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, 2021.
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;
53
Table of Contents
(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 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, 2021.
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, 2021 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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
54
Table of Contents
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, 2021, 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, 2021, 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, 2021, of the Company and our report dated February 24, 2022, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in accounting principle applied to its convertible debt effective January 1, 2021.
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 24, 2022
55
Table of Contents
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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 2022 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 2022 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 2022 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 2022 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 2022 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.
56
Table of Contents
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. (2)
3.2†
Amended and Restated Bylaws of Collegium Pharmaceutical, Inc. (3)
4.1†
Warrant to Purchase Stock, dated November 8, 2018, issued by Collegium Pharmaceutical, Inc. to Assertio Therapeutics, Inc. (4)
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. (5)
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. (5)
4.4†
Form of certificate representing the 2.625% Convertible Senior Notes due 2026 (included as Exhibit A to Exhibit 4.3) (5)
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. (7)
10.3+†
Performance Bonus Plan. (8)
10.4(a)+†
Amended and Restated 2014 Stock Incentive Plan. (7)
10.4(b)+†
Form of Incentive Stock Option Agreement under the Amended and Restated 2014 Stock Incentive Plan. (7)
10.4(c)+†
Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2014 Stock Incentive Plan. (7)
10.4(d)+†
Form of Restricted Stock Award Agreement under the Amended and Restated 2014 Stock Incentive Plan. (7)
10.4(e)+†
Form of Performance Share Unit Agreement under the Amended and Restated 2014 Stock Incentive Plan. (9)
10.5†
Form of Indemnification Agreement. (8)
10.6+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Collegium Pharmaceutical, Inc. and Joseph Ciaffoni. (10)
10.7+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Shirley Kuhlmann and Collegium Pharmaceutical, Inc. (10)
10.8+†
Letter Agreement dated June 4, 2018, by and between Collegium Pharmaceutical, Inc. and Michael T. Heffernan. (11)
10.9+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Collegium Pharmaceutical, Inc. and Scott Dreyer. (10)
10.10+†
Amended & Restated Employment Agreement, effective as of December 27, 2020, by and between Richard Malamut, M.D. and Collegium Pharmaceutical, Inc. (10)
10.11*†
Commercialization Agreement, by and among, Assertio, Inc., Collegium Pharmaceutical, Inc. and Collegium NF, LLC, dated as of December 4, 2017. (12)
10.12†
Amendment dated January 9, 2018 to Commercialization Agreement by and among Assertio, Inc. and Collegium Pharmaceutical, Inc. and Collegium NF, LLC. (12)
10.13†
Amendment No. 2 to Commercialization Agreement, dated August 29, 2018, by and among Collegium Pharmaceutical, Inc., Collegium NF, LLC, and Assertio Therapeutics, Inc. (14)
10.14†
Amendment No. 3 to Commercialization Agreement, dated November 8, 2018, by and among Collegium Pharmaceutical, Inc., Collegium NF, LLC, and Assertio Therapeutics, Inc. (4)
10.15†
Purchase Agreement, dated as of February 6, 2020, by and between Collegium Pharmaceutical, Inc. and Assertio Therapeutics, Inc. (15)
10.16†
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. (15)
57
Table of Contents
10.17†
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. (16)
10.18†
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. (2)
10.19†
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. (16)
10.20†
Consent Agreement, dated January 30, 2020, by and among Grünenthal GmbH, Assertio Therapeutics, Inc. and Collegium Pharmaceutical, Inc. (16)
10.21†
Settlement Agreement, dated September 29, 2020, by and among Collegium Pharmaceutical, Inc. and Teva Pharmaceuticals USA, Inc. (17)
10.22+†
Employment Agreement, dated May 24, 2021, by and between Colleen Tupper and Collegium Pharmaceutical, Inc. ( 18)
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, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2021, 2020, (ii) Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019, (iii) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2021, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019, 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 Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 filed with the Commission on August 5, 2020.
(3) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on December 4, 2017.
(4) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on November 8, 2018.
(5) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2020.
(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.
58
Table of Contents
(7) 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.
(8) 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.
(9) 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.
(10) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on December 30, 2020.
(11) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on June 4, 2018.
(12) Previously filed as an exhibit to the registrant’s Annual Report on Form 10-K filed with the Commission on March 7, 2018.
(13) 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.
(14) 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.
(15) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on February 10, 2020.
(16) 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.
(17) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on September 30, 2020.
(18) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 filed with the Commission August 5, 2021.
Item 16. Form 10-K Summary
None.
59
Table of Contents
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
President and Chief Executive Officer (Principal Executive Officer) and Director
February 24, 2022
Joseph Ciaffoni
/s/ Colleen Tupper
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
February 24, 2022
Colleen Tupper
/s/ Michael T. Heffernan, R.Ph.
Chairman of the Board
February 24, 2022
Michael T. Heffernan, R.Ph.
/s/ Rita Balice-Gordon, Ph.D.
Director
February 24, 2022
Rita Balice-Gordon, Ph.D.
/s/ Garen G. Bohlin
Director
February 24, 2022
Garen G. Bohlin
/s/ John A. Fallon, M.D.
Director
February 24, 2022
John A. Fallon, M.D.
/s/ John G. Freund, M.D.
Director
February 24, 2022
John G. Freund, M.D.
/s/ Gwen Melincoff
Director
February 24, 2022
Gwen Melincoff
/s/ Gino Santini
Director
February 24, 2022
Gino Santini
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
60
Table of Contents
COLLEGIUM PHARMACEUTICAL, INC.
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements
Pages
Report of Independent Registered Public Accounting Firm ( PCAOB ID 34 )
F-2
Consolidated Balance Sheets as of December 31, 2021 and 2020
F-4
Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020, and 2019
F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2021, 2020 and 2019
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
F-7
Notes to Consolidated Financial Statements
F-8
F-1
Table of Contents
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, 2021 and 2020, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 24, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for convertible debt in 2021 due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , using the modified retrospective approach.
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 Recognition – Product Return Liability– Refer to Note 3 to the Financial Statements
Critical Audit Matter Description
Revenue is recognized when control is transferred to the customer, which occurs upon delivery, and revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to sales deductions and a refund liability is established for estimated product returns. At the end of each reporting period, the Company
F-2
Table of Contents
updates the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. Variable consideration, including the risk of customer concessions, is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. The Company updates 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).
Estimating the variable consideration and the provision for the refund liability requires significant judgment by management. Given the complexity and significant estimation involved in calculating variable consideration and the refund liability, our audit in this area required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the revenue deductions and the refund liability (the “return adjustments”) included the following, among others:
● We tested the effectiveness of controls over the measurement and recognition of return adjustments, including management's controls over product returns and revenue data.
● We evaluated the Company's methodology and significant assumptions made in developing the return adjustments.
● We tested the completeness and accuracy of the data underlying the measurement of return adjustments.
