What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 164 added, 140 removed, 182 unchanged (63% of the section changed)

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We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Form 10-K, including those set forth under “Forward-looking Statements” and “Risk Factors”, as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.

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

We are building a leading, diversified specialty pharmaceutical company committed to improving the lives of people living with serious medical conditions.

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

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

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

We initially licensed the right to commercialize the Nucynta Products in the United States through a Commercialization

Agreement with Assertio Therapeutics, Inc.

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

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

On February 13, 2020, we closed the Nucynta

Acquisition in accordance with the Nucynta Purchase Agreement.

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

Upon closing, the Nucynta Commercialization Agreement was effectively terminated.

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

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

However, we generated net income of $71.5 million and $26.8 million in the years ended December 31, 2021 and December 31, 2020, respectively.

As of December 31, 2021, we had an accumulated deficit of $256.3 million.

Substantially all of our net losses resulted from costs incurred in connection with selling, general and administrative costs associated with our operations and research and development programs.

We believe that our cash and cash equivalents at December 31, 2021, together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

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

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

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

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

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

As of the date of the filing of this Annual Report on Form 10-K, we expect the COVID-19 pandemic and actions taken to contain it to continue to impact our revenue.

Notwithstanding the lifting of COVID-19 restrictions in many jurisdictions, and amidst continuing public health concerns relating to the spread of COVID-19, weekly pain patient office visits continue to be depressed compared to pre-COVID periods, which in turn may account for fewer patients beginning therapy with our products.

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

Financial Operations Overview

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

Please refer to

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

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

Research and Development Expenses

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Other selling, general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services, and expenses associated with obtaining and maintaining patents.

As we continue to invest in the commercialization of our products, we expect our selling, general and administrative expenses to be substantial for the foreseeable future.

As we continue to invest in the commercialization of our products, we expect our selling, general and administrative expenses to continue to be substantial for the foreseeable future.

Interest Expense

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

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

Interest expense consists primarily of cash and non-cash interest costs related to the term notes and convertible notes issued in February 2020 in connection with the Nucynta Acquisition.

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

However, in January 2020, the Company prepaid the outstanding principal, accrued interest, and required prepayment fees on the SVB term loan and recognized an immaterial loss on extinguishment as a component of interest expense.

Interest Income

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Provision for Income Taxes

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

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

The provision for income taxes reflects expense for federal and state income taxes.

During the year ended December 31, 2021, the Company removed its valuation allowance on the substantial majority of its deferred tax assets, resulting in a tax benefit in 2021.

Given the valuation allowance that was recorded on deferred tax assets during the year ended December 31, 2020, the provision for 2020 income taxes consisted of state income tax for certain states that enacted changes in tax laws that prevented us from using our state-level NOLs to offset taxable income.

Critical Accounting Policies and Significant Judgments and Estimates

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

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

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

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

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Product Revenue

Our only source of revenue to date has been generated by sales of our products, which are primarily sold to distributors (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”).

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

This generally occurs upon delivery;

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

Therefore, product sales are recorded upon delivery net of estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, as well as estimated product returns.

Prior to the adoption of ASC 606 on January 1, 2018, we recognized revenue in accordance with ASC Topic 605, Revenue Recognition (“legacy GAAP”), or when there was persuasive evidence of an arrangement;

when title and risk of loss had passed to the customer;

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

and when collectability was reasonably assured.

The satisfaction of these criteria generally occurred upon delivery of products to customers, or the sell-in method of revenue recognition under legacy GAAP.

In addition, we recognized the transaction price net of estimated chargebacks, rebates, sales incentives and allowance.

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

Revenue for product sales is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

This generally occurs upon delivery to our customers when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable.

Therefore, product sales are recorded upon delivery to our customers net of estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, as well as estimated product returns.

Sales Deductions

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

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

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

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

For Xtampza ER, since the product has only been commercially sold since June 2016, estimates of product returns are based on a combination of historical returns processed to date, taking into consideration the expiration date of product upon delivery to customers, as well as

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

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

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.

