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, 2022.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our
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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 our evaluation, Management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the fourth quarter of 2022, we completed the integration of BDSI into our internal control over financial reporting. Except for this change, there has been no other changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Collegium Pharmaceutical, Inc. and subsidiaries (the “Company”) as of December 31, 2022, 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, 2022, 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, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2023
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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 — Our Executive Officers ,” the information required to be furnished pursuant to this item is incorporated herein by reference to our definitive proxy statement for the 2023 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 2023 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 2023 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 2023 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 2023 Annual Meeting of Shareholders.
PART I V
Item 15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements
See Part II, Item 8 for the Consolidated Financial Statements required to be included in this Form 10 - K.
Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
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Exhibit s
Exhibit
Number
Exhibit Description
2.1†
Agreement and Plan of Merger, dated July 10, 2014, by and between Collegium Pharmaceutical, Inc., a Delaware corporation, and Collegium Pharmaceutical, Inc., a Virginia corporation. (1)
2.2†
Agreement and Plan of Merger, dated as of February 14, 2022, by and among Collegium Pharmaceutical, Inc., Bristol Acquisition Company, Inc. and BioDelivery Sciences International, Inc. (16)
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
Indenture, dated as of February 10, 2023, between Collegium Pharmaceutical, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. (11)
4.6
Form of certificate representing the 2.875% Convertible Senior Notes due 2029 (included as Exhibit A to Exhibit 4.5). (11)
4.7
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+†
Amended & Restated Employment Agreement, dated December 27, 2020, by and between Collegium Pharmaceutical, Inc. and Scott Dreyer. (10)
10.9+†
Amended & Restated Employment Agreement, effective as of December 27, 2020, by and between Richard Malamut, M.D. and Collegium Pharmaceutical, Inc. (10)
10.10†
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. (12)
10.11†
Consent Agreement, dated January 30, 2020, by and among Grünenthal GmbH, Assertio Therapeutics, Inc. and Collegium Pharmaceutical, Inc. (12)
10.12†
Settlement Agreement, dated September 29, 2020, by and among Collegium Pharmaceutical, Inc. and Teva Pharmaceuticals USA, Inc. (13)
10.13+†
Employment Agreement, dated May 24, 2021, by and between Colleen Tupper and Collegium Pharmaceutical, Inc. (14)
10.14†
Amended and Restated Loan Agreement, dated as of March 22, 2022, by and among Collegium Pharmaceutical, Inc., the guarantors party thereto, BioPharma Credit PLC, and BioPharma Credit Investments V (Master) LP, as lenders. (17)
10.15
Second Amendment to Loan Agreement, dated as of February 6, 2023, Amended and Restated Loan Agreement, dated as of March 22, 2022, by and among Collegium Pharmaceutical, Inc., the guarantors party thereto, BioPharma Credit PLC, and BioPharma Credit Investments V (Master) LP, as lenders .
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10.16†
Exclusive License Agreement, dated April 4, 2019, between the Company and Shionogi, Inc. (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K filed by BDSI on March 9, 2022). (15)
10.17+†
Amendment to Employment Agreement, dated January 20, 2022 by and between Collegium Pharmaceutical, Inc. and Joseph Ciaffoni. (15)
10.18+†
Amendment to Employment Agreement, dated January 20, 2022 by and between Collegium Pharmaceutical, Inc. and Colleen Tupper. (15)
10.19+†
Amendment to Employment Agreement, dated January 20, 2022 by and between Collegium Pharmaceutical, Inc. and Shirley Kuhlmann. (15)
10.20+†
Amendment to Employment Agreement, dated January 20, 2022 by and between Collegium Pharmaceutical, Inc. and Scott Dreyer. (15)
10.21+†
Employment Agreement, dated March 23, 2022 by and between Collegium Pharmaceutical, Inc. and Thomas Smith. (15)
21.1
Subsidiaries of Collegium Pharmaceutical, Inc.
23.1
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
31.1
Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2
Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1
Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.
32.2
Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.
101
The following financial information from this Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2022, and 2021, (ii) Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020, (iii) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2022, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020, 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.
(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.
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(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 February 13, 2023.
(12) 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.
(13) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on September 30, 2020.
(14) 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.
(15) Previously filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 filed with the Commission May 10, 2022.
(16) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on February 14, 2022.
(17) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Commission on March 23, 2022.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLLEGIUM PHARMACEUTICAL, INC.
By: /s/ Joseph Ciaffoni
Joseph Ciaffoni
Chief Executive Officer
Signature
Title
Date
/s/ Joseph Ciaffoni
President and Chief Executive Officer
February 23, 2023
Joseph Ciaffoni
(Principal Executive Officer) and Director
/s/ Colleen Tupper
Executive Vice President and Chief Financial Officer
February 23, 2023
Colleen Tupper
(Principal Financial and Accounting Officer)
/s/ Michael T. Heffernan, R.Ph.
Chairman of the Board
February 23, 2023
Michael T. Heffernan, R.Ph.
/s/ Rita Balice-Gordon, Ph.D.
Director
February 23, 2023
Rita Balice-Gordon, Ph.D.
/s/ Garen G. Bohlin
Director
February 23, 2023
Garen G. Bohlin
/s/ John A. Fallon, M.D.
Director
February 23, 2023
John A. Fallon, M.D.
/s/ John G. Freund, M.D.
Director
February 23, 2023
John G. Freund, M.D.
/s/ Gwen Melincoff
Director
February 23, 2023
Gwen Melincoff
/s/ Gino Santini
Director
February 23, 2023
Gino Santini
/s/ Neil McFarlane
Director
February 23, 2023
Neil McFarlane
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
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COLLEGIUM PHARMACEUTICAL, INC.
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements
Pages
Report of Independent Registered Public Accounting Firm ( PCAOB ID 34 )
F-2
Consolidated Balance Sheets as of December 31, 2022 and 2021
F-5
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021, and 2020
F-6
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2022, 2021, and 2020
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
F-8
Notes to Consolidated Financial Statements
F-9
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Collegium Pharmaceutical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Collegium Pharmaceutical, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 23, 2023, 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 Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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 updates the estimated transaction price (including updating its assessment of whether an estimate of variable
F-2
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consideration should be 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 level of estimation uncertainty involved in calculating 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.
Business Combinations - Refer to Note 4 to the financial statements
Critical Audit Matter Description
During the year ended December 31, 2022, the Company acquired BioDelivery Sciences International, Inc (“BDSI”) for $669.4 million and accounted for the transaction as a business combination. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identifiable intangible assets and inventory of $435.0 million and $77.4 million, respectively. Management estimated the fair value of these assets using valuation techniques, including income-based models, which required the use of significant estimates and assumptions related to revenue forecasts, future profit margins, and the selection of appropriate discount rates.
We identified the valuation of acquired intangible assets and inventory as a critical audit matter. Given that the determination of the fair value of the acquired intangible assets and inventory requires significant estimates and assumptions by management, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the revenue forecasts, future profit margins, and the selection of the discount rates for the acquired intangible assets and inventory included the following, among others:
● We tested the effectiveness of controls over the valuation of the acquired intangible assets and inventory, including management's controls over revenue forecasts, future profit margins, and selection of the discount rates.
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● We assessed the reasonableness of management's revenue and profit margin forecasts by performing the following:
o We compared the forecasts to historical results of the acquired business.
o We compared the forecasts to internal forecasts and other information obtained while performing the audit.
o We performed a sensitivity analysis to determine the impact of the assumptions under different scenarios.
o We compared the revenue growth rates and profit margins to available external information.
● With the assistance of our fair value specialists, we performed the following:
o We evaluated the reasonableness of the valuation methodologies selected and the mathematical accuracy of the calculation.
o We tested the source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculations and compared those to the amounts selected by management.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2023
We have served as the Company's auditor since 2016.
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED BALANCE SHEET S
(In thousands, except share and per share data)
December 31,
December 31,
2022
2021
Assets
Current assets
Cash and cash equivalents
$
173,688
$
186,426
Accounts receivable, net
183,119
105,844
Inventory
46,501
17,394
Prepaid expenses and other current assets
16,681
5,879
Total current assets
419,989
315,543
Property and equipment, net
19,521
19,491
Operating lease assets
6,861
7,644
Intangible assets, net
567,468
268,723
Restricted cash
2,547
2,547
Deferred tax assets
23,950
78,042
Other noncurrent assets
100
87
Goodwill
133,695
—
Total assets
$
1,174,131
$
692,077
Liabilities and shareholders' equity
Current liabilities
Accounts payable
$
3,494
$
4,189
Accrued expenses
36,129
29,214
Accrued rebates, returns and discounts
230,491
196,996
Current portion of term notes payable
162,500
48,353
Current portion of operating lease liabilities
1,112
814
Total current liabilities
433,726
279,566
Term notes payable, net of current portion
397,578
61,666
Convertible senior notes
140,873
139,966
Operating lease liabilities, net of current portion
7,112
7,951
Total liabilities
979,289
489,149
Commitments and contingencies (refer to Note 12)
Shareholders’ equity:
Preferred stock, $ 0.001 par value; authorized shares - 5,000,000
—
—
Common stock, $ 0.001 par value; authorized shares - 100,000,000 ; 37,084,759 issued and 33,848,936 outstanding shares at December 31, 2022 and 35,806,119 issued and 33,655,402 outstanding shares at December 31, 2021
37
36
Additional paid-in capital
538,073
502,095
Treasury stock, at cost; 3,235,823 shares at December 31, 2022 and 2,150,717 shares at December 31, 2021
( 61,924 )
( 42,861 )
Accumulated deficit
( 281,344 )
( 256,342 )
Total shareholders’ equity
194,842
202,928
Total liabilities and shareholders’ equity
$
1,174,131
$
692,077
The accompanying notes are an integral part of these consolidated financial statements.