● We tested the mathematical accuracy of management's underlying calculation of return adjustments.
● We tested the reasonableness of management's estimate through corroboration with management outside of accounting and finance and evaluated evidence related to return adjustments.
● We evaluated management's ability to accurately forecast product return activity by performing a retrospective review, comparing prior period product return estimates to actual product returns processed in the subsequent year to identify potential bias or unanticipated trends in the determination of the refund liability.
● We developed independent estimates of the return adjustments using historical sales and returns activity, product dating and expiration dates, and other information.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 24, 2022
We have served as the Company's auditor since 2016.
F-3
Table of Contents
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED BALANCE SHEET S
(In thousands, except share and per share data)
December 31,
December 31,
2021
2020
Assets
Current assets
Cash and cash equivalents
$
186,426
$
174,116
Accounts receivable, net
105,844
83,320
Inventory
17,394
15,614
Prepaid expenses and other current assets
5,879
4,838
Total current assets
315,543
277,888
Property and equipment, net
19,491
18,988
Operating lease assets
7,644
8,391
Intangible asset, net
268,723
335,904
Restricted cash
2,547
2,547
Deferred tax assets
78,042
—
Other noncurrent assets
87
123
Total assets
$
692,077
$
643,841
Liabilities and shareholders' equity
Current liabilities
Accounts payable
$
4,189
$
10,016
Accrued expenses
29,214
24,656
Accrued rebates, returns and discounts
196,996
156,554
Current portion of term notes payable
48,353
47,495
Current portion of operating lease liabilities
814
730
Total current liabilities
279,566
239,451
Term notes payable, net of current portion
61,666
110,019
Convertible senior notes
139,966
99,575
Operating lease liabilities, net of current portion
7,951
8,765
Total liabilities
489,149
457,810
Commitments and contingencies (see Note 11)
Shareholders’ equity:
Preferred stock, $ 0.001 par value; authorized shares - 5,000,000
—
—
Common stock, $ 0.001 par value; authorized shares - 100,000,000 ; 35,806,119 issued and 33,655,402 outstanding shares at December 31, 2021 and 34,612,054 issued and outstanding at December 31, 2020
36
35
Additional paid-in capital
502,095
519,143
Accumulated deficit
( 256,342 )
( 333,147 )
Treasury stock, at cost; 2,150,717 shares at December 31, 2021 and none at December 31, 2020
( 42,861 )
—
Total shareholders’ equity
202,928
186,031
Total liabilities and shareholders’ equity
$
692,077
$
643,841
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATION S
(In thousands, except share and per share data)
Years ended December 31,
2021
2020
2019
Product revenues, net
$
276,868
$
310,016
$
296,701
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
59,070
69,500
178,908
Intangible asset amortization
67,181
60,680
14,752
Total cost of products revenues
126,251
130,180
193,660
Gross profit
150,617
179,836
103,041
Operating expenses
Research and development
9,451
9,772
10,340
Selling, general and administrative
118,960
113,832
116,449
Restructuring
4,578
—
—
Total operating expenses
132,989
123,604
126,789
Income (loss) from operations
17,628
56,232
( 23,748 )
Interest expense
( 21,014 )
( 28,882 )
( 909 )
Interest income
12
232
1,935
(Loss) income before income taxes
( 3,374 )
27,582
( 22,722 )
(Benefit from) provision for income taxes
( 74,891 )
830
—
Net income (loss)
$
71,517
$
26,752
$
( 22,722 )
Earnings (loss) per share — basic
$
2.05
$
0.78
$
( 0.68 )
Weighted-average shares — basic
34,936,817
34,407,959
33,453,844
Earnings (loss) per share — diluted
$
1.86
$
0.76
$
( 0.68 )
Weighted-average shares — diluted
41,045,805
35,151,353
33,453,844
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUIT Y
(In thousands, except share data)
Additional
Total
Common Stock
Paid-In
Treasury Stock
Accumulated
Shareholders’
Shares
Amount
Capital
Shares
Amount
Deficit
Equity
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 loss
—
—
—
—
—
26,752
26,752
Balance at December 31, 2020
34,612,054
$
35
$
519,143
—
$
—
$
( 333,147 )
$
186,031
Cumulative effect of adjustment for adoption of ASU 2020-06
—
—
( 44,777 )
—
—
5,288
( 39,489 )
Exercise of common stock options
803,485
1
11,868
—
—
—
11,869
Issuance for employee stock purchase plan
43,719
—
755
—
—
—
755
Vesting of RSUs and PSUs
511,743
—
—
—
—
—
—
Shares withheld for employee taxes upon vesting of RSUs and PSUs
( 164,882 )
—
( 4,149 )
—
—
—
( 4,149 )
Share repurchases
—
—
—
( 2,150,717 )
( 42,861 )
—
( 42,861 )
Forward contract on ASR agreement
—
—
( 5,000 )
—
—
—
( 5,000 )
Stock-based compensation
—
—
24,255
—
—
—
24,255
Net income
—
—
—
—
—
71,517
71,517
Balance at December 31, 2021
35,806,119
$
36
$
502,095
( 2,150,717 )
$
( 42,861 )
$
( 256,342 )
$
202,928
The accompanying notes are an integral part of these consolidated financial statements
F-6
Table of Contents
COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW S
(In thousands)
Years ended December 31,
2021
2020
2019
Operating activities
Net income (loss)
$
71,517
$
26,752
$
( 22,722 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization expense
67,181
60,680
14,752
Depreciation expense
1,736
870
731
Deferred income taxes
( 78,042 )
—
—
Stock-based compensation expense
24,255
21,910
16,528
Non-cash lease expense
18
57
313
Non-cash interest expense for amortization of debt discount and issuance costs
3,406
8,972
—
Changes in operating assets and liabilities:
Accounts receivable
( 22,524 )
( 10,367 )
4,993
Inventory
( 2,296 )
( 8,270 )
( 1,826 )
Prepaid expenses and other assets
( 1,086 )
( 1,598 )
2,037
Accounts payable
( 5,827 )
3,769
( 5,903 )
Accrued expenses
4,777
( 7,838 )
6,056
Accrued rebates, returns and discounts
40,442
( 995 )
12,766
Operating lease assets and liabilities
—
—
734
Other long-term liabilities
—
—
( 676 )
Net cash provided by operating activities
103,557
93,942
27,783
Investing activities
Purchase of intangible asset
—
( 368,226 )
—
Purchases of property and equipment
( 1,944 )
( 5,546 )
( 6,438 )
Net cash used in investing activities
( 1,944 )
( 373,772 )
( 6,438 )
Financing activities
Proceeds from issuances of common stock from employee stock purchase plans
755
758
817
Proceeds from the exercise of stock options
11,952
6,577
2,046
Payments made for employee stock tax withholdings
( 4,149 )
( 2,255 )
( 822 )
Repurchases of common stock, including the ASR agreement
( 47,861 )
—
—
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
( 50,000 )
( 37,500 )
—
Repayment of term loan
—
( 11,500 )
—
Net cash (used in) provided by financing activities
( 89,303 )
286,474
2,041
Net increase in cash, cash equivalents and restricted cash
12,310
6,644
23,386
Cash, cash equivalents and restricted cash at beginning of period
176,663
170,019
146,633
Cash, cash equivalents and restricted cash at end of period
$
188,973
$
176,663
$
170,019
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents
$
186,426
$
174,116
170,019
Restricted cash
2,547
2,547
—
Total cash, cash equivalents and restricted cash
$
188,973
$
176,663
170,019
Supplemental disclosure of cash flow information
Cash paid for offering costs
$
—
$
—
$
30
Cash paid for interest
$
17,608
$
18,967
$
709
Cash paid for income taxes
$
3,005
$
483
$
—
Supplemental disclosure of non-cash activities
Acquisition of property and equipment in accounts payable and accrued expenses
$
72
$
293
$
134
Accrued royalties discharged upon closing of asset acquisition
$
—
$
1,145
—
Inventory used in the construction and installation of property and equipment
$
516
$
2,299
—
Receivable from stock option exercises in other current assets
$
—
$
80
$
—
Operating lease assets assumed
$
—
$
—
$
9,957
Operating lease liabilities assumed
$
—
$
—
$
10,691
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
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’s mission is to build a leading, diversified specialty pharmaceutical company committed to improving the lives of people living with serious medical conditions. 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.
