the U.S. District Court for the District of Delaware. Pursuant to the terms of the settlement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company will grant Teva a license to market its generic version of Xtampza ER in the United States beginning on or after September 2, 2033 (subject to U.S. Food and Drug Administration approval, and acceleration under certain circumstances). As a result of the settlement, Teva has agreed to a consent judgment confirming that its proposed generic products infringe upon the Company’s asserted patents and that those patents are valid and enforceable with respect to Teva’s proposed generic products. Additional details regarding the settlement are confidential.
Opioid Litigation
As a result of the opioid epidemic, numerous state and local governments, healthcare providers, and other entities have brought suit against manufacturers, wholesale distributors, and pharmacies alleging a variety of claims related to opioid marketing and distribution practices. In late 2017, the U.S. Judicial Panel on Multidistrict Litigation ordered the consolidation of what were then a few hundred cases pending around the country in federal court against opioid manufacturers and distributors into a Multi-District Litigation (MDL) in the Northern District of Ohio. Currently, the Opioid MDL consists of over 2,000 opioid-related cases brought primarily by states, cities, counties, and other local entities. Generally speaking, these suits do not seek damages for injuries to individuals but rather compensation for the cost of public services needed to address the consequences of addicted communities, ranging from emergency response capabilities to rehabilitation services. The Company has been named as a defendant in a small subset of the MDL cases.
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Of the 21 MDL cases that have named the Company as a defendant, the allegations against it have been dismissed or withdrawn in 13 cases. In addition, the Company has been dismissed from three non-MDL cases filed in Pennsylvania and Arkansas state courts.
Eight cases that name the Company as a defendant, originally filed in three states, remain pending in the MDL:
● Virginia. On January 11, 2019, the City of Portsmouth filed a lawsuit in Virginia Circuit Court against the Company and other pharmaceutical manufacturers and distributors. The lawsuit alleges a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, and violations of state consumer protection laws. On October 3, 2019, the City of Portsmouth case was transferred to the MDL.
● New Jersey. On March 15, 2019, the Company was named in a lawsuit in the MDL by the City of Paterson, New Jersey. The lawsuit alleges violations of fraud, public nuisance, negligent misrepresentation, and violations of state consumer protection laws, and seeks, generally, penalties and/or injunctive relief. On June 14, 2019, the City of Trenton filed a lawsuit in the New Jersey Superior Court against the Company and other pharmaceutical manufacturers and distributors. The lawsuit alleges a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, and violations of state consumer protection laws and the New Jersey Drug Dealer Liability Act. On December 18, 2019, the case was transferred to the MDL.
● Connecticut. On April 9, 2019, the City of Norwich, Connecticut and the Town of Enfield, Connecticut filed lawsuits that name the Company in Connecticut Superior Court. The lawsuits allege violations of fraud, public nuisance, negligent misrepresentation, and violations of state consumer protection laws. On June 28, 2019, both cases were transferred to the MDL. In October 2019, the Company was named in two additional Connecticut lawsuits: the City of Middletown and the Town of Wethersfield. These cases were both also transferred to the MDL in July 2019. Finally, on January 15, 2020, the Town of Windham, Connecticut filed a lawsuit that names the Company, among other pharmaceutical manufacturers, in Connecticut Superior Court. The lawsuit alleges violations of fraud, public nuisance, negligent misrepresentation, and violations of state consumer protection laws. On March 3, 2020, the lawsuit was transferred to the MDL.
Each of the lawsuits in the MDL naming the Company seeks, generally, penalties and injunctive relief. None of the lawsuits naming the Company are designated as representative cases in the MDL, and therefore, are effectively currently stayed.
Outside of the MDL, there are several cases pending against the Company in state courts in Pennsylvania and Massachusetts:
● In Pennsylvania, six lawsuits naming the Company have been consolidated for discovery purposes in the Delaware County Court of Common Pleas as part of a consolidated proceeding of similar lawsuits brought by numerous Pennsylvania counties against other pharmaceutical manufacturers and distributors. These include lawsuits filed between May 2018 and July 2019 on behalf of Bucks County, Clinton County, Mercer County, Warrington Township, Warminster Townerhip, and the City of Lock Haven, each of Pennsylvania, alleging claims related to opioid marketing and distribution, including negligence, fraud, unjust enrichment, public nuisance, and violations of state consumer protections laws. None of these cases has been designated a Track One case in which discovery would commence, and therefore they are all effectively stayed at present.
● In Massachusetts, there are lawsuits by the City of Worcester, the City of Salem, the City of Framingham, the Town of Lynfield, the City of Springfield, the City of Haverhill, the City of Gloucester, the Town of Canton, the Town of Wakefield, the City of Chicopee, the Town of Natick, the City of Cambridge and the Town of Randolp, all of which have been consolidated before the Business Litigation Session of the Superior Court. The actions allege a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, violations of Mass Gen. Laws ch. 93A, Section 11 , unjust enrichment and civil conspiracy. The case brought by the City of Springfield was selected to advance for the purpose of motion practice, defendants’ motions to dismiss were denied on January 3, 2020. There is no trial date set for this case.