Provisions for product returns are based on product-level returns rates, recent unprocessed return claims, as well as relevant market events and other factors.

Our return policy requires that product is physically returned within an 18-month window beginning six months prior to expiration and up until twelve months after expiration.

Estimates of the future product returns are made at the time of revenue recognition to determine the amount of consideration to which we expect to be entitled (that is, excluding the products expected to be returned).

To the extent we receive amounts in excess of what we expect to be entitled to receive due to a product return, we do not recognize revenue when we transfer products to customers but instead recognize those excess amounts received as a refund liability.

We update the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds with the corresponding adjustments recognized as revenue (or reductions of revenue).

Historically, estimates of the refund liability for product returned for Nucynta Products were based on historical returns rates as these products have been commercially sold in the US since 2009 for Nucynta IR and since 2011 for Nucynta ER.

Because the Company began selling the Nucynta Products in 2018, the majority of Nucynta Products sold to customers by the Company were not eligible for return until the year ended December 31, 2021, or beyond.

ER, estimates of the refund liability for product returns were historically based on a combination of historical actual returns processed to date, taking into consideration the expiration date of product upon delivery to customers, as well as forecasted customer buying and return patterns, channel inventory levels, and other specifically known market events and trends.

Refer to Note 3 , Revenue from Contracts with Customers , for more information.

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

Intangible Assets

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As of December 31, 2021, our only intangible asset is related to the Nucynta Intangible Asset.

There have been no triggering events that indicate that the carrying value is not recoverable from undiscounted cash flows.

We utilize the asset and liability method of accounting for income taxes.

Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse.

The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

In determining the extent to which a valuation allowance for deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry back opportunities, reversal of certain deferred tax liabilities, and other tax planning strategies.

Prior to generating income during the year ended December 31, 2020, the Company had a history of operating losses and a valuation allowance was maintained on the majority of the Company’s deferred tax assets through March 31, 2021.

As a result of sustained positive earnings history as demonstrated through recent cumulative earnings, as of June 30, 2021, the Company began using projections of future taxable income as a source of realizing its deferred tax assets.

Accordingly, the Company released the portion of the valuation allowance on deferred tax assets expected to be realized through future earnings in the three months ended June 30, 2021, and subsequent quarters.

The Company has maintained a valuation allowance on the portion of its deferred tax assets that are not more likely than not to be realized due to tax limitation or other conditions of $2.0 million as of December 31, 2021.

The Company recognized a total tax benefit of $74.9 million for the year ended December 31, 2021, which included a deferred tax benefit of $78.0 million.

Significant judgment is required in making these assessments to maintain or reverse our valuation allowances, and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time.

Results of Operations

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Selling, general and administrative

Restructuring

Total operating expenses

Income (loss) from operations

Income from operations

Interest expense

Interest income

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Comparison of the Years Ended December 31, 2020 and 2019

Product revenues, net were $310.0 million for the year ended December 31, 2020 (“2020”), compared to $296.7 million for the year ended December 31, 2019 (“2019”).

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

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

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

For 2020, Nucynta IR and ER

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

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

(Loss) income before income taxes

(Benefit from) provision for income taxes

Product revenues, net were $276.9 million for the year ended December 31, 2021 (“2021”), compared to $310.0 million for the year ended December 31, 2020 (“2020”), representing a $33.1 million decrease.

For 2021, Xtampza product revenue was $103.7 million compared to $128.0 million for 2020.

The $24.3 million decrease for Xtampza revenue was due to higher gross-to-net adjustments, primarily related to rebates and provisions for returns, partially offset by a benefit from an increase in sales volume and price.

For 2021, Nucynta IR and ER revenue was $102.2 million and $71.0 million, respectively, compared to $116.3 million and $65.7 million, respectively, for 2020.

The $8.8 million decrease for Nucynta Products revenue was due to a decrease in sales volume and higher provisions for returns, partially offset by a benefit from lower gross-to-net adjustments primarily related to rebates.

Cost of product revenues (excluding intangible asset amortization) was $59.1 million for 2021, compared to $69.5 million for 2020.