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATION S
(In thousands, except share and per share data)
Years Ended December 31,
2022
2021
2020
Product revenues, net
$
463,933
$
276,868
$
310,016
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
118,190
59,070
69,500
Intangible asset amortization and impairment
136,255
67,181
60,680
Total cost of products revenues
254,445
126,251
130,180
Gross profit
209,488
150,617
179,836
Operating expenses
Research and development
3,983
9,451
9,772
Selling, general and administrative
172,186
118,960
113,832
Restructuring
—
4,578
—
Total operating expenses
176,169
132,989
123,604
Income from operations
33,319
17,628
56,232
Interest expense
( 63,213 )
( 21,014 )
( 28,882 )
Interest income
1,047
12
232
(Loss) income before income taxes
( 28,847 )
( 3,374 )
27,582
(Benefit from) provision for income taxes
( 3,845 )
( 74,891 )
830
Net (loss) income
$
( 25,002 )
$
71,517
$
26,752
(Loss) earnings per share — basic
$
( 0.74 )
$
2.05
$
0.78
Weighted-average shares — basic
33,829,495
34,936,817
34,407,959
(Loss) earnings per share — diluted
$
( 0.74 )
$
1.86
$
0.76
Weighted-average shares — diluted
33,829,495
41,045,805
35,151,353
The accompanying notes are an integral part of these consolidated financial statements.
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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, 2019
33,678,840
$
34
$
447,297
—
$
—
$
( 359,899 )
$
87,432
Exercise of common stock options
637,924
1
6,656
—
—
—
6,657
Issuance for employee stock purchase plan
67,512
—
758
—
—
—
758
Vesting of RSUs
335,524
—
—
—
—
—
—
Shares withheld for employee taxes upon vesting of RSUs
( 107,746 )
—
( 2,255 )
—
—
—
( 2,255 )
Stock-based compensation
—
—
21,910
—
—
—
21,910
Equity component of 2020 Convertible Notes, net of issuance costs of $ 1,773
—
—
44,777
—
—
—
44,777
Net income
—
—
—
—
—
26,752
26,752
Balance at December 31, 2020
34,612,054
$
35
$
519,143
—
$
—
$
( 333,147 )
$
186,031
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
Exercise of common stock options
742,348
—
11,811
—
—
—
11,811
Issuance for employee stock purchase plan
22,627
—
337
—
—
—
337
Vesting of RSUs and PSUs
699,285
1
—
—
—
—
1
Shares withheld for employee taxes upon vesting of RSUs and PSUs
( 226,286 )
—
( 4,044 )
—
—
—
( 4,044 )
Share repurchases
—
—
5,000
( 1,085,106 )
( 19,063 )
—
( 14,063 )
Exercise of warrant
40,666
—
—
—
—
—
—
Stock-based compensation
—
—
22,874
—
—
—
22,874
Net loss
—
—
—
—
—
( 25,002 )
( 25,002 )
Balance at December 31, 2022
37,084,759
$
37
$
538,073
( 3,235,823 )
$
( 61,924 )
$
( 281,344 )
$
194,842
The accompanying notes are an integral part of these consolidated financial statements.
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COLLEGIUM PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW S
(In thousands)
Years Ended December 31,
2022
2021
2020
Operating activities
Net (loss) income
$
( 25,002 )
$
71,517
$
26,752
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization and impairment expense
136,255
67,181
60,680
Depreciation expense
2,684
1,736
870
Deferred income taxes
( 8,391 )
( 78,042 )
—
Stock-based compensation expense
22,874
24,255
21,910
Non-cash lease expense
238
18
57
Non-cash interest expense for amortization of debt discount and issuance costs
8,285
3,406
8,972
Changes in operating assets and liabilities:
Accounts receivable
( 21,780 )
( 22,524 )
( 10,367 )
Inventory
48,274
( 2,296 )
( 8,270 )
Prepaid expenses and other assets
( 4,606 )
( 1,086 )
( 1,598 )
Accounts payable
( 707 )
( 5,827 )
3,769
Accrued expenses
( 11,131 )
4,777
( 7,838 )
Accrued rebates, returns and discounts
( 22,766 )
40,442
( 995 )
Operating lease assets and liabilities
3
—
—
Net cash provided by operating activities
124,230
103,557
93,942
Investing activities
Purchase of intangible asset
—
—
( 368,226 )
Purchases of property and equipment
( 1,622 )
( 1,944 )
( 5,546 )
Acquisition of BDSI (net of cash acquired)
( 572,069 )
—
—
Net cash used in investing activities
( 573,691 )
( 1,944 )
( 373,772 )
Financing activities
Proceeds from issuances of common stock from employee stock purchase plans
337
755
758
Proceeds from the exercise of stock options
11,811
11,952
6,577
Payments made for employee stock tax withholdings
( 4,044 )
( 4,149 )
( 2,255 )
Repurchases of common stock
( 14,063 )
( 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
( 75,000 )
( 50,000 )
( 37,500 )
Proceeds from term note modification
517,682
—
—
Repayment of term loan
—
—
( 11,500 )
Net cash provided by (used in) financing activities
436,723
( 89,303 )
286,474
Net (decrease) increase in cash, cash equivalents and restricted cash
( 12,738 )
12,310
6,644
Cash, cash equivalents and restricted cash at beginning of year
188,973
176,663
170,019
Cash, cash equivalents and restricted cash at end of year
$
176,235
$
188,973
$
176,663
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents
$
173,688
$
186,426
$
174,116
Restricted cash
2,547
2,547
2,547
Total cash, cash equivalents and restricted cash
$
176,235
$
188,973
$
176,663
Supplemental disclosure of cash flow information
Cash paid for interest
$
52,528
$
17,608
$
18,967
Cash paid for income taxes
$
10,400
$
3,005
$
483
Supplemental disclosure of non-cash activities
Acquisition of property and equipment in accounts payable and accrued expenses
$
—
$
72
$
293
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
The accompanying notes are an integral part of these consolidated financial statements.
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COLLEGIUM PHARMACEUTICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. NATURE OF BUSINESS
Organization
Collegium Pharmaceutical, Inc. (the “Company” or “Collegium”) 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 portfolio includes Xtampza ER, Nucynta ER and Nucynta IR (collectively the “Nucynta Products”), Belbuca, and Symproic.
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, product-related litigation, 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. As the COVID-19 pandemic unfolded, and governmental and societal reactions to it evolved, the Company’s business was impacted by several trends, including depressed pain patient office visits compared to pre-COVID periods. The Company believes the disruptions caused by COVID-19 will continue and there remains substantial uncertainty as to when such disruptions will cease.
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 Corporation (a Massachusetts corporation), Collegium NF LLC (a Delaware limited liability company), BioDelivery Sciences International, Inc. (a Delaware corporation), Arius Pharmaceuticals, Inc. (a Delaware corporation), and Arius Two, Inc. (a Delaware corporation), all 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 the 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 related to the fair value of assets acquired and liabilities assumed, including acquired intangible assets and the fair value of inventory acquired, estimates utilized in the ongoing valuation of inventory related to potential unsaleable product, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, impairment of intangible assets and deferred 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.
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Fair Value Measurements
Fair value measurements and disclosures describe the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
Level 1 inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 inputs:
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 inputs:
Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2022 and 2021.
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, 2022 and 2021.
Significant
Quoted Prices
other
Significant
in active
observable
unobservable
markets
inputs
inputs
Total
(Level 1)
(Level 2)
(Level 3)
December 31, 2022
Money market funds, included in cash equivalents
$
172,590
$
172,590
$
—
$
—
December 31, 2021
Money market funds, included in cash equivalents
$
45,078
$
45,078
$
—
$
—
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.
Assets and Liabilities Not Carried at Fair Value
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, 2022, the convertible senior notes had a fair value of approximately $ 138,359 and a net carrying value of $ 140,873 .
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, 2022, the carrying amount of the term notes reasonably approximated the estimated fair value.
As of December 31, 2022, and 2021, 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, 2022, 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 and the nature of the assets in the money market funds.
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Three customers comprised 10% or more of the Company’s accounts receivable balance as of December 31, 2022. These customers comprised 37 %, 33 %, and 28 % of the accounts receivable balance as of December 31, 2022 and 46 %, 33 %, and 20 % as of December 31, 2021.
The same customers comprised 10% or more of the Company’s revenue during the year ended December 31, 2022. These customers comprised 33 %, 32 %, and 31 % of revenue during the year ended December 31, 2022; 35 %, 31 %, and 29 % during the year ended December 31, 2021; and 34 %, 31 %, and 31 % during the year ended December 31, 2020.
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, 2022 or 2021. The Company has no financial instruments with off balance sheet risk of loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash in readily available checking and savings accounts and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.
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, 2022 and 2021, the Company had restricted cash of $ 2,547 , which represents cash held in a depository account at a financial institution to collateralize conditional standby 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.
The Company outsources the manufacturing of its products to contract manufacturers. In addition, the Company currently relies on a sole supplier or a limited number of suppliers for the active pharmaceutical ingredients in its products. Accordingly, the Company has concentration risk associated with its commercial manufacturing.
The Company has capitalized $ 46,501 of inventory as of December 31, 2022. 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
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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.
Business Combination Accounting and Valuation of Acquired Assets
To determine whether acquisitions should be accounted for as a business combination or as an asset acquisition, the Company makes certain judgments regarding whether the acquired set of activities and assets meets the definition of a business. Judgment is required in assessing whether the acquired processes or activities, along with their inputs, would be substantive to constitute a business, as defined by U.S. GAAP.
The acquisition method of accounting requires the recognition of assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets acquired and the liabilities assumed. The determination of the fair value requires the estimation of fair values based on non-observable inputs that are included in valuation models. An income approach, which generally relies upon projected cash flow models, is used in estimating the fair value of the acquired intangible assets and the fair value of acquired inventory. These cash flow projections are based on management's estimates of economic and market conditions including the estimated future cash flows from revenues of acquired assets, the timing and projection of costs and expenses and the related profit margins, tax rates, and an appropriate discount rate.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. Goodwill is not amortized but is subject to impairment testing at least annually as of October 1 or when a triggering event occurs that could indicate a potential impairment. In performing the goodwill impairment test, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying value. Alternatively, the Company may elect to proceed directly to the quantitative impairment test. In performing the quantitative analysis, the Company compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the Company’s reporting unit exceeds its fair value, the Company would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, up to the amount of goodwill allocated to that reporting unit. The Company performed a qualitative assessment during the annual impairment review as of October 1, 2022 and concluded that it is not more likely than not that the fair value of the Company’s reporting unit is less than its carrying amount.