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The Company disputes the allegations in these lawsuits and intends to vigorously defend these actions. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.
Opioid-Related Request and Subpoenas
The Company, like a number of other pharmaceutical companies, has received subpoenas or civil investigative demands related to opioid sales and marketing. The Company has received such subpoenas or civil investigative demands from the Offices of the Attorney General of each of Washington, New Hampshire, Maryland and Massachusetts. The Company is currently cooperating with each of the foregoing states in their respective investigations.
12. DEBT
Pharmakon Term Notes
On February 6, 2020, in connection with the execution of the Nucynta Purchase Agreement, the Company, together with its subsidiary, Collegium Securities Corporation, entered into a Loan Agreement (the “Loan Agreement”) with BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender (collectively “Pharmakon”). The Loan Agreement provides for a $ 200,000 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. O n February 13, 2020 (the “Closing Date”) , the Company received the net proceeds.
The term notes bear interest at a rate based upon the three-month LIBOR rate, subject to a LIBOR floor of 2.0 %, plus a margin of 7.5 % per annum, payable quarterly in arrears. The Company is required to repay the term notes by making equal quarterly payments of principal beginning in the first quarter immediately following the third month anniversary of the Closing Date. The term notes will mature on the calendar quarter end immediately following the 48 -month anniversary of the Closing Date and is guaranteed by the Company’s material domestic subsidiaries and also secured by substantially all of the Company’s material assets. On the Closing Date, the Company paid to Pharmakon a facility fee equal to 2.50 % of the aggregate principal amount of the term notes, or $ 5,000 , in addition to $ 427 of other expenses incurred by Pharmakon and reimbursed by the Company (together, the “discount”). Net proceeds of $ 194,573 were transferred to Assertio by the Company as agent in partial satisfaction of the Nucynta Purchase Agreement. In addition, the Company capitalized $ 2,456 of term notes issuance costs, related to legal and advisory fees.
Except with respect to certain prepayments made with the proceeds from new equity issuances as described below, the Loan Agreement permits voluntary prepayment at any time, subject to a prepayment premium. The prepayment premium is equal to 3.00 % of the principal amount being prepaid prior to the second-year anniversary of the Closing Date, 2.00 % of the principal amount being prepaid on or after the second-year anniversary, but on or prior to the third-year anniversary, of the Closing Date, and 1.00 % of the principal amount being prepaid on or after the third-year anniversary of the Closing Date, but prior to the fourth-year anniversary of the Closing Date. The Loan Agreement also includes a make-whole premium if there is a voluntary prepayment, a prepayment due to a change in control or acceleration following an Event of Default on or prior to the second-year anniversary of the Closing Date in an amount equal to foregone interest from the date of prepayment through the second-year anniversary of the Closing Date. A change of control triggers a mandatory prepayment of the term notes.
The Loan Agreement also permits single voluntary prepayments of the Loan Agreement of less than or equal to $ 50,000 made solely from the proceeds of an equity issuance by the Company. If equity prepayment occurs prior to the second-year anniversary of the Closing Date, a prepayment premium of 5.00 % would apply, with no make-whole premium.
The Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that require the Company to maintain $ 200,000 in annual net sales and covenants that limit the Company’s ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary
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course of business, restrictions which limit the Company’s ability to pay dividends and restrictions of net assets of subsidiaries. The Loan Agreement also contains customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Failure to comply with these covenants would constitute an event of default under the Loan Agreement, notwithstanding the Company’s ability to meet its debt service obligations. The Loan Agreement also includes various customary remedies for Pharmakon 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. Under certain circumstances, a default interest rate will apply on outstanding obligations during the occurrence and continuance of an event of default.
During the year ended December 31, 2020 the Company recognized interest expense of $ 19,034 related to the term notes.
As of December 31, 2020, principal repayments under the term notes are estimated to be paid as follows:
Years ended December 31,
Principal Payments
2021
$
50,000
2022
50,000
2023
50,000
2024
12,500
Total before unamortized discount and issuance costs
$
162,500
Less: unamortized discount and issuance costs
( 4,986 )
Total term notes
$
157,514
Silicon Valley Bank Term Loan Facility
From August 2012 until January 2020, the Company maintained a term loan facility with Silicon Valley Bank (“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”), the Company had a term loan facility in an amount of $ 11,500 , which replaced the Company’s 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 bore interest at a rate per annum of 0.75 % above the prime rate (as defined in the Consent and Amendment). The Company was eligible to repay the Consent and Amendment in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing in January 2020.
In January 2020, the Company prepaid the outstanding principal and accrued interest on the Consent and Amendment along with the required prepayment fees. The loss on extinguishment of the term loan was immaterial and was recorded as a component of interest expense.