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 Company expects the COVID-19 pandemic and actions taken to contain it to continue to impact its 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 the Company’s products. The Company believes that the disruptions caused by COVID-19 will continue and there remains substantial uncertainty as to when such disruptions will cease.
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 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.
F-8
Table of Contents
Liquidity
The Company believes that its cash and cash equivalents at December 31, 2021, 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 historically experienced net losses in each year since its inception until 2020, and as of December 31, 2021, had an accumulated deficit of $ 256,342 .
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, 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
Fair value measurements and disclosures describe the fair value hierarchy based on three levels of inputs 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
There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2021 and 2020.
F-9
Table of Contents
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, 2021 and 2020.
Significant
Quoted Prices
other
Significant
in active
observable
unobservable
markets
inputs
inputs
Total
(Level 1)
(Level 2)
(Level 3)
December 31, 2021
Money market funds, included in cash equivalents
$
45,078
$
45,078
$
—
$
—
December 31, 2020
Money market funds, included in cash equivalents
$
45,069
$
45,069
$
—
$
—
The Company’s cash equivalents, which consist of money market funds, are measured at fair value on a recurring basis using quoted market prices. Accordingly, these securities are categorized as Level 1.
The Company’s convertible senior notes fall into the Level 2 category within the fair value level hierarchy. The fair value was determined based on data points other than quoted prices that are observable, either directly or indirectly, such as broker quotes in a non-active market. As of December 31, 2021, the convertible senior notes had a fair value of approximately $ 139,078 and a net carrying value of $ 139,966 .
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, 2021, the carrying amount of the term notes reasonably approximated the estimated fair value.
As of December 31, 2021, and December 31, 2020, the carrying amounts of the cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and accrued rebates, returns and discounts, reasonably approximated the 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, 2021, 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, 2021. These customers comprised 46 %, 33 % and 20 % of the accounts receivable balance as of December 31, 2021; 46 %, 34 % and 17 % as of December 31, 2020; and 51 %, 27 %, and 19 % as of December 31, 2019.
The same three customers comprised 10% or more of the Company’s revenue during the year ended December 31, 2021. These customers comprised 35 %, 31 % and 29 % of revenue during the year ended December 31, 2021; 34 %, 31 % and 31 % during the year ended December 31, 2020; and 34 %, 31 %, and 30 % during the year ended December 31, 2019.
To date, the Company has not experienced any credit losses with respect to the collection of its accounts receivable and has not recorded an allowance for credit losses as of December 31, 2021 or 2020. The Company has no financial instruments with off balance sheet risk of loss.
F-10
Table of Contents
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.
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, 2021 and 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.
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, 2021, 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 $ 17,394 of inventory as of December 31, 2021. The Company expects to use the inventory over its operating cycle.
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.
F-11
Table of Contents
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 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.
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. At lease commencement, the Company measures the lease liability at the present value of the remaining lease payments discounted using the incremental borrowing rate and the corresponding lease asset is adjusted for incentives received and indirect costs. The Company records operating lease rent expense in the Statements of Operations over the lease term. Variable lease costs are not included in the measurement of the operating lease liability and 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.
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. Refer to Note 3 , Revenue from Contracts with Customers , 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 $ 4,186 , $ 5,368 and $ 9,527 in the years ended December 31, 2021, 2020, and 2019 respectively. Advertising and product promotion costs are expensed as incurred.
F-12
Table of Contents
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 the grant date fair value and recognizes compensation expense over the 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 grant date fair value of stock options using the Black-Scholes option pricing model. The Company estimates the grant date fair value of restricted stock units based on the fair value of the underlying common stock. For awards with performance conditions, the Company estimates the number of shares that will vest based upon the probability of achieving performance metrics. For employee awards with market conditions, the Company recognizes compensation expense on an accelerated attribution basis. The Company estimates the grant date fair value of awards with market conditions using the Monte Carlo model.
Restructuring
During the three months ended December 31, 2021, the Company executed a plan to reduce its workforce, primarily related to its salesforce. The arrangements included the payment of a cash severance benefit near the time of separation, together with continued medical benefits and related services. As a result, the Company recognized $ 4,578 in restructuring expense. Of this amount, $ 1,335 was paid by December 31, 2021 and $ 2,980 was paid in January 2022, with the remaining $ 263 will be paid in the first half of 2022.
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, 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.
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, 2021, 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
Basic 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 earnings per share is computed by dividing the net income (loss) attributable to common shareholders 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, if-converted, or contingently issuable accounting methods, depending on the nature of the security. For purposes of the diluted earnings per share calculation, stock options, restricted stock units, performance share units, and shares potentially issuable in connection with our employee stock purchase plan and Convertible Notes are considered potentially dilutive securities and included to the extent that their addition is not anti-dilutive.
F-13
Table of Contents
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 ( refer to Note 12, Debt ) 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, 2021 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.
Recently Adopted Accounting Pronouncements
New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as required by the specified effective dates.
In December 2019, the FASB issued Accounting Standards Update (“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 became effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard effective January 1, 2021 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.
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, Reference Rate Reform (Topic 848): Scope, in January 2021 to refine and clarify some of 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.
In August 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 . This ASU simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument, such as the Company’s convertible senior notes, will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures.