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
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intangible assets would be written down to the estimated fair value, calculated based on the present value of expected future cash flows.
Leases
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 Company’s Consolidated Balance Sheets. 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 wholesale pharmaceutical distributors, which in turn sell the product to pharmacies for the treatment of patients. 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 more information.
Research and Development Costs
Research and development expenses have historically consisted of product development expenses incurred in identifying, developing, and testing product candidates. Product development expenses primarily consisted of labor, benefits, and related employee expenses for personnel directly involved in product development activities, fees paid to contract research organizations for managing clinical and non-clinical trials, and regulatory costs.
As of April 1, 2022, the Company focused entirely on commercial products rather than research and development and redirected resources from research and development activities. As such, there were no expenses incurred in research and development after the three months ended March 31, 2022.
Advertising and Product Promotion Costs
Advertising and product promotion costs are included in selling, general and administrative expenses and were $ 11,743 , $ 4,186 and $ 5,368 in the years ended December 31, 2022, 2021, and 2020 respectively. Advertising and product promotion costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for grants of stock options, restricted stock units and performance share units to employees, as well as to the Board of Directors, based on the grant date fair value and recognizes compensation expense over the vesting period, net of actual forfeitures. For 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 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.
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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 the remaining $ 3,243 was 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, 2022, 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 the employee stock purchase plan and convertible senior notes are considered potentially dilutive securities and included to the extent that their addition is not anti-dilutive.
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 13, 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, 2022 were not material based on a scenario-based cash flow model that uses unobservable inputs that
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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 August 2020, the FASB issued Accounting Standards Update (“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 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 adopted this standard effective January 1, 2022 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends Accounting Standards Codification (“ASC”) 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. As a result of the amendments made by the ASU, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements. The ASU’s amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (i) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the
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interim period of early application and (ii) prospectively to all business combinations that occur on or after the date of initial application. The Company adopted this standard effective January 1, 2022 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In 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 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 and ASU 2022-06, Reference Rate Reform (Topic 848) to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. As the United Kingdom’s Financial Conduct Authority announced that the intended cessation date of LIBOR in the United States will be June 30, 2023, the Company expects to be impacted by reference reform in the next twelve months as the Company’s contracts and transactions are transitioned to another reference rate, however, the impact of such transition is not yet known. Upon the transition of the Company’s contracts and transactions to new reference rates in connection with reference rate reform, the Company will prospectively apply the standard and disclose the effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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
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 with a customer, 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, 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, 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.
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Transaction Price and Variable Consideration
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to sales deductions, including (1) rebates and incentives, including managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances; (2) product returns, including return estimates; 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, including returns for Xtampza, the Nucynta Products, Belbuca and Symproic, are based on product-level returns rates, including processed as well as unprocessed return claims, in addition to 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). At the end of each reporting period, the Company analyzes trends in returns rates and updates its assessment of variable consideration for returns to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. 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).
The Company provides the right of return to its customers for an 18-month window beginning six months prior to expiration and up until twelve months after expiration. 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 return claim is validated and finalized. The Company’s return policy requires that product is returned and that the return is claimed within the 18-month window.
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2021 Returns Adjustment
Prior to the year ended December, 31, 2021, estimates of the refund liability for Xtampza product returns were based on a combination of a limited amount 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 had not been eligible for return until the year ended December 31, 2021, or beyond. For the Nucynta Products, estimates of the refund liability for product returns were based on historical returns rates as these products have been commercially sold in the U.S. since 2009 for Nucynta IR and since 2011 for Nucynta ER. Because the Company began selling the Nucynta Products in 2018, most of the Nucynta Products sold to customers by the Company were not eligible for return until the year ended December 31, 2021, or beyond.
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 vigorously pursued collections of the full amount of these short-pay receivables. 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.
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.
During the year ended December 31, 2022, the Company revised its estimate of variable consideration associated with unprocessed returns claims that arose in prior periods due to the receipt of payment and settlement, which resulted in an increase to product revenues, net of $ 4,684 . During the year ended December 31, 2021, the Company’s adjustment was a $ 26,644 reduction in product revenues.
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 revenues, net and earnings in the period such revisions become known. 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 revenues, net.
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The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the years ended December 31, 2022, 2021, and 2020, respectively:
Trade
Rebates and
Product
Allowances and
Incentives (1)
Returns (2)
Chargebacks (3)
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
Acquired from BDSI
38,074
18,187
7,575
Provision related to current period sales
497,250
38,250
132,547
Changes in estimate related to prior period sales
( 619 )
2,505
( 592 )
Credits/payments made
( 520,147 )
( 40,005 )
( 130,698 )
Balance at December 31, 2022
$
156,937
$
73,554
$
22,058
(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, 2022, 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 discloses disaggregated revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As such, the Company disaggregates its product revenues, net from contracts with customers by product, as disclosed in the table below.
Years Ended December 31,
2022
2021
2020
Belbuca
$
126,461
$
—
$
—
Xtampza ER
138,804
103,708
127,984
Nucynta IR
112,058
102,222
116,318
Nucynta ER
72,418
70,938
65,714
Symproic
12,267
—
—
Other
1,925
—
—
Total product revenues, net
$
463,933
$
276,868
$
310,016
The Company began recognizing revenue from net product sales of Belbuca, Symproic, and Elyxyb following the Acquisition Date as defined in Note 4, Acquisitions .
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4. ACQUISITIONS
On March 22, 2022 (the “Acquisition Date”), the Company acquired BioDelivery Sciences International, Inc. (“BDSI”), a specialty pharmaceutical company working to deliver innovative therapies for individuals living with serious and debilitating chronic conditions (the “BDSI Acquisition”). Upon closing, the Company acquired the Belbuca, Symproic, and Elyxyb products.
Upon completion of t he BDSI Acquisition, management leveraged the Company’s existing sales force and other operations to commercialize additional products that are typically marketed to similar physicians and to develop other synergies. The Company obtained control through the acquisition of shares in the all-cash transaction which closed on March 22, 2022.
The total consideration paid for the BDSI acquisition was approximately $ 669,431 consisting of the following (in thousands, except per share amounts):
Fair Value of Purchase Price Consideration
Amount
Fair value of purchase price consideration paid at closing:
Cash consideration for all outstanding shares of BDSI's common and preferred stock ( 103,235,298 shares acquired at $ 5.60 per share)
$
578,118
Cash consideration paid to settle RSUs and in-the-money options
28,309
Cash paid to settle BDSI debt
63,004
Total purchase consideration
$
669,431
The Company has accounted for the BDSI Acquisition as a business combination and, accordingly, has included the assets acquired, liabilities assumed and results of operations in its financial statements following the Acquisition Date.
The preliminary purchase price allocation is based on estimates, assumptions, valuations and other studies which have not yet been finalized. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change the carrying value of goodwill. The Company is finalizing its valuation of acquired deferred tax assets and anticipates finalizing the purchase price allocation as the information necessary to complete the analysis is obtained, but no later than one year after the Acquisition Date. During the year ended December 31, 2022, the subsequent adjustments within the measurement period to the preliminary purchase price allocation did not have a significant impact on earnings. The Company recorded measurement period adjustments to increase inventory by $ 14,300 , decrease intangible assets by $ 10,000 , increase accrued rebates, returns and discounts by $ 3,916 , increase prepaid expenses and other current assets by $ 888 , decrease accrued expenses by $ 502 , and increase deferred tax liabilities by $ 3,957 , with a net offsetting increase to goodwill of $ 2,183 .
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The following tables set forth the preliminary allocation of the BDSI Acquisition purchase price to the estimated fair value of the net assets acquired at the Acquisition Date (in thousands):
Amounts Recognized at the Acquisition Date
Assets Acquired
Cash and cash equivalents
$
97,362
Accounts receivable
55,495
Inventory
77,382
Prepaid expenses and other current assets
6,125
Property and equipment
1,242
Operating lease assets
481
Intangible assets
435,000
Total assets
$
673,087
Liabilities Assumed
Accounts payable
$
12
Accrued expenses
18,115
Accrued rebates, returns and discounts
56,261
Operating lease liabilities
481
Deferred tax liabilities
62,482
Total liabilities
$
137,351
Total identifiable net assets acquired
535,736
Goodwill
133,695
Total consideration transferred
$
669,431
The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the $ 435,000 of intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with risk. The Company is amortizing the identifiable intangible assets on a straight-line basis over their respective useful lives (refer to Note 10, Goodwill and Intangible Assets ). In addition, the acquired inventory was recognized at its acquisition-date fair value, which resulted in an increase of $ 54,700 compared to its preacquisition book value.
The excess of the purchase price over the fair value of identifiable net assets acquired represents goodwill. This goodwill is primarily attributable to synergies of merging operations. The acquired goodwill is not deductible for tax purposes.
Total revenues attributable to BDSI from the Acquisition Date through December 31, 2022 were $ 140,653 . However, earnings attributable to BDSI from the Acquisition Date through December 31, 2022 are not distinguishable due to the rapid integration of BDSI’s core operations into the Company.
Unaudited Pro Forma Summary of Operations
The following table shows the unaudited pro forma summary of operations for the years ended December 31, 2022 and 2021, as if the BDSI Acquisition had occurred on January 1, 2021. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of January 1, 2021, and is not indicative of what such results would be expected for any future period:
Years Ended December 31,
2022
2021
Total revenues
$
493,284
$
443,571
Net income
$
8,674
$
15,015
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The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of the Company and BDSI. The pro forma financial information primarily reflects the following pro forma adjustments:
● The Company’s acquisition related transaction costs of $ 14,718 were reflected as of January 1, 2021
● Employee severance related expense of $ 8,008 was reflected as of January 1, 2021
● Additional amortization expense from the acquired intangibles
● Additional cost of product revenues related to the step-up basis in inventory to record inventory at fair value; and
● Adjustments to the Company’s interest expense related to repayment of the 2020 Term Loan and entering into the 2022 Term Loan as defined in Note 13, Debt.
In addition, all of the above adjustments were adjusted for the applicable tax impact.