Convertible Senior Notes
On February 13, 2020, the Company issued 2.625 % convertible senior notes due in 2026 (the “convertible notes”) in the aggregate principal amount of $ 143,750 , in a public offering registered under the Securities Act of 1933, as amended. The convertible notes were issued in connection with funding the Nucynta Acquisition, and the proceeds of the convertible notes were used to finance a portion of the purchase price payable pursuant to the Nucynta Purchase Agreement. Some of the Company’s existing investors participated in the convertible notes offering.
The Company may, at its option, settle the convertible notes in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. Accordingly, the Company separately accounted for the liability component (the “Liability Component”) and the embedded derivative conversion option (the “Equity Component”) of the convertible notes by allocating the proceeds between the Liability Component and the Equity Component. In connection with the issuance of the convertible notes, the Company incurred approximately $ 5,473 of
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debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs between the Liability Component and the Equity Component based on the allocation of the proceeds. Of the total debt issuance costs, $ 1,773 was allocated to the Equity Component and recorded as a reduction to additional paid-in capital and $ 3,700 was allocated to the Liability Component and recorded as a debt discount of the convertible notes. The portion allocated to the Liability Component is amortized to interest expense using the effective interest method over six years .
The convertible notes are the Company’s senior unsecured obligations and bear interest at a rate of 2.625 % per year payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. 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. The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The notes will mature on February 15, 2026, unless earlier repurchased, redeemed or converted. The initial conversion rate is 34.2618 shares of common stock per $1 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 are subject to adjustment upon the occurrence of certain events.
Holders of the convertible notes may convert all or any portion of their convertible notes, in multiples of $1 principal amount, at their option only under the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020, if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the “trading price” per $1 principal amount of the Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
(3) upon the occurrence of certain corporate events or distributions on the Company’s common stock;
(4) if the Company calls the convertible notes for redemption; or
(5) at any time from, and including, August 15, 2025 until the close of business on the scheduled trading day immediately before the maturity date.
As of December 31, 2020, none of the above circumstances had occurred and as such, the convertible notes could not have been converted.
The Company may not redeem the convertible notes prior to February 15, 2023. On or after February 15, 2023, the Company may redeem the convertible notes, in whole and not in part, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, only if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price on:
(1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and
(2) the trading day immediately before the date the Company sends such notice.
Calling any convertible note for redemption will constitute a make-whole fundamental change with respect to that convertible note, in which case the conversion rate applicable to the conversion of that convertible note, if it is converted in connection with the redemption, will be increased in certain circumstances for a specified period of time.
The convertible notes have customary default provisions, including (i) a default in the payment when due (whether at maturity, upon redemption or repurchase upon fundamental change or otherwise) of the principal of, or the redemption
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price or fundamental change repurchase price for, any note; (ii) a default for 30 days in the payment when due of interest on any note; (iii) a default in the Company’s obligation to convert a note in accordance with the indenture; (iv) a default with respect to the Company’s obligations under the indenture related to consolidations, mergers and asset sales; (v) certain payment or other defaults by the Company or certain subsidiaries with respect to mortgages, agreements or other instruments for indebtedness for money borrowed of at least $ 20,000 ; and (vi) certain events of bankruptcy, insolvency and reorganization with respect to the Company or any of its significant subsidiaries.
The initial carrying amount of the Liability Component of $ 97,200 was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible borrowing rate for similar debt. The Equity Component of the Notes of $ 46,550 was recognized as a debt discount. The excess of the principal amount of the Liability Component over its carrying amount is amortized to interest expense using the effective interest method over six years . The Equity Component, which is included in the additional paid in capital portion of stockholders’ equity on the Company’s consolidated balance sheet, is not remeasured as long as it continues to meet the conditions for equity classification.
As of December 31, 2020, the convertible notes outstanding consisted of the following:
Liability component:
Principal
$
143,750
Less: unamortized debt discount and issuance costs
( 44,175 )
Net carrying amount
$
99,575
Equity component, net of issuance costs of $ 1,773
$
44,777
The Company determined the expected life of the convertible notes was equal to its six-year term. The effective interest rate on the Liability Component of the convertible notes was 10.27 %. As of December 31, 2020, the “if-converted value” did not exceed the remaining principal amount of the convertible notes. The fair value of the convertible notes was determined based on data points other than quoted prices that are observable, either directly or indirectly, and has been classified as Level 2 within the fair value hierarchy. The fair value of the convertible notes, which differs from their carrying value, is influenced by market interest rates, the Company’s stock price and stock price volatility.