The Company elected to early adopt this guidance on January 1, 2021 using the modified retrospective method. Under this transition method, the cumulative effect of the accounting change was removing the impact of recognizing the equity component of the Company’s convertible notes (at issuance and the subsequent accounting impact of additional interest expense from debt discount amortization). The cumulative effect of the accounting change as of January 1, 2021 was an increase to the carrying amount of the convertible notes of $ 39,489 , a reduction to accumulated deficit of $ 5,288 , and a reduction to additional paid-in capital of $ 44,777 . Interest expense of the convertible senior notes will be lower as a result of adoption of this guidance and diluted net loss per share will be computed using the if-converted method for the
F-14
Table of Contents
convertible senior notes. As a result of the adoption of this guidance, interest expense decreased and net income increased by $ 6,488 , basic earnings per share was increased by $ 0.19 , and diluted earnings per share was decreased by $ 0.06 for the year ended December 31, 2021.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 and may be applied prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company will adopt this standard effective January 1, 2022 and the adoption is not expected to have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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.
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 wholesalers (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”).
Revenue Recognition
In accordance with 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.
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.
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 (wholesalers), 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.
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
F-15
Table of Contents
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; 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.
The Company bases its estimates of variable consideration, which could include estimates of future rebates, returns, and other adjustments, on historical data and other information. Estimates include: (i) timing of the rebates and returns incurred, (ii) pricing adjustments related to rebates and returns, and (iii) the quantity of product that will be rebated or returned in the future. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period.
Provisions for rebates and incentives are based on the estimated amount of rebates and incentives to be claimed on the related sales. 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 wholesalers. Given that wholesalers 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 future 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.
Provisions for product returns are based on product-level returns rates, recent unprocessed return claims, as well as relevant market events and other factors. Estimates of the future product returns are made at the time of revenue recognition to determine the amount of consideration to which the Company expects to be entitled (that is, excluding the products expected to be returned). To the extent the Company receives amounts in excess of what it expects to be entitled to receive due to a product return, the Company does not recognize revenue when it transfers products to customers but instead recognizes those excess amounts received as a refund liability. The Company updates 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. For Xtampza 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. Sales of Xtampza increased significantly starting in 2018; as a result, the majority of Xtampza sold to customers by the Company has not been eligible for return until the year ended December 31, 2021, or beyond.
The Company’s customers short-pay an existing invoice upon notice of a product return claim. Adjustments to the preliminary short-paid claims are processed when the product is physically returned and the return claim is validated and finalized. The Company’s 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.
F-16
Table of Contents
During the year ended December 31, 2021, there were unprecedented and significant disruptions in the processing of product returns. Specifically, the Company’s customers, via the third-party returns processor that they and many pharmacies engage to process the majority of the Company’s product returns, failed to return products to the Company in the ordinary course. The value of actual returned product during the year ended December 31, 2021 represented less than 20 % of the value of the product returns claimed during that period. Due to the failure of the customers and their vendor to return product timely in the ordinary course, the Company did not physically receive returned products corresponding to the substantial majority of the returns claimed and could not validate or finalize customer return claims, nor determine if the return was or would be eligible for refund upon the physical return. The lack of timely processing of requested product returns obscures information related to the validation of product returns and increases uncertainty related to the actual volume of product that will be physically returned and credited in accordance with the Company’s returns policy.
During the fourth quarter of 2021, after significant and sustained efforts with customers to resolve the unprocessed return claims, the Company formally denied a significant portion of these claims under the Company’s return policy. The Company subsequently received payment for only a portion of the denied claims and intends to vigorously pursue collections of the full amount of these short-pay receivables. Additional unprocessed return claims have and are expected to continue to expire prior to their physical return.
Although the Company has denied and expects to continue to deny credit for product returns that are not in accordance with its return policy, uncertainty exists related to the ultimate resolution of these claims. At the end of each reporting period, the Company updates the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. Variable consideration, including the risk of customer concessions, is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. In particular, resolution of the unprocessed return claims includes the risk of concession for those that are outside of the Company’s return policy. As a result of discussions with customers related to unprocessed return claims and the uncertainty associated with the ultimate resolution, as well as the impact of unprocessed claims on estimates of future returns, the Company recorded an adjustment to reduce product revenue, net of $ 38,329 , with offsetting reductions in accounts receivable or increases in the refund liability for future product returns.
Significant judgment is required to determine the variable consideration included in the transaction price as described above. Adjustments to the estimated variable consideration included in the transaction price occurs when new information indicates that the estimate should be revised. If the value of accepted and processed claims is different than the amount estimated and included in variable consideration, then adjustments would impact product revenue, net and earnings in the period such revisions become known. During the year ended December 31, 2021, the Company’s adjustment related the transaction price of performance obligations satisfied in the prior year was $ 26,644 , which includes $ 8,763 in adjustments to the refund liability. The amount of variable consideration ultimately received and included in the transaction price may materially differ from the Company’s estimates, resulting in additional adjustments recorded to increase or decrease product revenue, net.
F-17
Table of Contents
The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the years ended December 31, 2021, 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 )
( 65,976 )
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
Provision related to current period sales
378,694
27,229
84,470
Changes in estimate related to prior period sales
1,121
8,763
4
Credits/payments made
( 370,211 )
( 5,154 )
( 90,303 )
Balance at December 31, 2021
$
142,379
$
54,617
$
13,226
(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, 2021, 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 table below. These categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors :
Years ended December 31,
2021
2020
2019
Xtampza ER
$
103,708
127,984
$
105,012
Nucynta Products (1)
173,160
182,032
191,689
Total product revenues, net
$
276,868
$
310,016
$
296,701
(1) For the year ended December 31, 2021, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $ 102,222 and $ 70,938 respectively. 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.
F-18
Table of Contents
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.
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
The following table presents the computations of basic and dilutive earnings (loss) per common share:
Years ended December 31,
2021
2020
2019
Numerator:
Net income (loss)
$
71,517
$
26,752
$
( 22,722 )
Adjustment for interest expense recognized on convertible senior notes:
4,675
—
—
Net income (loss) — diluted
$
76,192
$
26,752
( 22,722 )
Denominator:
Weighted-average shares outstanding — basic
34,936,817
34,407,959
33,453,844
Effect of dilutive securities:
Stock options
504,699
431,524
—
Restricted stock units
461,471
271,542
—
Performance share units
85,229
27,002
—
Employee stock purchase plan
1,198
567
—
Warrants
131,257
12,759
—
Convertible senior notes
4,925,134
—
—
Weighted average shares outstanding — diluted
41,045,805
35,151,353
33,453,844
Earnings (loss) per share — basic
$
2.05
$
0.78
$
( 0.68 )
Earnings (loss) per share — diluted
$
1.86
$
0.76
$
( 0.68 )
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 for the year ended December 31, 2020. Effective for the year ended December 31, 2021, the Company used the if-converted method for the convertible senior notes as a result of the adoption of ASU 2020-06, as described in Recently Adopted Accounting Pronouncements above.