Acquisition Related Expenses
During the year ended December 31, 2022, the Company incurred $ 31,297 of acquisition related expenses as a result of the BDSI Acquisition and the substantial majority were included in “ Selling, general, and administrative” expenses in the Consolidated Statements of Operations. These costs include transaction costs, which primarily consisted of financial advisory, banking, legal, and regulatory fees, and other consulting fees, incurred to complete the acquisition, employee-related expenses (severance cost and benefits) for terminated employees after the acquisition, BDSI directors and officers insurance, and miscellaneous other acquisition expenses incurred. The Company does not expect to incur any additional expenses related to the BDSI Acquisition.
Year Ended December 31, 2022
Transaction costs
$
14,718
Employee-related expenses
8,008
BDSI directors and officers insurance
4,492
Other acquisition expenses
4,079
Total acquisition related expenses
$
31,297
5. LICENSE AGREEMENTS
The Company periodically enters into license agreements to develop and commercialize its products.
Shionogi license and supply agreement
Prior to the BDSI Acquisition, BDSI and Shionogi Inc. (“Shionogi”) entered into an exclusive license agreement (the “Shionogi License Agreement”) for the commercialization of Symproic in the United States including Puerto Rico (the “Shionogi Territory”) for the treatment of opioid-induced constipation in adult patients with chronic non-cancer pain (the “Shionogi Field”).
Pursuant to the terms of the Shionogi License Agreement, tiered royalty payments on net sales of Symproic in the Shionogi Territory are payable quarterly based on a royalty rate that ranges from 8.5 % to 17.5 % (plus an additional 1 % of net sales on a pass-through basis to a third-party licensor of Shionogi) based on volume of net sales and whether Symproic is being sold as an authorized generic. Unless earlier terminated, the Shionogi License Agreement will continue in effect until the expiration of the royalty obligations, as defined therein. Upon expiration of the Shionogi License Agreement, all licenses granted for Symproic in the Shionogi Field and in the Shionogi Territory survive and become fully-paid, royalty-free, perpetual and irrevocable.
BDSI and Shionogi also had entered into a supply agreement under which Shionogi will supply Symproic at cost plus an agreed upon markup. In the event that Symproic is sourced from a third-party supplier, Shionogi would continue to supply naldemedine tosylate for use in Symproic manufacturing at cost plus such agreed upon markup for the duration of the Shionogi License Agreement.
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Dr. Reddy’s acquired product rights
Prior to the BDSI Acquisition, BDSI and Dr. Reddy’s Laboratories Limited (“DRL”), entered into an asset purchase agreement (the “ Elyxyb Asset Purchase Agreement”) for the acquisition by BDSI from DRL of certain patents, trademarks, regulatory approvals and other rights related to Elyxyb and its commercialization in the United States and Canada (the “DRL Territory”).
Pursuant to the terms of the Elyxyb Asset Purchase Agreement, a $ 9,000 payment was due to DRL on August 3, 2022. In addition, up to an additional $ 9,000 of payments are due to DRL upon achievement of certain regulatory milestones as well as for quarterly earn-out payments on potential sales of the Elyxyb Product in the DRL Territory that range from high single digits to the low double digits (subject to reduction in certain circumstances) of net sales based on volume of sales. DRL will also be entitled to one-time payments upon the achievement of six escalating sales milestones, which range from $ 4,000 to be paid upon the achievement of $ 50,000 in net sales in a calendar year to $ 100,000 to be paid upon the achievement of $ 1,000,000 in net sales in a calendar year up to a total of $ 262,000 .
During the three months ended December 31, 2022, the Company discontinued the commercialization of Elyxyb. Refer to Note 10, Goodwill and Intangible Assets , for more information.
In February 2023, the Company entered into an agreement with Scilex to transfer to Scilex all assets, rights, and obligations necessary to commercialize Elyxyb in the United States and Canada (the “Elyxyb Sale Agreement”). Refer to Note 20, Subsequent Events , for more information.
6. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net income or loss 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 or loss by the weighted-average number of shares of common stock, plus potentially dilutive securities outstanding for the period, as determined in accordance with the treasury stock, 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 (“RSUs”), performance share units (“PSUs”), and shares potentially issuable in connection with the employee stock purchase plan and convertible senior notes are considered potentially dilutive securities and included to the extent that their addition is not anti-dilutive.
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The following table presents the computations of basic and dilutive earnings (loss) per common share:
Years Ended December 31,
2022
2021
2020
Numerator:
Net (loss) income
$
( 25,002 )
$
71,517
$
26,752
Adjustment for interest expense recognized on convertible senior notes:
—
4,675
—
Net (loss) income — diluted
$
( 25,002 )
$
76,192
$
26,752
Denominator:
Weighted-average shares outstanding — basic
33,829,495
34,936,817
34,407,959
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
33,829,495
41,045,805
35,151,353
(Loss) earnings per share — basic
$
( 0.74 )
$
2.05
$
0.78
(Loss) earnings per share — diluted
$
( 0.74 )
$
1.86
$
0.76
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. The Company uses the if-converted method for the convertible senior notes.
The following table presents dilutive securities excluded from the calculation of diluted earnings per share:
Years Ended December 31,
2022
2021
2020
Stock options
1,683,805
1,202,403
2,294,961
Restricted stock units
2,047,571
22,605
4,809
Performance share units
447,770
242,714
211,618
Convertible senior notes
4,925,134
—
4,925,134
For PSUs, 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.
7. INVENTORY
Inventory consisted of the following:
Years Ended December 31,
2022
2021
Raw materials
$
5,600
$
3,685
Work in process
24,672
1,007
Finished goods
16,229
12,702
Total inventory
$
46,501
$
17,394
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During the year ended December 31, 2022, the expenses related to excess and obsolete inventory that were recorded as a component of cost of products revenues were $ 1,814 . Expenses related to excess and obsolete inventory were immaterial for the years ended December 31, 2021 and 2020.
During the years ended December 31, 2022, 2021, and 2020, inventory used in the construction and installation of property and equipment was zero , $ 516 , and $ 2,299 , respectively.
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
Years Ended December 31,
2022
2021
Prepaid regulatory fees
$
5,614
$
3,602
Prepaid income taxes
5,138
—
Prepaid co-pay program incentives
1,907
—
Prepaid insurance
960
864
Other current assets
57
27
Other prepaid expenses
3,005
1,386
Prepaid expenses and other current assets
$
16,681
$
5,879
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Years Ended December 31,
2022
2021
Computers and office equipment
$
2,491
$
1,547
Laboratory equipment
436
1,340
Furniture and fixtures
1,133
1,079
Manufacturing equipment
20,910
14,498
Leasehold improvements
874
541
Construction-in-process
—
5,182
Total property and equipment
25,844
24,187
Less: accumulated deprecation
( 6,323 )
( 4,696 )
Property and equipment, net
$
19,521
$
19,491
Depreciation expense related to property and equipment amounted to $ 2,684 , $ 1,736 and $ 870 for the years ended December 31, 2022, 2021, and 2020, respectively. During the years ended December 31, 2022, 2021, and 2020 the Company disposed of fully depreciated assets of $ 1,040 , $ 96 and $ 102 , respectively. Any gains or losses from the retirement, sale or disposal of property and equipment during the years ended December 31, 2022, 2021, and 2020 were immaterial.
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10. GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill resulted from the BDSI Acquisition. Refer to Note 4, Acquisitions, for more information.
The following tables summarizes the changes in the carrying amount of goodwill:
Amount
Balance at December 31, 2021
$
—
Goodwill resulting from BDSI Acquisition
133,695
Balance at December 31, 2022
$
133,695
The following table sets forth the cost, accumulated amortization, and carrying amount of intangible assets as of December 31, 2022 and 2021:
As of December 31, 2022
As of December 31, 2021
Amortization Period
(Years)
Cost
Accumulated Amortization
Carrying Amount
Cost
Accumulated Amortization
Carrying Amount
Belbuca
4.8
$
360,000
$
( 58,428 )
$
301,572
$
—
$
—
$
—
Nucynta Products
8.0
521,170
( 319,628 )
201,542
521,170
( 252,447 )
268,723
Symproic
9.6
70,000
( 5,646 )
64,354
—
—
—
Elyxyb
—
5,000
( 5,000 )
—
—
—
—
Total intangibles
$
956,170
$
( 388,702 )
$
567,468
$
521,170
$
( 252,447 )
$
268,723
The following table presents amortization and impairment expense recognized in cost of product revenues for the years ended December 31, 2022, 2021, and 2020:
Years Ended December 31,
2022
2021
2021
Belbuca
$
58,428
$
—
$
—
Nucynta Products
67,181
67,181
60,680
Symproic
5,646
—
—
Elyxyb (1)
5,000
—
—
Total amortization and impairment expense
$
136,255
$
67,181
$
60,680
(1) Includes $ 214 of amortization expense and $ 4,786 of impairment expense .
Intangible Asset Impairment
During the three months ended December 31, 2022, the Company made the decision to discontinue the commercialization of Elyxyb. Accordingly, an asset impairment evaluation performed during the three months ended December 31, 2022 resulted in the Company recognizing $ 4,786 of impairment expense related to the Elyxyb intangible asset, which was equivalent to the carrying amount of the Elyxyb asset at the time of the impairment determination. The impairment expense reflects that no significant proceeds are expected to be realized from its disposition. The impairment expense is included in “ Intangible asset amortization and impairment ” in the Consolidated Statements of Operations. Other expenses associated with the discontinuation of Elyxyb were immaterial.
The revenues generated from sales of Elyxyb to date were immaterial. Elyxyb is not considered a significant component of the entity’s business and therefore, is not presented as a discontinued operation.
There were no employees impacted by the decision to discontinue the commercialization of Elyxyb and therefore, no severance or employee benefit expense were recognized. In addition, contract termination costs related to the
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discontinuation were immaterial and expensed upon the termination of the contracts. The expected completion date of the remaining exit and other activities associated with the discontuation of Elyxyb is March 31, 2023.
In February 2023, the Company entered into the Elyxyb Sale Agreement with Scilex to transfer to Scilex all assets, rights, and obligations necessary to commercialize Elyxyb in the United States and Canada. Refer to Note 20, Subsequent Events , for more information.