The following table presents the total interest expense recognized related to the convertible notes during the year ended December 31, 2020:
Year ended December 31,
2020
Contractual interest expense
$
3,323
Amortization of debt discount
5,628
Amortization of debt issuance costs
447
Total interest expense
$
9,398
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As of December 31, 2020, the future minimum payments on the convertible notes were as follows:
Years ended December 31,
Future Minimum Payments
2021
3,773
2022
3,773
2023
3,773
2024
3,773
2025
3,773
Thereafter
145,639
Total minimum payments
$
164,504
Less: interest
( 20,754 )
Less: unamortized debt discount and issuance costs
( 44,175 )
Convertible senior notes
$
99,575
13. LEASES
In accordance with ASC Topic 842, Lease Accounting, the Company records lease assets and liabilities for lease arrangements exceeding a 12-month initial term. For operating leases, the Company records a beginning lease liability equal to the present value of minimum lease payments to be made over the lease term discounted using the Company’s incremental borrowing rate and a corresponding lease asset adjusted for incentives received and indirect costs. After lease commencement, the Company remeasures the operating liability at the present value of the remaining lease payments discounted using the original incremental borrowing rate and corresponding lease asset adjusted for incentives received, indirect costs and uneven lease payments. The Company records operating lease rent expense in the Statements of Operations on a straight-line basis over the lease term. Variable lease costs, that are primarily associated with non-lease components are not included in the measurement of the operating lease liability, are recognized in the period in which they are incurred. Leases with an initial term of 12 months or less, or short-term leases, are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term. The Company does not have any financing lease arrangements.
As of December 31, 2020, the Company had operating lease assets of $ 8,391 and operating lease liabilities of $ 9,495 primarily related to operating lease agreements for its corporate headquarters.
Operating Lease Arrangements
In March 2018, the Company entered into an operating lease for its new corporate headquarters (the “Stoughton Lease”) pursuant to which the Company leases approximately 50,678 of rentable square feet of space, in Stoughton, Massachusetts. The Stoughton Lease commenced in August 2018 when the Company took possession of the space. After the initial four-month free rent period following possession of the space, the operating lease will continue for a term of 10 years . The Company has the right to extend the term of the Stoughton Lease for two additional five-year terms, provided that written notice is provided to the landlord no later than 12 months prior to the expiration of the then current Stoughton Lease term. The Company does not believe the exercise of the extension to be reasonably certain as of the balance sheet date and therefore did not include the extension as part of its recognized lease asset and lease liability. The annual base rent is $ 1,214 , or $ 23.95 per rentable square foot, and will increase annually by 2.5 % to 3.1 % over the subsequent years.
In September 2019, the Company determined it had ceased use of its lease for the remaining 9,660 square feet at its former corporate headquarters in Canton, Massachusetts (“Canton Lease”). The Company impaired the o perating lease asset and adjusted the operating lease liability to the fair value of cost that will continue to be incurred under the Canton Lease. In December 2019, the Company terminated the Canton Lease and the operating lease liability was reduced to zero .
In January 2016, the Company entered a non-cancellable contract with the contract manufacturing organization (“CMO”) of Xtampza ER. The contract term continues through December 2022 and automatically renews for successive two-year terms unless either party gives written notice of termination two-years in advance. Xtampza ER production is
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currently conducted in an area of the manufacturing plant that is shared with other clients. Pursuant to the terms of the agreement, since 2016 the CMO has reserved 3,267 square feet of existing manufacturing space for a dedicated production suite for Xtampza ER, which was put into service in the year ended December 31, 2020. As the Company can direct the use of the dedicated space and obtain substantially all the economic benefits of the dedicated space, the Company determined that the arrangement was an embedded operating lease. The Company expects the lease term to continue at least through December 2026 and separated the agreement’s lease and non-lease components in determining the operating lease assets and liabilities. The Company determined its best estimate of stand-alone prices for each of the lease and nonlease components by considering observable information including gross margins expected to be recovered from the Company’s service provider and terms of similar lease contracts.
Short-Term Lease Arrangements
In December 2018, the Company began entering into 12-month , non-cancelable vehicle leases for its field-based employees. Each vehicle lease is executed separately and expires at varying times with automatic renewal options that are cancelable at any time. The rent expense for these leases is therefore recognized on a straight-line basis over the lease term in the period in which it is incurred.
Variable Lease Costs
Variable lease costs associated with non-lease components primarily include utilities, property taxes, and other operating costs that are passed on from the lessor.