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

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

The $10.4 million decrease was primarily related to a decrease in royalty expense for the

Nucynta Products, partially offset by an increase in sales volume for Xtampza.

Investments in manufacturing, including the transfer of the Nucynta ER manufacturing process, which is expected to be completed in 2022, may impact the relationship between revenue and costs of product revenues (excluding intangible asset amortization) in future periods.

In the 2020 Period, we recognized $14.2 million in sales-based royalty expense due to Assertio under the terms of the Nucynta Commercialization Agreement.

Our sales-based royalty obligations to Assertio ceased upon closing of the Nucynta Acquisition on February 13, 2020.

Intangible asset amortization was $67.2 million for 2021, compared to $60.7 million for 2020.

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Research and development expenses were $9.5 million for 2021, compared to $9.8 million for 2020.

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

The $300,000 decrease was primarily related to a decrease in salaries, wages and benefits, partially offset by an increase in trial related costs.

Selling, general and administrative expenses were $119.0 million for 2021, compared to $113.8 million for 2020.

The $2.6 million decrease was primarily related to:

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

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

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

partially offset by

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

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

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

The $5.2 million increase was primarily related to:

● an increase in audit, legal, and other professional fees of $3.5 million, primarily related to higher costs associated with ongoing intellectual property litigation;

● an increase in litigation settlements of $2.9 million due to the Company executing a settlement framework to resolve 27 pending opioid-related lawsuits.

Refer to Note 11 , Commitments and Contingencies, for further information;

● an increase in salaries, wages and benefits of $1.6 million, primarily due to stock-based compensation expense,

● an increase in insurance of $747,000, primarily due to higher premiums;

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

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

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

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

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

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

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

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

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

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

partially offset by

● a decrease in sales, marketing and consulting costs of $3.6 million, primarily due to lower costs incurred in 2021 to support the ongoing commercialization of our products.

Restructuring expenses were $4.6 million for 2021, compared to zero for 2020.

The increase in restructuring expenses is due to the Company entering into a plan to reduce its workforce, primarily related to its salesforce in 2021.

The arrangements included the payment of a cash severance benefit near the time of separation, together with continued medical benefits and related services.

Refer to Note 2 , Significant Accounting Policies , for further information.

Interest expense was $21.0 million for 2021, compared to $28.9 million for 2020.

The $7.9 million decrease was primarily due to lower non-cash interest expense associated with the Company’s convertible notes in 2021 as a result of the adoption of ASU 2020-06 in 2021 combined with lower cash interest expense associated with the Company’s term note due to continued principal payments.

Interest income was $12,000 for 2021, compared to $232,000 for 2020.

The $220,000 decrease was primarily due to lower interest rates earned on money market funds.

Benefit from income taxes was $74.9 million for 2021, which includes a $78.0 million tax benefit related to the release of the Company’s valuation allowance on the majority of its net operating losses and other deferred tax assets, compared to a provision for income taxes of $830,000 for 2020.

The $75.7 million increase was primarily due to the Company’s valuation allowance release in 2021.

Liquidity and Capital Resources

Sources of liquidity

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

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

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

We have historically incurred net losses in each year since inception until 2020.

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

As of December 31, 2021, we had $186.4 million in cash and cash equivalents.

We believe that our cash and cash equivalents at December 31, 2021, together with expected cash inflows from operations, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

Borrowing Arrangements and Equity Offerings

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

The following transactions represent the material borrowing arrangements and equity offerings.

Pharmakon Term Notes

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

The outstanding principal balance for the term notes as of December 31, 2021 is $112,500, including $50,000 of obligations due in the first twelve months after period end.

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

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

Silicon Valley Bank Term Loan Facility

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

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

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

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

The outstanding principal balance for the convertible notes as of December 31, 2021 is $143,750.

There are no principal repayment obligations due in the first twelve months after period end.

Debt Commitment Letter

On February 14, 2022, in connection with the definitive agreement to acquire BioDelivery Sciences International, Inc.