As of December 31, 2022, the remaining amortization expense expected to be recognized is as follows:
Years ended December 31,
Belbuca
Nucynta Products
Symproic
Total
2023
$
75,393
$
67,181
$
7,285
$
149,859
2024
75,393
67,181
7,285
149,859
2025
75,393
67,180
7,285
149,858
2026
75,393
—
7,285
82,678
2027
—
—
7,285
7,285
Thereafter
—
—
27,929
27,929
Remaining amortization expense
$
301,572
$
201,542
$
64,354
$
567,468
11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
As of December 31,
2022
2021
Accrued royalties
$
13,770
$
9,930
Accrued bonuses
6,347
2,634
Accrued product taxes and fees
4,352
2,570
Accrued sales and marketing
2,130
697
Accrued audit and legal
1,957
3,623
Accrued incentive compensation
1,507
851
Accrued interest
1,410
1,415
Accrued payroll and related benefits
1,208
807
Accrued income taxes
—
622
Accrued restructuring expenses
—
3,222
Accrued other operating costs
3,448
2,843
Total accrued expenses
$
36,129
$
29,214
12. 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 material 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
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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.
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 12, 2022, the Company filed a Motion to
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Dismiss the Appeal as Untimely. On May 20, 2022, the Federal Circuit denied the Motion to Dismiss and directed the parties to address jurisdiction during merits briefing.
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, 2022, the Court set (i) the fact discovery deadline for May 4, 2023; and (ii) expert witness depositions to conclude by August 24, 2023. The Court has not set a deadline for dispositive motions or trial.
The remaining patents-in-suit in the lead consolidated action in the District of Massachusetts are the ʼ933, ʼ919, ʼ434, and ʼ961 patents. The parties agreed, however, that litigation concerning the ʼ961 patent is stayed pending resolution of Purdue’s Federal Circuit appeal of the PTAB decision invalidating the claims of the ʼ961 patent. 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.
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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.
Litigation Related to the BDSI Acquisition
On February 25, 2022, in connection with the BDSI Acquisition, a purported individual stockholder of BDSI filed a complaint in the United States District Court for the Southern District of New York, captioned Stein v. BioDelivery Sciences International, Inc., et al. , No. 1:22-cv-01600, naming as defendants BDSI and each member of its Board of Directors as of the date of the Merger Agreement (“ Stein Action”). On February 28, 2022, two additional cases were filed by purported individual stockholders of BDSI in the same court, captioned Sanford v. BioDelivery Sciences International, Inc., et al ., No. 1:22-cv-01676 (“ Sanford Action”), and Higley v. BioDelivery Sciences International, Inc., et al. , No. 1:22-cv-01658 (“ Higley Action”). On March 2, 2022 and March 5, 2022, two additional cases were filed by purported individual stockholders of BDSI in the United States District Court for the Eastern District of New York, captioned Justice II v. BioDelivery Sciences International, Inc., et al. , No. 1:22-cv-01145 (“ Justice Action”) and Zomber v. BioDelivery Sciences International, Inc., et al. , No. 1:22-cv-01220 (“ Zomber Action”; together with the Stein , Sanford , Higley , and Justice Actions, the “Actions”). The Actions and any similar subsequently filed cases involving BDSI, its officers or Board of Directors, or any committee thereof, and/or any of the Company’s officers or directors relating directly or indirectly to the Merger Agreement, the BDSI Acquisition or any related transaction, are referred to as the “Merger Litigations.”
The Merger Litigations filed to date generally allege that the Schedule 14D-9 is materially incomplete and misleading by allegedly failing to disclose purportedly material information relating to the sale process leading to the Merger, BDSI’s financial projections, and the analyses performed by Moelis & Company LLC in connection with the Merger. The Merger Litigations assert violations of Section 14(e) of the Exchange Act and violations of Section 20(a) of the Exchange Act against BDSI’s Board of Directors. Additionally, the Stein, Higley, Justice , and Zomber complaints assert violations of Section 14(d) of the Exchange Act and Rule 14d-9 promulgated thereunder. The Merger Litigations seek, among other things: an injunction enjoining consummation of the Merger, rescission of the Merger Agreement, a declaration that BDSI and its Board of Directors violated Sections 14(e) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, damages, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees and expenses, and any other relief the court may deem just and proper.
In addition, on February 24, 2022, February 28, 2022, and March 7, 2022, BDSI received demand letters from three purported stockholders of BDSI seeking to inspect certain books and records of BDSI related to the Merger (collectively, the “Inspection Letters”). On March 4, 2022, March 9, 2022, and March 11, 2022, BDSI received demand letters from four purported stockholders alleging that the Schedule 14D-9 omits purportedly material information relating to the Merger (collectively, the “Demand Letters”).
On April 14, 2022, plaintiff in the Higley Action filed a notice of voluntary dismissal of the complaint. On May 15, 2022, plaintiff in the Zomber Action filed a notice of voluntary dismissal of the complaint. And, on June 24, 2022, plaintiff in the Justice Action filed a notice of voluntary dismissal of the complaint. In the remaining Stein and Sanford Actions, on July 20, 2022, the respective Courts entered an Order for plaintiff to serve a summons and complaint by August 3, 2022. On July 28, 2022, plaintiff in the Sanford Action filed a partial voluntary dismissal of the individual named defendants but not BDSI from that action and filed a waiver of service as to BDSI. On October 26, 2022, plaintiff in the Sanford Action filed a notice of voluntary dismissal of the complaint as to Defendant BDSI as well. To date, the complaint in the Stein Action has not been served on, nor was service waived by, any of the named defendants in that action.
While the Company believes that the remaining Merger Litigations, Inspection Letters, and Demand Letters are without merit and that the disclosures in the Schedule 14D-9 comply fully with applicable law, solely in order to avoid the expense and distraction of litigation, BDSI previously determined to voluntarily supplement the Schedule 14D-9 with certain supplemental disclosures set forth in BDSI’s Schedule 14D-9 filed with the SEC on March 11, 2022 (the “Supplemental Disclosures”). The Company and BDSI believe that the Supplemental Disclosures mooted all allegations or concerns raised in the Merger Litigations, Inspection Letters, and Demand Letters.
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As set forth in the Supplemental Disclosures, nothing therein shall be deemed an admission of the legal necessity or materiality under applicable law of the Supplemental Disclosures. To the contrary, the Company and BDSI specifically deny all allegations that any of the Supplemental Disclosures, or any other additional disclosures, were or are required. The Company plans to defend the Merger Litigations 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 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. The Company was named as a defendant in a small subset of the MDL cases. Of the 21 MDL cases that named the Company as a defendant, the allegations against it were previously dismissed or withdrawn in 13 cases as of December 31, 2021. As explained below, the remaining eight MDL cases that named the Company were dismissed as of April 19, 2022. In addition, the Company had been previously dismissed from three non-MDL cases filed in Pennsylvania and Arkansas state courts.
Outside of the MDL, there were several cases filed against the Company in state courts in Pennsylvania and Massachusetts:
● In Pennsylvania, six lawsuits naming the Company were 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 included 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.
● In Massachusetts, there were 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 were consolidated before the Business Litigation Session of the Superior Court. The actions alleged 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.
On December 24, 2021, the Company entered into a settlement framework with Scott+Scott Attorneys at Law, LLP, the law firm representing plaintiffs in each of the 27 cases, including the 8 remaining MDL cases and 19 state court cases described above. Pursuant to the terms of the settlement framework, which were later memorialized in a final settlement agreement, the Company agreed to pay $ 2,750 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 settlement agreement was executed by the Company and all 27 plaintiffs, and the amounts subject to the settlement agreement were paid.
The Company entered into this settlement to efficiently resolve this litigation and does not admit any liability or acknowledge any wrongdoing in connection with the settlement agreement.
The parties have submitted appropriate motions to dismiss the Company with prejudice for each of the 27 cases. All were granted, thereby dismissing the Company, with prejudice, from all 27 cases.
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Ongoing BDSI Litigation Matters
BDSI’s ongoing litigations with Aquestive Therapeutics, Inc. (formerly MonoSol Rx, “Aquestive”) and Indivior PLC (formerly RB Pharmaceuticals Limited, “Indivior”) are provided below.
Litigation related to BUNAVAIL
On October 29, 2013, Reckitt Benckiser, Inc., Indivior PLC (formerly RB Pharmaceuticals Limited, “Indivior”), and Aquestive Therapeutics, Inc. (formerly MonoSol Rx, “Aquestive”) (collectively, the “RB Plaintiffs”) filed an action against BDSI relating to its BUNAVAIL product in the United States District Court for the Eastern District of North Carolina (“EDNC”) for alleged patent infringement. BUNAVAIL is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL, which has never been disclosed publicly, infringes its U.S. Patent No. 8,475,832 (the “‘832 Patent”). On May 21, 2014, the Court granted BDSI’s motion to dismiss.
On September 22, 2014, the RB Plaintiffs filed an action against BDSI (and BDSI’s commercial partner) relating to BDSI’s BUNAVAIL product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent No. 8,765,167 (the “‘167 Patent”).
On December 12, 2014, BDSI filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against its commercial partner. On October 28, 2014, BDSI filed multiple IPR petitions on certain claims of the ‘167 Patent. The USPTO instituted three of the four IPR petitions. The PTAB upheld the claims and denied collateral estoppel applied to the PTAB decisions in March 2016. BDSI appealed to Court of Appeals for the Federal Circuit. The USPTO intervened with respect to whether collateral estoppel applied to the PTAB.
On June 19, 2018, BDSI filed a motion to remand the case for further consideration by the PTAB in view of intervening authority. On July 31, 2018, the Federal Circuit vacated the decisions, and remanded the ‘167 Patent IPRs for further consideration on the merits.
On February 7, 2019, the PTAB issued three decisions on remand vacating institution of the three previously instituted IPRs of the ‘167 patent. BDSI timely appealed the PTAB decisions, and that appeal was ultimately denied.