The components of lease cost for the years ended December 31, 2020 and 2019 are as follows:
Year ended December 31,
2020
2019
Lease Cost
Operating lease cost
$
1,305
$
1,446
Short-term lease cost
1,312
752
Variable lease cost
331
283
Total lease cost
$
2,948
$
2,481
The lease term and discount rate for operating leases for the years ended December 31, 2020 and 2019 are as follows:
As of December 31,
Lease Term and Discount Rate:
2020
2019
Weighted-average remaining lease term — operating leases (years)
8.6
9.6
Weighted-average discount rate — operating leases
6.1 %
6.1 %
Other information related to operating leases for the years ended December 31, 2020 and 2019 is as follows:
Year ended December 31,
Other Information:
2020
2019
Cash paid for amounts included in the measurement of operating leases liabilities
$
1,249
$
1,133
Leased assets obtained in exchange for new operating lease liabilities
—
—
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The Company’s aggregate future minimum lease payments for its operating leases, including embedded operating lease arrangements, as of December 31, 2020, are as follows:
2021
$
1,287
2022
1,325
2023
1,363
2024
1,401
2025
1,439
After 2025
5,537
Total minimum lease payments
$
12,352
Less: Present value discount
2,857
Present value of lease liabilities
$
9,495
14. EQUITY
Common Stock
In May 2015, the Company adopted the Amended and Restated 2014 Stock Incentive Plan (the “Plan”), under which an aggregate of 2,700,000 shares of common stock were authorized for issuance to employees, officers, directors, consultants and advisors of the Company, plus an annual increase on the first day of each fiscal year until the expiration of the Plan equal to 4 % of the total number of outstanding shares of common stock on December 31st of the immediately preceding calendar year (or a lower amount as otherwise determined by the Company’s board of directors (“Board of Directors”) prior to January 1st). As of December 31, 2020, there were 928,261 shares of common stock available for issuance pursuant to the Plan. The Plan provides for granting of both Internal Revenue Service qualified incentive stock options and non-qualified options, restricted stock awards, restricted stock units and performance stock units. The Company’s qualified incentive stock options, non-qualified options and restricted stock units generally vest ratably over a four-year period of service. The stock options generally have a ten-year contractual life and, upon termination, vested options are generally exercisable between one and three months following the termination date, while unvested options are forfeited immediately upon termination. Refer to Note 15, Stock-based Compensation , for more information.
Warrants
As of December 31, 2020, the warrant issued in connection with the Third Amendment to the Nucynta Commercialization Agreement in November 2018 was the Company’s only outstanding warrant, which is described in greater detail in Note 9. The warrant expires in November 2022.
15. STOCK-BASED COMPENSATION
Performance Share Units, Restricted Stock Units and Stock Options
Performance Share Units
The Company periodically grants performance share units (“PSUs”) to certain members of the Company's senior management team. PSUs vest subject to the satisfaction of annual and cumulative performance and/or market conditions established by the Compensation Committee.
In January 2019, the Company granted PSUs with performance conditions related to 2019, 2020, 2021 and three-year cumulative revenue goals for Xtampza ER. The PSUs were to vest following a three-year performance period, subject to the satisfaction of the performance criteria and the executive’s continued employment through the performance period. PSUs may vest in a range between 0 % and 200 % , based on the satisfaction of performance criteria, and no shares will be issued if the minimum applicable performance metric is not achieved. The Company recognizes compensation expense ratably over the required service period based on its estimate of the number of shares that will
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vest based upon the probability of achieving the performance metrics. If there is a change in the estimate of the number of shares that are likely to vest, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made.
In February 2020, the Company granted PSUs with performance criteria related to the relative ranking of the total stockholder return (“TSR”) of the Company’s common stock in 2020, 2021, 2022 and the cumulative three-year performance period return relative to the TSR of certain peer companies within the S&P Pharmaceutical Select Industry Index. TSR will be measured based on the 30-day average stock price on the first day of each period compared to the 30-day average stock price on the last day of each period. The PSUs subject to the annual performance criteria will vest annually, subject to the satisfaction of the performance criteria and the executive’s continued employment through the performance period. The cumulative PSUs will vest following the three-year performance period, subject to the satisfaction of the performance criteria and the executive’s continued employment through the performance period. PSUs may vest in a range between 0 % and 200 % , based on the satisfaction of performance, and no shares will be issued if the minimum applicable performance metric is not achieved. As these PSUs vest based on the achievement of market conditions, the grant date fair values were determined using a Monte-Carlo valuation model. The Monte-Carlo valuation model considered a variety of potential future share prices for the Company as well as its peer companies in the selected market index. The weighted-average grant date fair value of 2020 PSUs granted with market-based vesting conditions was $ 28.81 based on the valuation model.
In December 2020, the Company’s board of directors approved a modification of PSUs that were originally granted to the Company’s senior management team in January 2019. The modification replaced the original performance criteria for the 2020, 2021 and cumulative performance periods from being based on Xtampza 2020, 2021 and three-year cumulative revenue goals to being based on total shareholder return (“TSR”) for 2020, 2021 and the corresponding two-year cumulative period. The PSUs achieved based on 2019 Xtampza revenues goals were not changed as part of the modification. The Company accounted for this modification under ASC 718, and, per guidance, determined the modification created incremental value as the fair value of these awards was increased upon modification. The increase in fair value resulted in an accelerated recognition of stock-based compensation expense on the modification date of $ 906 . The total expense for these PSUs in years ended December 31, 2020 and 2019 was $ 950 and $ 136 , respectively.
A summary of the Company’s performance share units activity for the year ended December 31, 2020 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2019
99,400
$
15.90
Granted
187,978
28.49
Vested
—
—
Forfeited
—
—
Performance adjustment
( 4,155 )
15.90
Outstanding at December 31, 2020
283,223
$
24.26
The number of PSUs awarded represents the target number of shares of common stock that may be earned; however, the actual number of shares earned may vary based on the satisfaction of performance criteria. The weighted-average grant date fair value of PSUs granted for the years ended December 31, 2020 and 2019 was $ 28.49 and $ 15.90 , respectively. There were no PSUs granted in the year ended December 31, 2018.