The following table presents dilutive securities excluded from the calculation of diluted earnings per share:
Years ended December 31,
2021
2020
2019
Stock options
1,202,403
2,294,961
3,955,887
Restricted stock units
22,605
4,809
849,679
Performance share units
242,714
211,618
99,400
Employee stock purchase plan
—
—
—
Warrants
—
—
1,041,667
Convertible senior notes
—
4,925,134
—
F-19
Table of Contents
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. All other securities presented in the table above were excluded from the calculation of diluted earnings per share as their inclusion would have had an antidilutive effect.
As discussed in Note 14, the forward contract in connection with the Company’s ASR Agreement was outstanding as of December 31, 2021. As the Company is entitled to receive additional shares of its common stock in connection with the outstanding forward contract, the receipt of additional shares of common stock would be antidilutive. Therefore, no adjustments were made in the computation of earnings per share for the period the forward was outstanding.
6. INVENTORY
Inventory consisted of the following:
As of December 31,
2021
2020
Raw materials
$
3,685
$
3,514
Work in process
1,007
1,096
Finished goods
12,702
11,004
Total inventory
$
17,394
$
15,614
During the years ended December 31, 2021, 2020 and 2019, the aggregate charges related to excess inventory were immaterial. These expenses were recorded as a component of cost of product revenues. During the years ended December 31, 2021 and 2020, inventory used in the construction and installation of property and equipment was $ 516 and $ 2,299 , respectively. During the year ended December 31, 2019, 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,
2021
2020
Prepaid regulatory fees
$
3,602
$
3,280
Prepaid insurance
864
656
Other current assets
27
60
Prepaid development costs
—
392
Other prepaid expenses
1,386
450
Prepaid expenses and other current assets
$
5,879
$
4,838
F-20
Table of Contents
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of December 31,
2021
2020
Computers and office equipment
$
1,547
$
1,429
Laboratory equipment
1,340
1,299
Furniture and fixtures
1,079
1,073
Manufacturing equipment
14,498
14,119
Leasehold improvements
541
541
Construction-in-process
5,182
3,583
Total property and equipment
24,187
22,044
Less: accumulated deprecation
( 4,696 )
( 3,056 )
Property and equipment, net
$
19,491
$
18,988
Depreciation expense related to property and equipment amounted to $ 1,736 , $ 870 and $ 731 for the years ended December 31, 2021, 2020 and 2019, respectively. During the years ended December 31, 2021, 2020, and 2019 the Company disposed of fully depreciated assets of $ 96 , $ 102 and $ 280 , 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, 2021, 2020, or 2019.
9. INTANGIBLE ASSETS
As of December 31, 2021 and 2020, 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,
2021
2020
Gross carrying amount
$
521,170
$
521,170
Accumulated amortization
( 252,447 )
( 185,266 )
Intangible asset, net
$
268,723
$
335,904
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 ( refer to Note 4 , License Agreements ). In February 2020, the Company entered into a loan agreement ( refer to Note 12 , Debt ) and issued convertible senior notes ( refer to Note 12 , Debt ) 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
F-21
Table of Contents
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 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.
Under the original terms of the Nucynta Commercialization Agreement, the Company was obligated to make guaranteed annual minimum royalty payments.
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.
F-22
Table of Contents
The following table summarizes the gross carrying amount, accumulated amortization, and net book value of the Nucynta Intangible Asset for the years ended December 31, 2021, 2020, and 2019:
Gross Carrying Value
Accumulated Amortization
Net Book Value
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
Amortization expense through period end
—
( 67,181 )
( 67,181 )
Balance as of December 31, 2021
$
521,170
$
( 252,447 )
$
268,723
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 determined that the useful life for the Nucynta Intangible Asset was approximately 5.9 years from the closing date of the Nucynta Acquisition. The Company recognizes 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, 2021, 2020, and 2019:
Years ended December 31,
2021
2020
2019
Nucynta amortization expense included in cost of product revenues
$
67,181
$
60,680
$
14,752
As of December 31, 2021, the remaining amortization period is approximately 4.0 years and is expected to be recognized in the following periods:
Years ended December 31,
Amortization Expense
2022
$
67,181
2023
67,181
2024
67,181
2025
67,180
Remaining amortization expense:
$
268,723
F-23
Table of Contents
10. ACCRUED EXPENSES
Accrued expenses consisted of the following:
As of December 31,
2021
2020
Accrued royalties
$
9,930
$
12,954
Accrued audit and legal
3,623
445
Accrued restructuring expenses
3,222
—
Accrued bonuses
2,634
4,571
Accrued product taxes and fees
2,570
1,817
Accrued interest
1,415
1,415
Accrued incentive compensation
851
1,417
Accrued payroll and related benefits
807
892
Accrued sales and marketing
697
261
Accrued income taxes
622
—
Accrued other operating costs
2,843
884
Total accrued expenses
$
29,214
$
24,656
As of December 31, 2021, the accrued audit and legal balance presented in the table above includes $ 2,750 related to litigation costs incurred to execute a settlement framework to resolve 27 pending opioid-related lawsuits.
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 other 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 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.
F-24
Table of Contents
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.
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. The Court issued an order on September 28, 2018 in which it granted in part a motion for summary judgment that the Company filed. Specifically, the Court ruled that the Xtampza ER formulation does not infringe the ʼ497 and ʼ717 patents. 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 any appeal of the PTAB proceedings. 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. On November 19, 2021, the PTAB (i) denied Purdue’s motion to terminate the PGR and (ii) issued its Final Written Decision, finding that claims 1-17 of the ʼ961 patent were invalid for lack of written description and anticipation. On December 17, 2021, Purdue filed a Request for Director Review. That request was denied on February 7, 2022. On February 16, 2022, Purdue filed a Federal Circuit notice of appeal.
On April 2, 2021, the Court granted Purdue’s Motion to Lift the Stay in the District of Massachusetts that was entered following Purdue’s Notice of Bankruptcy. On April 9, 2021, Purdue filed another follow-on lawsuit asserting infringement of U.S. Patent No. 10,407,434, which was late-listed in the Orange Book and therefore could not trigger any stay of FDA approval. The Company responded to Purdue’s complaint asserting the ’434 patent with a motion to dismiss. On May 21, 2021, and in response to the Company’s motion to dismiss, Purdue filed an amended complaint asserting the ’434 patent. The Company renewed its motion to dismiss on June 4, 2021, arguing: (i) Purdue cannot, as a matter of law, state a claim for infringement under § 271(e)(2)(A); (ii) Purdue cannot, as a matter of law, state a claim for product-by-process infringement under §271(g); and (iii) Purdue has not alleged facts sufficient to support any indirect infringement theory under §271(b) or (c). The Court held a hearing on the Company’s motion to dismiss on October 13, 2021, and the motion is pending before the Court.