On May 18, 2021, the RB Plaintiffs filed an amended complaint dropping BDSI’s commercial partner from the action it began on September 22, 2014. On June 1, 2021, BDSI answered the amended complaint asserting counterclaims of non-infringement, invalidity, and unenforceability. On December 16, 2021, the parties completed claim construction briefing on the disputed claim terms of the ʼ167 patent. The Court has not set a date for the claim construction hearing, or for a subsequent trial. 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.
Litigation related to BELBUCA
On January 13, 2017, Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA infringes the ‘167 Patent. In lieu of answering the complaint, BDSI filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. On July 25, 2017, the New Jersey Court administratively terminated the case pending the parties’ submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case was later transferred to the Delaware District Court. On October 31, 2017, BDSI filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC.
On October 16, 2018, denying the motion to dismiss as moot, the Delaware District Court granted BDSI’s motion to transfer the case to the EDNC. On November 20, 2018, BDSI moved the EDNC to dismiss the complaint for patent infringement for failure to state a claim for relief.
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On August 6, 2019, the EDNC granted BDSI’s motion to dismiss, and dismissed the complaint without prejudice. On or about November 11, 2019, Aquestive refiled a complaint in the EDNC against BDSI alleging that BELBUCA infringes the ‘167 Patent. On January 13, 2020, in lieu of answering the complaint, BDSI filed a motion to dismiss the complaint. After that motion was denied, BDSI answered the complaint on April 16, 2020. Aquestive moved to dismiss BDSI’s counterclaim of unenforceability, but the court denied that motion.
On December 16, 2021, the parties completed claim construction briefing on the disputed claim terms of the ʼ167 patent. The Court has not set a date for the claim construction hearing, or for a subsequent trial. 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.
Chemo Research, S.L
On March 1, 2019, BDSI filed a complaint for patent infringement in United States District Court for the District of Delaware against Chemo Research, S.L., Insud Pharma S.L., IntelGenx Corp., and IntelGenx Technologies Corp. (collectively, the “Chemo Defendants”), asserting that the Chemo Defendants infringe its Orange Book-listed patents for BELBUCA, including U.S. Patent Nos. 8,147,866 (“’866 patent”) and 9,655,843, (“’843 patent”) both expiring in July of 2027, and U.S. Patent No. 9,901,539 (“’539 patent”) expiring December of 2032 (collectively, “the BEMA patents”). This complaint follows a receipt by BDSI on January 31, 2019, of a Notice Letter from Chemo Research S.L. stating that it has filed with the FDA an ANDA containing a Paragraph IV Patent Certification, for a generic version of BELBUCA Buccal Film in strengths 75 mcg, 150 mcg, 300 mcg, 450 mcg, and 900 mcg. Because BDSI initiated a patent infringement suit asserting the patents identified in the Notice Letter within 45 days after receipt, the FDA is prevented from approving the ANDA until the earlier of 30 months or a decision in the case that each of the patents is not infringed or invalid. On March 15, 2019, BDSI filed a complaint against the Chemo Defendants in the Federal District Court for the District of New Jersey asserting the same claims for patent infringement made in the Delaware lawsuit. On April 19, 2019, Defendants filed an answer to the Delaware complaint wherein they denied infringement of the ’866, ’843 and ’539 patents and asserted counterclaims seeking declaratory relief concerning the alleged invalidity and non-infringement of such patents.
On April 25, 2019, BDSI voluntarily dismissed the New Jersey lawsuit given Defendants’ consent to jurisdiction in Delaware.
The trial to adjudicate issues concerning the validity of the Orange Book-listed patents covering BELBUCA was held from March 1-3, 2021. Chemo did not participate in the bench trial. Instead, on February 26, 2021, Chemo agreed to be bound by the decision of the Court with respect to the validity of the BEMA patents from the March 1-3, 2021 trial with Alvogen. On December 20, 2021, the Court issued an opinion upholding the validity of certain claims in BDSI’s ʼ866 patent, which expires in 2027, and certain claims in the ’539 patent, which expires in 2032, to which Chemo is bound. This holding was affirmed on appeal by the Federal Circuit on December 21, 2022. The bench trial to adjudicate issues concerning the Chemo Defendants’ infringement of the Orange Book patents was set to commence on April 25, 2022. On March 30, 2022, the Court vacated the trial and has not yet set a new trial date.
On August 1, 2022, BDSI received a second Paragraph IV certification notice letter from Chemo indicating that Chemo has amended its ANDA to (i) withdraw its generic version of the 75 mcg and 150 mcg strengths of BELBUCA; and (ii) include its generic version of the 600 mcg and 750 mcg strengths of BELBUCA, in addition to the 300 mcg, 450 mcg, and 900 mcg strengths identified in the first Chemo Paragraph IV certification notice letter. In response, BDSI filed a complaint for patent infringement in Federal District Court for the District of Delaware. Chemo answered the complaint on December 1, 2022. The Court has not set a schedule for this litigation.
On August 24, 2022, the Court instructed the parties to update the Court at such time as the FDA addresses Chemo's July 29, 2022 response to the FDA. On February 8, 2023, the district court denied Chemo’s request for a trial date in the spring, and again instructed the parties to update the Court at such time as the FDA addresses Chemo’s July 29, 2022 response to the FDA.
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The Company plans to litigate these cases 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.
Alvogen
On September 7, 2018, BDSI filed a complaint for patent infringement in United States District Court for the District of Delaware against Alvogen Pb Research & Development LLC, Alvogen Malta Operations Ltd., Alvogen Pine Brook LLC, Alvogen, Incorporated, and Alvogen Group, Incorporated (collectively, “Alvogen”), asserting that Alvogen infringes BDSI’s Orange Book-listed patents for BELBUCA, including U.S. Patent Nos. 8,147,866 and 9,655,843, both expiring in July of 2027, and U.S. Patent No. 9,901,539, expiring in December of 2032 (collectively, “the BEMA patents”) . This complaint followed receipt by BDSI on July 30, 2018 of a Paragraph IV Patent Certification from Alvogen stating that Alvogen had filed an ANDA with the FDA for a generic version of BELBUCA Buccal Film (75 mcg, 150 mcg, 300 mcg, 450 mcg, 600 mcg, 750 mcg and 900 mcg). Because BDSI initiated a patent infringement suit asserting the patents identified in the Paragraph IV notice within 45 days after receipt of the Paragraph IV Certification, the FDA is prevented from approving the ANDA until the earlier of 30 months or a decision in the case that each of the patents is not infringed or invalid.
The Court scheduled a bench trial to adjudicate issues concerning the validity of the BEMA patents. A three-day bench trial against Alvogen was conducted commencing on March 1, 2021.
On December 20, 2021, the Court issued an opinion upholding the validity of certain claims in BDSI’s ʼ866 patent, which expires in 2027, and certain claims in the ’539 patent, which expires in 2032. Alvogen conceded infringement of those claims prior to the trial. The Court entered final judgment on January 21, 2022. The final judgment entered in this case upholding the validity of claims of the ’866 and ’539 Orange Book-listed patents extends the effective date of any final approval by the FDA of Alvogen’s ANDA until December 21, 2032, which is the expiration date of the ’539 patent, and enjoins Alvogen and those acting in concert with Alvogen from commercially manufacturing, using, selling, or offering for sale Alvogen’s ANDA products until December 21, 2032. Alvogen filed a motion to stay certain provisions of the final judgment in the Court. BDSI filed an opposition to Alvogen’s request for a stay. The Court retained jurisdiction to decide BDSI’s motion for contempt, which was filed on September 21, 2021.
Alvogen filed a notice of appeal to the Federal Circuit seeking to reverse the Court’s final judgment entered on January 21, 2022. Separately, BDSI has filed a cross-appeal to the Federal Circuit seeking to reverse the Court’s opinion that claims 3 and 10 of the ʼ866 patent and claims 8, 9 and 20 of the ’843 patent are invalid and thus Alvogen is not liable for infringement of those claims, as well as any other ruling decided adversely to BDSI. On November 1, 2022, the Federal Circuit held oral argument on the parties’ appeal and issued its decision on December 21, 2022. In that decision, the Federal Circuit affirmed the district court judgment that certain claims of the ʼ866 and ʼ539 patent were not invalid as obvious. The Federal Circuit also vacated the district court’s judgment that certain claims of the ʼ866 and ʼ843 patent were invalid as obvious and remanded to the district court for further proceedings. The mandate issued on February 10, 2023.
As it has done in the past, the Company intends to vigorously defend its intellectual property against assertions of invalidity or non-infringement.
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 , including $ 65 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.
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13. DEBT
2020 Term Loan
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 “2020 Loan Agreement”) with BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender (collectively “Pharmakon”). The 2020 Loan Agreement provided for a $ 200,000 secured term loan (the “2020 Term Loan”), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement. O n February 13, 2020 (the “2020 Term Loan Closing Date”) , the Company received the $ 200,000 proceeds from the 2020 Term Loan.
On March 22, 2022 the outstanding balance under the 2020 Loan Agreement was fully paid in connection with the closing of the BDSI Acquisition and establishment of the 2022 Term Loan, as described below.
2022 Term Loan
On March 22, 2022, in connection with the closing of the BDSI Acquisition, the Company entered into an Amended and Restated Loan Agreement by and among the Company, and Pharmakon (the “2022 Loan Agreement”). The 2022 Loan Agreement provided for a $ 650,000 secured term loan (the “2022 Term Loan”), the proceeds of which were used to repay the Company’s existing term notes and fund a portion of the consideration to be paid to complete the BDSI Acquisition. The 2022 Loan Agreement was accounted for as a debt modification and transaction fees of $ 173 were expensed. In connection with the 2022 Loan Agreement, the Company paid loan commitment and other fees to the lender of $ 19,818 , which together with preexisting debt issuance costs and note discounts of $ 2,049 will be amortized over the term of the loan using the effective interest rate.
The 2022 Term Loan will mature on the 48-month anniversary of the closing of the BDSI Acquisition and is guaranteed by the Company’s material domestic subsidiaries. The 2022 Term Loan is also secured by substantially all of the assets of the Company and its material domestic subsidiaries. The 2022 Term Loan bears interest at a rate based upon the London Interbank Offered Rate (“LIBOR”) (subject to a LIBOR floor of 1.20 %), plus a margin of 7.5 % per annum. As of December 31, 2022, the interest rate was 11.2 %. The Company is required to repay the 2022 Term Loan by paying $ 100,000 in principal payments during the first year and the remaining $ 550,000 balance will amortize in equal quarterly installments over the remaining three years.