For the years ended December 31, 2020 and 2019, the stock-based compensation expense for PSUs was $3,551 and $136, respectively. There was no expense for PSUs in the year ended December 31, 2018.
As of December 31, 2020, the unrecognized compensation cost related to performance share units was $ 3,555 and is expected to be recognized as expense over approximately 1.6 years.
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Restricted Stock Units
A summary of the Company’s restricted stock units activity for the year ended December 31, 2020 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2019
849,679
$
17.10
Granted
767,634
21.35
Vested
( 335,524 )
17.85
Forfeited
( 39,402 )
20.20
Outstanding at December 31, 2020
1,242,387
$
19.42
The weighted-average grant date fair value of RSUs granted for the years ended December 31, 2020, 2019 and 2018 was $ 21.35 , $ 15.48 and $ 23.41 . The total fair value of RSUs vested (measured on the date of vesting) for the years ended December 31, 2020, 2019 and 2018 was $ 6,992 , $ 2,683 and $ 1,782 respectively.
As of December 31, 2020, the unrecognized compensation cost related to restricted stock units was $ 16,816 and is expected to be recognized as expense over approximately 2.6 years. The fair value of restricted stock units vested during the year ended December 31, 2020 was $ 5,989 .
Stock Options
The Company granted stock options to employees for the years ended December 31, 2020, 2019 and 2018. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model and restricted stock awards and restricted stock units based on the fair value of the award.
A summary of the Company’s stock option activity for the year ended December 31, 2020 and related information is as follows:
Weighted-
Weighted-
Average
Average
Remaining
Aggregate
Exercise Price
Contractual
Intrinsic
Shares
per Share
Term (in years)
Value
Outstanding at December 31, 2019
3,955,887
$
16.00
7.5
$
21,257
Granted
717,304
21.30
Exercised
( 637,924 )
10.44
Cancelled
( 174,786 )
18.82
Outstanding at December 31, 2020
3,860,481
$
17.78
7.2
$
13,011
Exercisable at December 31, 2020
2,373,097
$
17.00
6.4
$
9,770
The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:
Year ended December 31,
2020
2019
2018
Risk-free interest rate
1.3
%
2.4
%
2.6
%
Volatility
66.2
%
63.3
%
64.8
%
Expected term (years)
6.0
6.1
6.1
Expected dividend yield
—
%
—
%
—
%
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Risk-free Interest Rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the stock option grants.
Expected Volatility. Due to the Company’s limited operating history and lack of company-specific historical or implied volatility, the expected volatility assumption is based on the Company’s volatility as well as the historical volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology and pharmaceutical industries. In evaluating similarity, the Company considers factors such as industry, stage of life cycle and size.
Expected Term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior through December 31, 2020 it determined the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.
Expected Dividend Yield. The expected dividend yield assumption is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.
The weighted-average grant date fair value of stock options granted for the years ended December 31, 2020, 2019, and 2018 was $ 12.78 , $ 9.07 and $ 14.51 respectively. The total intrinsic value of stock options exercised for the years ended December 31, 2020, 2019, and 2018 was $ 7,516 , $ 1,506 and $ 3,970 , respectively.
As of December 31, 2020, the unrecognized compensation cost related to outstanding options was $ 14,170 and is expected to be recognized as expense over approximately 2.4 years.
In June 2018, the Company’s board of directors approved a modification of equity-based awards granted to the former President and Chief Executive Officer to provide that all of those awards, to the extent unvested as of the Company’s 2020 annual meeting of shareholders, will vest on such date, subject to his continued service on the Company’s board of directors through such date. This modification was effective on June 4, 2018 and affected 116,250 shares of non-vested restricted stock units and 225,625 unvested stock options to purchase the Company’s common stock. The Company accounted for this modification under ASC 718, and, per guidance, determined the modification did not create incremental value as the fair value of these awards was unchanged. The shorter requisite service period resulted in the accelerated recognition of stock-based compensation expense from the modification date through the date of the annual meeting of shareholders in May 2020.
Employee Stock Purchase Plan
The Company’s 2015 Employee Stock Purchase Plan allows employees as designated by the Company’s Board of Directors to purchase shares of the Company’s common stock. The purchase price is equal to 85 % of the lower of the closing price of the Company’s common stock on (1) the first day of the purchase period or (2) the last day of the purchase period. During the year ended December 31, 2020, 67,512 shares of common stock were purchased for total proceeds of $ 758 . As of December 31, 2020, there were 1,315,844 shares of common stock authorized for issuance pursuant to the employee stock purchase plan. The expense for the years ended December 31, 2020, 2019 and 2018 was $ 342 , $ 358 and $ 493 respectively.