Like the prior follow-on lawsuits, the ’434 patent litigation was consolidated into the lead case and a scheduling order was entered. On October 5, 2021, the Court held a claim construction hearing for the ʼ961 patent and the ʼ434 patent. On November 17, 2021, by stipulation of the parties, the Court set (i) the fact discovery deadline for June 3, 2022; and (ii) expert witness depositions to conclude by August 19, 2022. The court has not set a deadline for dispositive motions or trial.
F-25
Table of Contents
The remaining patents-in-suit in the lead consolidated action in the District of Massachusetts are the ʼ933, ʼ919, ʼ434, and ʼ961 patents. Purdue has made a demand for monetary relief, and 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.
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.
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. 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.
F-26
Table of Contents
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 Township, 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 Lynnfield, 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 Randolph, 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.
On December 24, 2021, the Company entered into a settlement framework with Scott+Scott Attorneys at Law, LLP (the “Scott Firm”), the law firm representing plaintiffs in each of the 27 cases described above. Pursuant to the terms of the settlement framework, which is subject to approval by all parties of a final settlement agreement, the Company will pay
F-27
Table of Contents
an aggregate amount not to exceed $ 2,750,000 in exchange for the dismissal, with prejudice, of each plaintiff’s lawsuit against the Company and a release of claims related to such lawsuits. The Company has entered into this settlement framework to efficiently resolve this litigation and does not admit any liability or acknowledge any wrongdoing in connection with such settlement framework. The Company currently expects to execute a final settlement agreement and make the corresponding payment during the first quarter of 2022.
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.
On December 16, 2021, the Company entered into an Assurance of Discontinuance with the Massachusetts Attorney General (the “AoD”). Pursuant to the AoD, the Company provided certain assurances and agreed to pay the Massachusetts Attorney General $ 185,000 , including $ 65,000 relating to that office’s costs of investigation, in exchange for closure of the investigation and a release of claims pertaining to the subject matter of the investigation. 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-
F-28
Table of Contents
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 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 years ended December 31, 2021, 2020, and 2019, the Company recognized interest expense of $ 16,339 , $ 19,034 , and zero , respectively, related to the term notes.
As of December 31, 2021, principal repayments under the term notes are estimated to be paid as follows:
Years ended December 31,
Principal Payments
2022
$
50,000
2023
50,000
2024
12,500
Total before unamortized discount and issuance costs
$
112,500
Less: unamortized discount and issuance costs
( 2,481 )
Total term notes
$
110,019
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.
F-29
Table of Contents
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 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 .
Prior to the adoption of ASU 2020-06 on January 1, 2021, 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 convertible notes of $ 46,550 was recognized as a debt discount. The excess of the principal amount of the Liability Component over its carrying amount was amortized to interest expense using the effective interest method over six years .
Subsequent to the adoption of ASU 2020-06 on January 1, 2021, which the Company elected to adopt using the modified
retrospective method, the Company removed the impact of recognizing the Equity Component of the senior convertible
notes (at issuance and the subsequent accounting impact of additional interest expense from debt discount amortization).
The cumulative effective of the accounting change as of January 1, 2021 was an increase to the carrying amount of the
convertible notes of $ 39,489 , a reduction to accumulated deficit of $ 5,288 , and a reduction to additional paid-in capital of $ 44,777 .
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.
F-30
Table of Contents
As of December 31, 2021, 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 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.
As of December 31, 2021, the convertible notes outstanding consisted of the following:
Principal
$
143,750
Less: unamortized issuance costs
( 3,784 )
Net carrying amount
$
139,966
The Company determined the expected life of the convertible notes was equal to its six-year term. Subsequent to the adoption of ASU 2020-06, the effective interest rate on the convertible notes was 3.26 %. As of December 31, 2021, the if-converted value did not exceed the remaining principal amount of the convertible notes.
The following table presents the total interest expense recognized related to the convertible notes during the years ended December 31, 2021 and 2020:
Years ended December 31,
2021
2020
Contractual interest expense
$
3,773
$
3,323
Amortization of debt discount
—
5,628
Amortization of debt issuance costs
902
447
Total interest expense
$
4,675
$
9,398
F-31
Table of Contents
As of December 31, 2021, the future minimum payments on the convertible notes were as follows:
Years ended December 31,
Future Minimum Payments
2022
$
3,773
2023
3,773
2024
3,773
2025
3,773
2026
145,638
Total minimum payments
$
160,730
Less: interest
( 16,980 )
Less: unamortized issuance costs
( 3,784 )
Convertible senior notes
$
139,966
13. LEASES
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 did not believe the exercise of the extension to be reasonably certain as of the lease commencement 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 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 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 manufacturing 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 manufacturing suite 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.
As of December 31, 2021, the Company had operating lease assets of $ 7,644 and operating lease liabilities of $ 8,765 primarily related to operating lease agreements for its corporate headquarters.
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.
F-32
Table of Contents
Variable Lease Costs
Variable lease costs 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, 2021, 2020, and 2019 are as follows:
Years ended December 31,
2021
2020
2019
Lease Cost
Operating lease cost
$
1,305
$
1,305
$
1,446
Short-term lease cost
1,492
1,312
752
Variable lease cost
292
331
283
Total lease cost
$
3,089
$
2,948
$
2,481
The lease term and discount rate for operating leases for the years ended December 31, 2021 and 2020 are as follows:
As of December 31,
Lease Term and Discount Rate:
2021
2020
Weighted-average remaining lease term — operating leases (years)
7.6
8.6
Weighted-average discount rate — operating leases
6.1 %
6.1 %
Other information related to operating leases for the years ended December 31, 2021, 2020, and 2019 is as follows:
Years ended December 31,
Other Information:
2021
2020
2019
Cash paid for amounts included in the measurement of operating leases liabilities
$
1,286
$
1,249
$
1,133
Leased assets obtained in exchange for new operating lease liabilities
—
—
—
The Company’s aggregate future minimum lease payments for its operating leases, including embedded operating lease arrangements, as of December 31, 2021, are as follows:
2022
$
1,325
2023
1,363
2024
1,401
2025
1,439
2026
1,477
After 2026
4,060
Total minimum lease payments
$
11,065
Less: Present value discount
2,300
Present value of lease liabilities
$
8,765
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
F-33
Table of Contents
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, 2021, there were 1,588,735 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
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. As of December 31, 2021, the Warrant was the Company’s only outstanding warrant.
Share Repurchases
In August 2021, the Company’s board of directors authorized the Repurchase Program to repurchase up to $ 100,000 of outstanding shares of the Company’s common stock at any time or times through December 31, 2022. The Repurchase Program permits the Company to effect repurchases through a variety of methods, including open-market purchases (including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act), privately negotiated transactions, or otherwise in compliance with Rule 10b-18 of the Exchange Act. Shares repurchased under the Repurchase Program will return to the Company’s pool of authorized but unissued shares available for reissuance. The timing and amount of any such repurchases will be determined based on share price, market conditions, legal requirements, and other relevant factors. The Repurchase Program can be discontinued at any time. There can be no assurance as to the timing or number of shares of any repurchases in the future.