The 2022 Loan Agreement permits voluntary prepayment at any time, subject to a prepayment premium. The prepayment premium is equal to 2.00 % of the principal amount being prepaid prior to the second-year anniversary of the closing date, or 1.00 % of the principal amount being prepaid on or after the second-year anniversary of the closing date. The 2022 Loan Agreement also includes a make-whole premium in the event of a voluntary prepayment, a prepayment due to a change in control or acceleration following an Event of Default (as defined in the 2022 Loan Agreement) on or prior to the second-year anniversary of the closing date, in each case 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 also triggers a mandatory prepayment of the 2022 Term Loan.
The 2022 Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, 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. Failure to comply with these covenants would constitute an event of default under the 2022 Loan Agreement, notwithstanding the Company’s ability to meet its debt service obligations. The 2022 Loan Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the 2022 Loan Agreement and execution upon the collateral securing obligations under the 2022 Loan Agreement.
During the years ended December 31, 2022, 2021, and 2020, the Company recognized interest expense of $ 58,533 , $ 16,339 , and $ 19,034 , respectively.
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As of December 31, 2022, principal repayments under the 2022 Term Loan are as follows:
Years ended December 31,
Principal Payments
2023
$
162,500
2024
183,333
2025
183,333
2026
45,834
Total before unamortized discount and issuance costs
$
575,000
Less: unamortized discount and issuance costs
( 14,922 )
Total term notes
$
560,078
2026 Convertible Notes
On February 13, 2020, the Company issued 2.625 % convertible senior notes due in 2026 (the “2026 Convertible Notes” or “convertible notes”) in the aggregate principal amount of $ 143,750 , in a public offering registered under the Securities Act of 1933, as amended. The 2026 Convertible Notes were issued in connection with funding the Nucynta Acquisition, and the proceeds of the convertible notes were used to finance a portion of the purchase price payable pursuant to the Nucynta Purchase Agreement. Some of the Company’s existing investors participated in the convertible notes offering.
The Company may, at its option, settle the convertible notes in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. Accordingly, the Company originally accounted for the liability component (the “Liability Component”) and the embedded derivative conversion option (the “Equity Component”) of the convertible notes separately 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 was expected to be 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 expected to be 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 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.
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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 convertible notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
(3) upon the occurrence of certain corporate events or distributions on the Company’s common stock;
(4) if the Company calls the convertible notes for redemption; or
(5) at any time from, and including, August 15, 2025 until the close of business on the scheduled trading day immediately before the maturity date.
As of December 31, 2022, 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 convertible 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, 2022, the convertible notes outstanding consisted of the following:
Principal
$
143,750
Less: unamortized issuance costs
( 2,877 )
Net carrying amount
$
140,873
The Company determined the expected life of the convertible notes was equal to its six-year term. The effective interest rate on the convertible notes was 3.26 %. As of December 31, 2022, the if-converted value did not exceed the remaining principal amount of the convertible notes.
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The following table presents the total interest expense recognized related to the convertible notes during the years ended December 31, 2022, 2021, and 2020:
Years Ended December 31,
2022
2021
2020
Contractual interest expense
$
3,773
$
3,773
$
3,323
Amortization of debt discount
—
—
5,628
Amortization of debt issuance costs
907
902
447
Total interest expense
$
4,680
$
4,675
$
9,398
As of December 31, 2022, the future minimum payments on the convertible notes were as follows:
Years ended December 31,
Future Minimum Payments
2023
$
3,773
2024
3,773
2025
3,773
2026
145,638
Total minimum payments
$
156,957
Less: interest
( 13,207 )
Less: unamortized issuance costs
( 2,877 )
Convertible senior notes
$
140,873
14. LEASES
Operating Lease Arrangements
In March 2018, the Company entered into an operating lease for its 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 continued through December 2022 and was automatically renewed for successive two-year terms as neither party gave written notice of termination two-years in advance. 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.
In connection with the BDSI Acquisition, the Company acquired an operating lease for the former headquarters of BDSI pursuant to which the Company leases 11,628 of rentable square feet of space in Raleigh, North Carolina (the “BDSI Lease”). The BDSI Lease continues through July 2023. The Company does not expect to renew or extend the lease beyond its contractual expiration in July 2023.
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As of December 31, 2022, the Company had operating lease assets of $ 6,861 and operating lease liabilities of $ 8,224 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 recognized on a straight-line basis over the lease term in the period in which it is incurred.
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, 2022, 2021, and 2020 are as follows:
Years Ended December 31,
2022
2021
2020
Lease Cost
Operating lease cost
$
1,805
$
1,305
$
1,305
Short-term lease cost
993
1,492
1,312
Variable lease cost
331
292
331
Total lease cost
$
3,129
$
3,089
$
2,948
The lease term and discount rate for operating leases for the years ended December 31, 2022 and 2021 are as follows:
Years Ended December 31,
Lease Term and Discount Rate:
2022
2021
Weighted-average remaining lease term — operating leases (years)
6.6
7.6
Weighted-average discount rate — operating leases
6.2 %
6.1 %
Other information related to operating leases for the years ended December 31, 2022, 2021, and 2020 is as follows:
Years Ended December 31,
Other Information:
2022
2021
2020
Cash paid for amounts included in the measurement of operating leases liabilities
$
1,568
$
1,286
$
1,249
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, 2022, are as follows:
2023
$
1,585
2024
1,398
2025
1,436
2026
1,474
2027
1,489
Thereafter
2,697
Total minimum lease payments
$
10,079
Less: Present value discount
1,855
Present value of lease liabilities
$
8,224
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15. EQUITY
Common Stock
In May 2015, the Company adopted the Amended and Restated 2014 Stock Incentive Plan (the “Plan”), under which an aggregate of 2,700,000 shares of common stock were authorized for issuance to employees, officers, directors, consultants and advisors of the Company, plus an annual increase on the first day of each fiscal year until the expiration of the Plan equal to 4 % of the total number of outstanding shares of common stock on December 31st of the immediately preceding calendar year (or a lower amount as otherwise determined by the Company’s Board of Directors prior to January 1st). As of December 31, 2022, there were 1,920,793 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. Shares issued under all of our plans are funded through the issuance of new shares. Refer to Note 16, 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 was set to expire in November 2022 and included customary adjustments for changes in the Company’s capitalization. In November 2022, the Warrant was exercised through a cashless exercise and the Company issued 40,666 shares. As of December 31, 2022, there were no outstanding warrants remaining.
Share Repurchases
In August 2021, the Company’s Board of Directors authorized a repurchase program for the repurchase of up to $ 100,000 of shares of its common stock at any time or times through December 31, 2022 (the “Prior Repurchase Program”). The Prior Repurchase Program permitted 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 Prior Repurchase Program were returned to the Company’s pool of authorized but unissued shares available for reissuance. The timing and amount of any such repurchases were determined based on share price, market conditions, legal requirements, and other relevant factors.
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 $ 100,000 Prior 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
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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. As the Company was entitled to receive additional shares of its common stock in connection with the outstanding forward contract, the receipt of additional shares of common stock was antidilutive. Therefore, no adjustments were made in the computation of earnings per share for the period the forward was outstanding. The forward contract was no longer outstanding as of December 31, 2022.
Through December 31, 2022, the Company repurchased 3,235,823 shares at a weighted-average price of $ 19.14 per share for a total of $ 61,924 under the Prior Repurchase Program and the cost of repurchased shares were recorded as treasury stock in the Consolidated Balance Sheet. The Prior Repurchase Program expired on December 31, 2022.
In January 2023, the Company’s Board of Directors authorized the 2023 Share Repurchase Program for the repurchase of up to $ 100,000 of the Company’s common stock through December 31, 2023. The 2023 Share 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. The timing and amount of any shares purchased on the open market will be determined based on the Company’s evaluation of the market conditions, share price and other factors. The Company plans to utilize existing cash on hand to fund the share repurchase program.
16. STOCK-BASED COMPENSATION
Performance Share Units, Restricted Stock Units and Stock Options
Performance Share Units
The Company periodically grants 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 each year thereafter, 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
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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, 2022, 2021, and 2020 was zero , $ 289 and $ 950 , respectively.
A summary of the Company’s performance share units activity for the year ended December 31, 2022 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2021
353,100
$
31.77
Granted
241,550
24.12
Vested
( 126,081 )
29.12
Forfeited
( 22,104 )
29.60
Performance adjustment
1,305
28.96
Outstanding at December 31, 2022
447,770
$
28.71
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, 2022, 2021, and 2020 was $ 24.12 , $ 35.15 , and $ 28.49 , respectively.
For the years ended December 31, 2022, 2021, and 2020, the stock-based compensation expense for PSUs was $ 5,398 , $ 4,817 , and $ 3,551 , respectively.
As of December 31, 2022, the unrecognized compensation cost related to performance share units was $ 4,242 and is expected to be recognized as expense over approximately 1.6 years.
Restricted Stock Units
A summary of the Company’s RSUs activity for the year ended December 31, 2022 and related information is as follows:
Weighted-Average
Shares
Grant Date Fair Value
Outstanding at December 31, 2021
1,620,023
$
22.48
Granted
1,372,247
17.53
Vested
( 573,204 )
21.89
Forfeited
( 371,495 )
20.57
Outstanding at December 31, 2022
2,047,571
$
19.67
The weighted-average grant date fair value of RSUs granted for the years ended December 31, 2022, 2021 and 2020 was $ 17.53 , $ 24.23 and $ 21.35 . The total fair value of RSUs vested (measured on the date of vesting) for the years ended December 31, 2022, 2021 and 2020 was $ 10,166 , $ 11,165 and $ 6,992 respectively.
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As of December 31, 2022, the unrecognized compensation cost related to restricted stock units was $ 26,742 and is expected to be recognized as expense over approximately 2.6 years. The weighted-average grant date fair value of restricted stock units vested during the years ended December 31, 2022, 2021, and 2020 was $ 12,547 , $ 8,526 , and $ 5,989 , respectively.