Stock-Based Compensation Expense
Stock-based compensation for all stock options, restricted stock awards, restricted stock units, performance share units and for the employee stock purchase plan are reported within the following:
Year Ended December 31,
2020
2019
2018
Research and development expenses
$
3,909
$
2,126
$
1,468
Selling, general and administrative expenses
18,001
14,402
12,310
Total stock-based compensation expense
$
21,910
$
16,528
$
13,778
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16. INCOME TAXES
For the year ended December 31, 2020, the Company recorded a current state tax expense of $ 830 . For the years ended December 2019, and 2018 the Company did not record a current or deferred income tax expense or (benefit) due to current and historical losses incurred by the Company. The Company's losses before income taxes consist solely of losses from domestic operations.
A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:
As of December 31,
2020
2019
2018
Federal income tax expense at statutory rate
21.00
%
21.00
%
21.00
%
(Increase) decrease income tax (benefit) resulting from:
State income tax, net of federal benefit
5.06
5.59
5.89
Permanent differences
( 1.85 )
( 3.24 )
( 2.51 )
Research and development credit
( 1.08 )
1.83
0.52
Change in valuation allowance
( 20.12 )
( 25.18 )
( 24.90 )
Effective income tax rate
3.01
%
0.00
%
0.00
%
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are comprised of the following:
As of December 31,
2020
2019
Deferred tax assets:
U.S. and state net operating loss carryforwards
$
57,457
$
66,553
Research and development credits
5,004
3,768
Operating lease liabilities
2,508
2,630
Accruals and other (1)
15,306
14,286
Intangible assets
1,297
—
Depreciation
—
92
Gross deferred tax assets:
81,572
87,329
Valuation allowance
( 65,661 )
( 77,285 )
Total deferred tax assets:
15,911
10,044
Deferred tax liabilities:
Debt discount
( 10,809 )
—
Operating lease assets
( 2,217 )
( 2,357 )
Intangible assets
—
( 7,687 )
Depreciation
( 2,885 )
—
Net deferred tax assets
$
—
$
—
(1) Balance includes $ 7,133 and $ 5,796 of stock-based compensation expense related to accruals as of December 31, 2020 and 2019, respectively. Balance also includes $ 6,281 and $ 7,204 of accrued rebates, returns, and discounts as of December 31, 2020 and 2019, respectively.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As of December 31, 2020, and December 31, 2019, based on the Company's history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2020 and
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December 31, 2019. The valuation allowance decreased $ 11,624 during the year ended December 31, 2020 due primarily to the expected utilization of its net operating losses in 2020.
The Company recorded a valuation allowance against all of its deferred tax assets as of December 31, 2020 and 2019. The Company intends to continue to maintain a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Given the Company’s current earnings and anticipated future earnings, however, the Company believes that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow the Company to reach a conclusion that a significant portion or all of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to the provision for income taxes for the period the release is recorded. The exact timing and amount of the valuation allowance release, however, are subject to change on the basis of the level of profitability that the Company is able to actually achieve.
As of December 31, 2020, 2019, and 2018, the Company had gross U.S. federal net operating loss carryforwards of $ 226,824 , $ 292,342 , and $ 324,533 , respectively, which may be available to offset future income tax liabilities. The Tax Cuts and Jobs Act of 2017 (“TCJA”) will generally allow losses incurred after 2017 to be carried over indefinitely but will generally limit the NOL deduction to the lesser of the NOL carryover or 80% of a corporation’s taxable income (subject to Internal Revenue Code Sections 382 and 383). Also, there will be no carryback for losses incurred after 2017. Losses incurred prior to 2018 will generally be deductible to the extent of the lesser of a corporation’s NOL carryover or 100% of a corporation’s taxable income (subject to Internal Revenue Code Section 382 and 383) and be available for twenty years from the period the loss was generated.
As of December 31, 2020, 2019, and 2018, the Company also had gross U.S. state net operating loss carryforwards of $ 170,280 , $ 222,629 , and $ 285,181 , respectively, which may be available to offset future income tax liabilities and expire at various dates through 2038.
As of December 31, 2020, 2019 and 2018, the Company had federal research and development tax credit carryforwards of approximately $ 4,623 , $ 4,044 , and $ 3,628 , respectively, available to reduce future tax liabilities which expire at various dates through 2038. As of December 31, 2020, 2019 and 2018 the Company had state research and development tax credit carryforwards of approximately $ 1,150 , $ 1,112 , and $ 885 , respectively, available to reduce future tax liabilities which expire at various dates through 2035.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions.
During 2020, the Company completed an updated study to assess the impact of ownership changes, if any, on the Company’s ability to use its NOL and tax credit carryovers as defined under Section 382 of the Internal Revenue Code (“IRC 382”). As a result of the study, the Company concluded that there were ownership changes that occurred during the years 2006, 2012 and 2015 that could be subject to IRC 382 limitations. These IRC 382 annual limitations may limit the Company’s ability to use pre-ownership change federal NOL carryovers and pre-ownership change federal tax credit carryovers, which may potentially increase the Company’s future federal income tax liability.