In October 2021, the Company’s board of directors authorized an ASR Program to repurchase $ 25,000 of the Company’s common stock, as part of the Company’s existing $ 100,000 Repurchase Program. Under the terms of the Company's ASR agreement with an investment bank (the “ASR Agreement”), the Company paid $ 25,000 on November 15, 2021, and received 1,026,694 shares, representing 80 % of the upfront payment on a price per share of $ 19.48 , the closing price on the date the agreement was executed. The remaining shares purchased by the Company was based on the volume-weighted average price of its common stock through January 7, 2022, minus an agreed upon discount between the parties. On January 7, 2022, the ASR Agreement settled and the Company received an additional 307,132 shares, bringing the total shares repurchased pursuant to the ASR Agreement to 1,333,826 .
The ASR Agreement was accounted for as two separate transactions (1) a repurchase of common stock in a treasury stock transaction recorded on November 15, 2021 and (2) a forward contract indexed to the Company’s own common stock which settled on January 7, 2022. The forward contract for the purchase of the remaining $ 5,000 , representing remaining shares to be delivered by the investment bank under the ASR Agreement, was recorded as a reduction to stockholders’ equity as of December 31, 2021.
Forward contracts to repurchase a variable number of the Company’s equity shares that require physical settlement are accounted for in conformity with guidance in ASC 815-10-15. Under ASC 815-10-15-74, contracts issued or held by a company that are both (1) indexed to its own stock and (2) classified in stockholders’ equity in its statement of financial position are not considered to be derivative instruments. Based on the transaction structure, the Company concluded that the forward purchase contract portion of the Company’s ASR Agreement satisfied these criteria and accordingly was classified as an equity instrument. In accordance with ASC 260-10-55-88, the above-noted treasury stock acquisition resulted in an immediate reduction of 1,026,694 shares from the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted earnings per share. The forward contract was outstanding as of December 31, 2021. As the Company is entitled to receive additional shares of its common stock in connection
F-34
Table of Contents
with the outstanding forward contract, the receipt of additional shares of common stock would be antidilutive. Therefore, no adjustments were made in the computation of earnings per share for the period the forward was outstanding.
As of December 31, 2021, we repurchased 2,150,717 shares at a weighted-average price of $ 19.93 per share for a total of $ 42,861 under the Repurchase Program and the cost of repurchased shares were recorded as treasury stock in the condensed consolidated Balance Sheet. As of December 31, 2021, $ 57,139 remained available for share repurchases under the Repurchase Program.
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 vest based upon the probability of achieving the performance metrics. During the year ended December 31, 2021, the Company adjusted cumulative compensation expense based on the number of shares that vested.
Beginning in February 2020 and subsequently in 2021, the Company granted PSUs with performance criteria related to the relative ranking of the total stockholder return (“TSR”) of the Company’s common stock for each individual year within a three-year performance period as well as 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.
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 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, 2021, 2020, and 2019 was $ 289 , $ 950 and $ 136 , respectively.
F-35
Table of Contents
A summary of the Company’s performance share units activity for the year ended December 31, 2021 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2020
283,223
$
24.26
Granted
231,180
35.15
Vested
( 66,974 )
22.35
Forfeited
( 81,720 )
30.66
Performance adjustment
( 12,609 )
21.80
Outstanding at December 31, 2021
353,100
$
31.77
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, 2021, 2020, and 2019 was $ 35.15 , $ 28.49 , and $ 15.90 , respectively.
For the years ended December 31, 2021, 2020, and 2019, the stock-based compensation expense for PSUs was $ 4,817 , $ 3,551 , and $ 136 , respectively.
As of December 31, 2021, the unrecognized compensation cost related to performance share units was $ 4,443 and is expected to be recognized as expense over approximately 2.0 years.
Restricted Stock Units
A summary of the Company’s restricted stock units (“RSUs”) activity for the year ended December 31, 2021 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2020
1,242,387
$
19.42
Granted
1,373,031
24.23
Vested
( 444,769 )
19.17
Forfeited
( 550,626 )
22.63
Outstanding at December 31, 2021
1,620,023
$
22.48
The weighted-average grant date fair value of RSUs granted for the years ended December 31, 2021, 2020 and 2019 was $ 24.23 , $ 21.35 and $ 15.38 . The total fair value of RSUs vested (measured on the date of vesting) for the years ended December 31, 2021, 2020 and 2019 was $ 11,165 , $ 6,992 and $ 2,683 , respectively.
As of December 31, 2021, the unrecognized compensation cost related to restricted stock units was $ 24,936 and is expected to be recognized as expense over approximately 2.7 . The weighted-average grant date fair value of restricted stock units vested during the years ended December 31, 2021, 2020, and 2019 was $ 8,526 , $ 5,989 , and $ 4,066 , respectively.
Stock Options
The Company granted stock options to employees for the years ended December 31, 2021, 2020 and 2019. 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.
F-36
Table of Contents
A summary of the Company’s stock option activity for the year ended December 31, 2021 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, 2020
3,860,481
$
17.78
7.2
$
13,011
Granted
90,000
21.03
Exercised
( 803,485 )
14.78
Cancelled
( 418,827 )
20.65
Outstanding at December 31, 2021
2,728,169
$
18.33
5.8
$
6,070
Exercisable at December 31, 2021
2,220,889
$
18.26
5.3
$
5,262
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,
2021
2020
2019
Risk-free interest rate
0.7
%
1.3
%
2.4
%
Volatility
67.2
%
66.2
%
63.3
%
Expected term (years)
6.0
6.0
6.1
Expected dividend yield
—
%
—
%
—
%
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, 2021, it determined the expected term 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, 2021, 2020, and 2019 was $ 12.60 , $ 12.78 and $ 9.07 respectively. The total intrinsic value of stock options exercised for the years ended December 31, 2021, 2019, and 2018 was $ 6,456 , $ 7,516 and $ 1,506 , respectively.
As of December 31, 2021, the unrecognized compensation cost related to outstanding options was $ 5,096 and is expected to be recognized as expense over approximately 1.9 years.
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
F-37
Table of Contents
purchase period. During the year ended December 31, 2021, 43,719 shares of common stock were purchased for total proceeds of $ 755 . As of December 31, 2021, there were 1,618,246 shares of common stock authorized for issuance pursuant to the employee stock purchase plan. The expense for the years ended December 31, 2021, 2020 and 2019 was $ 224 , $ 342 and $ 358 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:
Years ended December 31,
2021
2020
2019
Research and development
$
3,422
3,909
$
2,126
Selling, general and administrative
20,833
18,001
14,402
Total stock-based compensation expense
$
24,255
$
21,910
$
16,528
16. INCOME TAXES
For the years ended December 31, 2021 and 2020, the Company recorded a benefit from income taxes of $ 74,891 and provision for income taxes of $ 830 , respectively. For the year ended December 31, 2019, the Company did no t record a current or deferred income tax provision or (benefit) due to current and historical losses incurred by the Company. The Company's losses before income taxes consisted solely of losses from domestic operations.