Stock Options
A summary of the Company’s stock option activity for the year ended December 31, 2022 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, 2021
2,728,169
$
18.33
5.8
$
6,070
Exercised
( 742,348 )
15.93
Cancelled
( 302,016 )
21.35
Outstanding at December 31, 2022
1,683,805
$
18.84
5.5
$
7,953
Exercisable at December 31, 2022
1,545,610
$
18.82
5.4
$
7,394
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:
Years Ended December 31,
2022
2021
2020
Risk-free interest rate
—
%
0.7
%
1.3
%
Volatility
—
%
67.2
%
66.2
%
Expected term (years)
—
6.0
6.0
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, 2022, 2021, and 2020 was zero , $ 12.60 and $ 12.78 respectively. The total intrinsic value of stock options exercised for the years ended December 31, 2022, 2021, and 2020 was $ 3,943 , $ 6,456 and $ 7,516 , respectively.
As of December 31, 2022, the unrecognized compensation cost related to outstanding options was $ 1,322 and is expected to be recognized as expense over approximately 1.1 years.
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Employee Stock Purchase Plan
The Company’s 2015 Employee Stock Purchase Plan allows employees as designated by the Company’s Board of Directors to purchase shares of the Company’s common stock. The purchase price is equal to 85 % of the lower of the closing price of the Company’s common stock on (1) the first day of the purchase period or (2) the last day of the purchase period. During the year ended December 31, 2022, 22,627 shares of common stock were purchased for total proceeds of $ 337 . As of December 31, 2022, there were 1,932,173 shares of common stock authorized for issuance pursuant to the employee stock purchase plan. The expense for the years ended December 31, 2022, 2021 and 2020 was $ 117 , $ 224 and $ 342 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,
2022
2021
2020
Research and development
$
1,591
3,422
3,909
Selling, general and administrative
21,283
20,833
18,001
Total stock-based compensation expense
$
22,874
$
24,255
$
21,910
17. INCOME TAXES
The (benefit from) provision for income taxes contained the following components:
Years Ended December 31,
2022
2021
2020
Current provision:
Federal
$
166
$
—
$
—
State
4,540
3,142
830
4,706
3,142
830
Deferred benefit:
Federal
$
( 4,631 )
$
( 61,445 )
$
—
State
( 3,920 )
( 16,588 )
—
( 8,551 )
( 78,033 )
—
(Benefit from) provision for income taxes
$
( 3,845 )
$
( 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:
Years Ended December 31,
2022
2021
2020
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
5.0
2.9
5.1
Permanent differences
( 1.9 )
( 3.9 )
1.1
Stock compensation
( 5.1 )
( 18.8 )
( 3.0 )
Research and development credit
0.7
16.3
( 1.1 )
Transaction costs
( 4.4 )
—
—
Change in tax rates and other
( 2.0 )
—
—
Change in valuation allowance
—
2,202.5
( 20.1 )
Effective income tax rate
13.3
%
2,220.0
%
3.0
%
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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:
Years Ended December 31,
2022
2021
Deferred tax assets:
U.S. and state net operating loss carryforwards
$
56,982
$
31,400
Research and development credits
5,036
5,470
Operating lease liabilities
2,131
2,321
Returns and discounts
19,423
23,072
Stock-based compensation
6,776
7,838
Accruals and other
5,228
2,210
163(j) Carryforward
3,647
—
Capitalized R&D
929
—
Intangible assets
23,592
12,699
Gross deferred tax assets:
123,744
85,010
Valuation allowance
( 5,254 )
( 1,966 )
Total deferred tax assets:
118,490
83,044
Deferred tax liabilities:
Debt discount
( 406 )
—
Operating lease assets
( 1,778 )
( 2,024 )
Inventory
( 3,918 )
—
Intangible assets
( 84,167 )
—
Property and equipment
( 4,271 )
( 2,978 )
Total deferred tax liabilities:
( 94,540 )
( 5,002 )
Net deferred tax assets
$
23,950
$
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, carryback opportunities, reversal of certain deferred tax liabilities, and other tax planning strategies. The Company maintains a partial valuation against its federal and state operating losses and federal R&D credits as of December 31, 2022. The valuation allowance was $ 5,254 and $ 1,966 as of December 31, 2022 and 2021, respectively. The change in the valuation allowance did not impact the tax provision for the year ended December 31, 2022. As a result of sustained positive earnings history through cumulative earnings over the prior three years, as of June 30, during the year ended December 31, 2021, the Company began using projections of future taxable income as a source of realizing its deferred tax assets. Accordingly, the Company recognized a deferred tax benefit of $ 78,042 for the year ended December 31, 2021 related to the reversal of valuation allowances.
As of December 31, 2022, 2021, and 2020, the Company had gross U.S. federal net operating loss carryforwards of $ 229,797 , $ 119,280 , and $ 226,824 , 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, 2022, 2021, and 2020, the Company also had gross U.S. state net operating loss carryforwards of $ 252,597 , $ 103,044 , and $ 170,280 , respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037.
As of December 31, 2022, 2021 and 2020, the Company had federal research and development tax credit carryforwards of approximately $ 4,231 , $ 4,503 , and $ 4,623 , respectively, available to reduce future tax liabilities which expire at
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various dates through 2037 and some are indefinite lived. As of December 31, 2022, 2021 and 2020 the Company had state research and development tax credit carryforwards of approximately $ 832 , $ 955 , and $ 1,150 , respectively, available to reduce future tax liabilities which expire at various dates through 2037.
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. The net operating losses acquired in the BDSI acquisition, totaling $ 234,675 are subject to limitation.
The Company has completed studies 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”). The Company concluded that there were ownership changes that occurred during the years 2006, 2012 and 2015 that would be subject to IRC 382 limitations. In addition, the Company concluded that there were ownership changes for BDSI that occurred during the years 2006 and 2022 that would 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.
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, 2019 through December 31, 2022. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.
The Company has not recognized deferred tax assets for certain federal and state research and development credits related to uncertain tax positions, 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:
Years Ended December 31,
2022
2021
2020
Gross UTB Balance at January 1
$
654
$
586
$
578
Additions based on tax positions related to the current year
—
67
36
Additions for tax positions related to acquisitions
10,930
—
—
(Reductions) additions for tax positions of prior years
( 184 )
1
( 28 )
Gross UTB Balance at December 31
$
11,400
$
654
$
586
Net UTB impacting the effective tax rate at December 31 excluding valuation allowance impacts, if any
$
11,368
$
500
$
560
18. 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, 2022, 2021 and 2020 was $ 1,315 , $ 1,236 , and $ 1,260 respectively.
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19. UNAUDITED QUARTERLY OPERATING RESULTS
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2022 and 2021:
First
Second
Third
Fourth
Year Ended December 31, 2022
Quarter
Quarter
Quarter
Quarter
Product revenues, net
$
83,751
$
123,549
$
127,013
$
129,620
Cost of product revenues
Cost of product revenues (excluding intangible asset amortization)
16,332
33,684
30,622
37,552
Intangible asset amortization and impairment
18,923
37,501
37,552
42,279
Total cost of products revenues
35,255
71,185
68,174
79,831
Gross profit
48,496
52,364
58,839
49,789
Operating expenses
Research and development
3,983
—
—
—
Selling, general and administrative
54,528
41,254
38,372
38,032
Total operating expenses
58,511
41,254
38,372
38,032
(Loss) income from operations
( 10,015 )
11,110
20,467
11,757
Interest expense
( 5,831 )
( 17,761 )
( 19,046 )
( 20,575 )
Interest income
4
5
11
1,027
(Loss) income before income taxes
( 15,842 )
( 6,646 )
1,432
( 7,791 )
(Benefit from) provision for income taxes
( 2,773 )
( 1,455 )
975
( 592 )
Net (loss) income
$
( 13,069 )
$
( 5,191 )
$
457
$
( 7,199 )
(Loss) earnings per share — basic
$
( 0.39 )
$
( 0.15 )
$
0.01
$
( 0.21 )
Weighted-average shares — basic
33,673,912
34,001,553
34,058,802
33,582,202
(Loss) earnings per share — diluted
$
( 0.39 )
$
( 0.15 )
$
0.01
$
( 0.21 )
Weighted-average shares — diluted
33,673,912
34,001,553
34,570,319
33,582,202
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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 and impairment
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
(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 .
20. SUBSEQUENT EVENTS
2029 Convertible Notes
On February 10, 2023, the Company issued $ 241,500 principal amount of its 2.875 % Convertible Senior Notes due 2029. The 2029 Convertible Notes issued on February 10, 2023 include $ 31,500 principal amount of notes issued pursuant to the full exercise by the initial purchasers of such optional purchase.
The 2029 Convertible Notes will be the Company’s senior, unsecured obligations and will be (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness, including its existing 2.625 % convertible senior notes due 2026; (ii) senior in right of payment to the Company’s future indebtedness that is expressly subordinated to the notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, including borrowings under the Company’s secured term loan agreement, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
The 2029 Convertible Notes will accrue interest at a rate of 2.875 % per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2023. The 2029 Convertible Notes will mature on February 15, 2029, unless earlier repurchased, redeemed or converted. Before November 15, 2028, noteholders will have the right to convert their notes only upon the occurrence of certain events. The Company will settle conversions by
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paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 27.3553 shares of common stock per $ 1,000 principal amount of 2029 Convertible Notes, which represents an initial conversion price of approximately $ 36.56 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events.
Contemporaneously with the pricing of the notes in the offering, Collegium entered into separate privately negotiated transactions with certain holders of the 2026 Convertible Notes to repurchase $ 117,400 aggregate principal amount of the 2026 notes for an aggregate of approximately $ 140,100 of cash, which includes accrued and unpaid interest on the 2026 Convertible Notes to be repurchased.
Tranfser of Elyxyb Rights and Obligations to Scilex
In February 2023, the Company entered into the Elyxyb Sale Agreement with Scilex to transfer to Scilex all assets, rights, and obligations necessary to commercialize Elyxyb in the United States and Canada.
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