The Company files income tax returns in the United States and in several states. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2017 through December 31, 2020. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. The Company originally recorded an unrecognized tax benefit of $ 902 (net rate effected unrecognized tax benefit of $ 235 ) during 2017 associated with its IRS examination of its 2015 federal income tax return, and accordingly reduced its NOL deferred tax asset during 2017. The Company settled its IRS audit during 2018, which resulted in a total decrease to its NOL carryover of $ 36 . As a result of the IRS settlement, the Company reversed this unrecognized tax benefit and trued-up its NOL carryover during 2018 to reflect the reduction of the $ 36 to its NOL as required by the IRS
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settlement. This is included in the tabular rollforward below of gross unrecognized tax benefits. Since a full valuation allowance has been provided against the Company’s net operating loss carryover, the true up of the NOL carryover and associated deferred tax asset during 2018 does not result in any financial statement impact.
For all years through December 31, 2020, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards. The Company has reduced its deferred tax asset for its estimate of credits that could be reduced, and that is included in the tabular rollforward of uncertain tax positions. Since a full valuation allowance has been provided against the Company’s research and development credits the reduction in the gross deferred tax asset established for the research and development credit carryforwards does not result in any financial statement impact.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:
As of December 31,
2020
2019
2018
Gross UTB Balance at January 1
$
578
$
502
$
1,364
Additions based on tax positions related to the current year
36
76
64
Additions for tax positions of prior years
—
—
—
Reductions for tax positions of prior years
( 28 )
—
( 24 )
Settlements
—
—
( 902 )
Reductions due to lapse of applicable statute of limitations
—
—
—
Gross UTB Balance at December 31
$
586
$
578
$
502
Net UTB impacting the effective tax rate at December 31 (included in the change in the valuation allowance in rate reconciliation)
$
560
$
549
$
481
17. EMPLOYEE BENEFITS
The Company has a retirement savings plan, which is qualified under section 401(k) of the Code, for its employees. The plan allows eligible employees to defer, at the employee’s discretion, pretax compensation up to the Internal Revenue Service annual limits. Employees become eligible to participate starting on the first day of employment. The Company is not required to contribute to this plan. Total expense for contributions made by the Company for the years ended December 31, 2020, 2019 and 2018 was $ 1,260 , $ 1,170 and $ 1,208 respectively.
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18. UNAUDITED QUARTERLY OPERATING RESULTS
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2020 and 2019:
First
Second
Third
Fourth
Year ended December 31, 2020
Quarter
Quarter
Quarter
Quarter
Product revenues, net
$
76,511
$
78,058
$
79,176
$
76,271
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
27,229
12,899
14,188
15,184
Intangible asset amortization
10,295
16,795
16,795
16,795
Total cost of products revenues
37,524
29,694
30,983
31,979
Gross profit
38,987
48,364
48,193
44,292
Operating expenses
Research and development
2,666
2,493
2,141
2,472
Selling, general and administrative
31,260
29,322
26,426
26,824
Total operating expenses
33,926
31,815
28,567
29,296
Income from operations
5,061
16,549
19,626
14,996
Interest expense
( 4,823 )
( 8,259 )
( 8,063 )
( 7,737 )
Interest income
212
14
3
3
Income before income taxes
450
8,304
11,566
7,262
Provision for income taxes
—
246
280
304
Net income
$
450
$
8,058
$
11,286
$
6,958
Earnings per share — basic
$
0.01
$
0.23
$
0.33
$
0.20
Weighted-average shares — basic
34,100,688
34,395,266
34,540,126
34,592,277
Earnings (loss) per share — diluted
$
0.01
$
0.23
$
0.32
$
0.20
Weighted-average shares — diluted
35,069,693
35,091,906
35,069,188
35,417,623
First
Second
Third
Fourth
Year ended December 31, 2019
Quarter
Quarter
Quarter
Quarter
Product revenues, net
$
74,516
$
75,040
$
72,942
$
74,203
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
45,476
44,966
43,066
45,400
Intangible asset amortization
3,688
3,688
3,688
3,688
Total cost of products revenues
49,164
48,654
46,754
49,088
Gross profit
25,352
26,386
26,188
25,115
Operating expenses
Research and development
2,992
2,459
2,491
2,398
Selling, general and administrative
32,352
28,935
30,072
25,090
Total operating expenses
35,344
31,394
32,563
27,488
Loss from operations
( 9,992 )
( 5,008 )
( 6,375 )
( 2,373 )
Interest expense
( 234 )
( 236 )
( 228 )
( 211 )
Interest income
526
532
494
383
Net loss
$
( 9,700 )
$
( 4,712 )
$
( 6,109 )
$
( 2,201 )
Weighted-average shares - basic and diluted
33,331,917
33,397,709
33,481,923
33,600,566
Loss per share - basic and diluted
$
( 0.29 )
$
( 0.14 )
$
( 0.18 )
$
( 0.07 )
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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.