(“BDSI”) (the “Merger Agreement”), we entered into a commitment letter (the “Debt Commitment Letter”) with Pharmakon Advisors, L.P.

pursuant to which funds managed by Pharmakon Advisors, L.P.

have committed, subject to customary conditions, to provide to Collegium a four (4) year senior secured term loan facility in an aggregate principal amount of $650.0 million (the “Term Facility”), including $100.0 million of principal repayment obligations due in the first twelve months of the loan.

Proceeds will be used to finance a portion of Collegium’s acquisition of BDSI, as well as to repay the outstanding debt of Collegium and BDSI and pay certain fees and expenses related thereto.

Under the terms of the Debt Commitment Letter, the Term Facility will have $100 million in amortization payments during the first year and the remaining $550 million balance will amortize in equal quarterly installments over the remaining three (3) years.

The loan will initially bear interest at 3-month LIBOR plus 7.50% per annum subject to a 1.20% floor, and Collegium will pay a one-time fee of 2% due at signing and 1% due at closing.

The obligation of Pharmakon Advisors, L.P.

to provide the financing under the Debt Commitment Letter is subject to a number of conditions, including the receipt by Pharmakon Advisors, L.P.

of executed loan documentation, the accuracy of certain representations and warranties in all material respects and consummation of the Transactions as contemplated by the Merger Agreement.

In this section, we discuss cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Net increase in cash, cash equivalents and restricted cash

Operating activities.

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

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

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

Cash provided by operating activities was $103.6 million in 2021, compared to $93.9 million in 2020.

The $9.7 million increase in cash provided by operating activities was primarily due to changes in working capital, including accounts receivable and accrued rebates, returns, and discounts, and accrued expenses, as well as higher net income exclusive of non-cash items.

Investing activities.

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

Cash used in investing activities was $1.9 million in 2021, compared to $373.8 million in 2020.

The $371.9 million increase in cash used in investing activities was primarily related to the Nucynta Acquisition.

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

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

Financing activities.

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

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

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

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

Cash used in financing activities was $89.3 million in 2021, compared to cash provided by financing activities of $286.5 million in 2020.

The $375.8 million decrease was primarily related to net proceeds from the term notes of $192.1 million and issuance of the convertible notes of $138.3 million, both of which were issued in 2020.

The remaining change is primarily related to repurchases of common stock of $47.9 million, including the ASR Program, and changes in payments made for employee restricted stock tax withholdings, partially offset by proceeds from exercises of stock options.

Funding requirements

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

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

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

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

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

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

currently expect.

The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including:

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020 that will affect our future liquidity:

(in thousands)

Operating lease obligations (1)

Term notes, including interest

Convertible senior notes, including interest

Purchase obligations (2)

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

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

The disclosed amounts represent the maximum amount that could be payable under the minimum purchase obligations.

The Company’s contractual obligations as of December 31, 2021 that will affect our future liquidity include our term notes, including interest, convertible senior notes, including interest, operating lease obligations, and purchase obligations.

For further detail regarding our term notes and convertible senior notes, refer to Note 12 , Debt.

For further detail regarding our operating lease obligations, refer to Note 13 , Leases .

The Company’s purchase obligations represent the minimum purchase obligations of up to $3.0 million per year with our contract manufacturer which are in effect as of December 31, 2021 and will remain in effect each year until the termination of our manufacturing agreement.

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

These payments are contingent upon the occurrence of various future events, and the amounts payable under these provisions depend upon the level of compensation at the time of termination of employment, are therefore not calculable at this time.

Non-GAAP Financial Measures

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

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

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

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

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

To supplement our financial results presented on a GAAP basis, we have included information about certain non-GAAP financial measures such as adjusted EBITDA and adjusted operating expenses.

We use these non-GAAP financial measures to understand, manage and evaluate our business as we believe they provide additional information on the performance of our business.

We believe that the presentation of these non-GAAP financial measures, taken in conjunction with our results under GAAP, provide analysts, investors, lenders and other third parties insight into our view and assessment of our ongoing operating performance.