The provision for (benefit from) income taxes contained the following components:
Year Ended December 31,
2021
2020
2019
Current provision (benefit):
Federal
$
—
$
—
$
—
State
3,142
830
—
3,142
830
—
Deferred provision (benefit):
Federal
$
( 61,445 )
$
—
$
—
State
( 16,588 )
—
—
( 78,033 )
—
—
Income tax provision (benefit)
$
( 74,891 )
$
830
$
—
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,
2021
2020
2019
Federal income tax expense at statutory rate
21.0
%
21.0
%
21.0
%
(Increase) decrease income tax (benefit) resulting from:
State income tax, net of federal benefit
2.9
5.1
5.6
Permanent differences
( 3.9 )
1.1
( 1.4 )
Stock compensation
( 18.8 )
( 3.0 )
( 1.8 )
Research and development credit
16.3
( 1.1 )
1.8
Change in valuation allowance
2,202.5
( 20.1 )
( 25.2 )
Effective income tax rate
2,220.0
%
3.0
%
—
%
F-38
Table of Contents
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,
2021
2020
Deferred tax assets:
U.S. and state net operating loss carryforwards
$
31,400
$
57,457
Research and development credits
5,470
5,004
Operating lease liabilities
2,321
2,508
Returns and discounts
23,072
6,281
Stock-based compensation
7,838
7,133
Accruals and other
2,210
1,892
Intangible assets
12,699
1,297
Gross deferred tax assets:
85,010
81,572
Valuation allowance
( 1,966 )
( 65,661 )
Total deferred tax assets:
83,044
15,911
Deferred tax liabilities:
Debt discount
—
( 10,809 )
Operating lease assets
( 2,024 )
( 2,217 )
Depreciation
( 2,978 )
( 2,885 )
Net deferred tax assets
$
78,042
$
—
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 through cumulative earnings over the last three years , 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. The Company recognized a deferred tax benefit of $ 78,042 for the year ended December 31, 2021. The net operating losses expected to be recovered through ordinary income in the year ended December 31, 2021 are included in the annual effective tax rate. 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 $ 1,966 as of December 31, 2021.
As of December 31, 2021, 2020, and 2019, the Company had gross U.S. federal net operating loss carryforwards of $ 119,280 , $ 226,824 , and $ 292,342 , 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, 2021, 2020, and 2019, the Company also had gross U.S. state net operating loss carryforwards of $ 103,044 , $ 170,280 , and $ 222,629 , respectively, which may be available to offset future income tax liabilities and expire at various dates through 2036.
F-39
Table of Contents
As of December 31, 2021, 2020 and 2019, the Company had federal research and development tax credit carryforwards of approximately $ 4,503 , $ 4,623 , and $ 4,044 , respectively, available to reduce future tax liabilities which expire at various dates through 2036. As of December 31, 2021, 2020 and 2019 the Company had state research and development tax credit carryforwards of approximately $ 955 , $ 1,150 , and $ 1,112 , respectively, available to reduce future tax liabilities which expire at various dates through 2036.
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, 2018 through December 31, 2021. 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.
For all years through December 31, 2021, 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.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:
As of December 31,
2021
2020
2019
Gross UTB Balance at January 1
$
586
$
578
$
502
Additions based on tax positions related to the current year
67
36
76
Additions for tax positions of prior years
1
—
—
Reductions for tax positions of prior years
—
( 28 )
—
Gross UTB Balance at December 31
$
654
$
586
$
578
Net UTB impacting the effective tax rate at December 31 excluding valuation allowance impacts, if any
$
500
$
560
$
549
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, 2021, 2020 and 2019 was $ 1,236 , $ 1,260 , and $ 1,170 respectively.
F-40
Table of Contents
18. UNAUDITED QUARTERLY OPERATING RESULTS
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2021 and 2020:
First
Second
Third
Fourth
Year ended December 31, 2021
Quarter
Quarter
Quarter
Quarter (1)
Product revenues, net
$
87,721
$
82,942
$
78,843
$
27,362
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
15,328
15,908
15,934
11,900
Intangible asset amortization
16,795
16,795
16,796
16,795
Total cost of products revenues
32,123
32,703
32,730
28,695
Gross profit
55,598
50,239
46,113
( 1,333 )
Operating expenses
Research and development
2,930
3,462
1,450
1,609
Selling, general and administrative
31,476
30,368
30,514
26,602
Restructuring
—
—
—
4,578
Total operating expenses
34,406
33,830
31,964
32,789
Income (loss) from operations
21,192
16,409
14,149
( 34,122 )
Interest expense
( 5,721 )
( 5,421 )
( 5,115 )
( 4,757 )
Interest income
3
3
3
3
Income (loss) before income taxes
15,474
10,991
9,037
( 38,876 )
(Benefit from) provision for income taxes
( 188 )
( 61,852 )
991
( 13,842 )
Net income (loss)
$
15,662
$
72,843
$
8,046
$
( 25,034 )
Earnings (loss) per share — basic
$
0.45
$
2.06
$
0.23
$
( 0.73 )
Weighted-average shares — basic
34,951,740
35,302,608
35,373,909
34,123,309
Earnings (loss) per share — diluted
$
0.41
$
1.79
$
0.22
$
( 0.73 )
Weighted-average shares — diluted
41,160,092
41,286,853
36,261,174
34,123,309
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 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
(1) In the fourth quarter of 2021, product revenues, net included a $ 38,329 product revenue adjustment related to returns adjustments, of which $ 13,787 related to Xtampza revenue and $ 24,542 related to Nucynta Products revenue. In addition, selling general and administrative operating expense includes $ 2,935 of expense related to litigation settlements .
F-41
Table of Contents
19. BIODELIVERY SCIENCES INTERNATIONAL, INC. ACQUISITION
On February 14, 2022, the Company and BioDelivery Sciences International, Inc. (NASDAQ: BDSI) announced the Merger Agreement pursuant to which Collegium will acquire BDSI for $ 5.60 per share in cash. The transaction, which has been unanimously approved by the boards of directors of both companies, is expected to close late in the first quarter 2022, subject to customary closing conditions, including receipt of required regulatory approvals and the tender of a majority of outstanding shares of BDSI’s common stock. Following the successful closing of the tender offer, the Company will acquire any shares of BDSI that are not tendered in the tender offer through a second-step merger at the same consideration as paid in the tender offer.
In connection with the definitive agreement to acquire BDSI, Collegium 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 million (the “Term Facility”). 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.
F-42
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.