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

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

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

Non-GAAP Adjusted Income

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

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

Three months ended

GAAP net income (loss)

Non-GAAP adjustments:

Stock-based compensation expense (1)

Intangible asset amortization (2)

Non-cash interest expense (3)

Nucynta royalty adjustment (4)

Provision for income taxes (5)

Total non-GAAP adjustments

Non-GAAP adjusted income

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

Represents amortization expense from the Nucynta Intangible Asset.

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

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

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

Represents current provision for estimated income taxes.

In our quarterly and annual reports, earnings press releases and conference calls, we may discuss the following financial measures that are not calculated in accordance with GAAP, to supplement our consolidated financial statements presented on a GAAP basis.

Adjusted EBITDA

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

Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income adjusted to exclude interest expense, interest income, the benefit from or provision for income taxes, depreciation, amortization, stock-based compensation, restructuring expenses, and litigation settlements.

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

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

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

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

1 unchanged sentence

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

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

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

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

Three months ended

GAAP net income (loss)

● we exclude restructuring expenses from adjusted EBITDA.

Restructuring expenses primarily include employee severance and contract termination costs.

The amount and/or frequency of these restructuring expenses are not part of our underlying business;

● we exclude litigation settlements from adjusted EBITDA, as well as any applicable income items or credit adjustments due to subsequent changes in estimates.

This does not include our legal fees to defend claims, which are expensed as incurred.

Adjusted EBITDA for the years ended December 31, 2021 and 2020 was as follows:

GAAP net income

Interest expense

Interest income

Provision for income taxes

(Benefit from) provision for income taxes

Stock-based compensation expense

Restructuring

Litigation settlements

Total adjustments

Adjusted EBITDA

Adjusted EBITDA was $118.3 million for 2021 compared to $139.7 million for 2020.

The $21.4 million decrease was primarily due to higher GAAP net income of $44.8 million and higher adjustments for amortization expense of $6.5 million, restructuring expenses of $4.6 million, litigation settlements of $2.9 million, stock-based compensation expense of $2.3 million, depreciation expense of $866,000, and interest income of $220,000, partially offset by lower adjustments for income taxes of $75.7 million, primarily due to the impact of the Company’s valuation allowance release, and interest expense of $7.9 million.

The following is a summary of 2021 quarterly Adjusted EBITDA through December 31, 2021:

First Quarter

2 unchanged sentences

Fourth Quarter

GAAP net income

GAAP net income (loss)

Interest expense

Interest income

Provision for income taxes

(Benefit from) provision for income taxes

Stock-based compensation expense

Restructuring

Litigation settlements

Total adjustments

Adjusted EBITDA

Adjusted Operating Expenses

Adjusted operating expenses is a non-GAAP financial measure that represents GAAP operating expenses adjusted to exclude stock-based compensation expense, restructuring, and litigation settlements.

Adjusted operating expenses for the years ended December 31, 2021 and 2020 were as follows:

GAAP Operating expenses

Stock-based compensation

Restructuring

Litigation settlements

Total adjustments

Adjusted operating expenses

Adjusted operating expenses were $101.2 million for 2021 compared to $101.7 million for 2020.

The $500,000 decrease was primarily related to an increase in GAAP operating expenses of $9.4 million due to the increase in selling, general and administrative expenses, partially offset by the decrease in research and development expenses, and higher adjustments for stock-based compensation expense, restructuring, and litigation settlements as described above in “Results of Operations.”

The following is a summary of 2021 quarterly adjusted operating expenses through December 31, 2021:

First Quarter

2 unchanged sentences

Fourth Quarter

GAAP net loss

Interest expense

Interest income

Stock-based compensation expense

GAAP Operating expenses

Stock-based compensation

Restructuring

Litigation settlements

Total adjustments

Adjusted EBITDA

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the periods presented, as defined under SEC rules.

Adjusted operating expenses

The following is a summary of 2020 quarterly adjusted operating expenses for the year ended December 31, 2020.

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

GAAP Operating expenses

Stock-based compensation

Restructuring

Litigation settlements

Total adjustments

Adjusted operating expenses

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What changed 10-K

Item 7. Management’s Discussion and Analysis