UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission file number: 001-37372

 

Collegium Pharmaceutical, Inc.

(Exact name of registrant as specified in its charter)

 

 

(781) 713-3699

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of July 30, 2016 there were 23,528,440 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

TABLE OF CONTENTS

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

Statements made in this Quarterly Report on Form 10-Q that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,”  “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

 

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

 

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

our ability to obtain and maintain regulatory approval of our products and product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

 

our plans to commercialize our product candidates and grow sales of our products;

 

the size and growth potential of the markets for our products and product candidates, and our ability to service those markets;

our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

 

the rate and degree of market acceptance of our products and product candidates;

 

the outcome of any patent infringement or other litigation that may be brought against us, including litigation with Purdue Pharma, L.P.;

our ability to attract collaborators with development, regulatory and commercialization expertise;

 

the success, cost and timing of our product development activities, studies and clinical trials;

 

our ability to obtain funding for our operations;

 

regulatory developments in the United States and foreign countries;

 

our expectations regarding our ability to obtain and adequately maintain sufficient intellectual property protection for our products and product candidates;

 

our ability to operate our business without infringing the intellectual property rights of others;

 

the performance of our third-party suppliers and manufacturers;

 

 

the loss of key scientific or management personnel;

 

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; and

 

the accuracy of our estimates regarding expenses, revenue, capital requirements and need for additional financing.

 

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Quarterly Report on Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

 

These and other risks are described under the heading “Risk Factors” in our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission, or the SEC, on March 18, 2016 for the year ended December 31, 2015, or Annual Report, and those risks described from time to time in other reports which we file with the SEC. Those factors and the other risk factors described therein are

not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements

.

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements (Unaudited).

 

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

(in thousands, except share and per share amounts)

 

 

See accompanying notes to the condensed consolidated financial statements.

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

(in thousands, except share and per share amounts)

 

 

See accompanying notes to the condensed consolidated financial statements.

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

(in thousands)

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

1. Nature of Business

 

Collegium Pharmaceutical, Inc. (the ‘‘Company’’) was incorporated in Delaware in April 2002 and then reincorporated in Virginia in July 2014. The Company has its principal operations in Canton, Massachusetts. The Company is a specialty pharmaceutical company developing and beginning to commercialize next-generation abuse-deterrent products that incorporate the Company’s patented DETERx® technology platform for the treatment of chronic pain and other diseases. The Company’s first product, Xtampza ER®, or Xtampza, is an abuse-deterrent, extended-release, oral formulation of oxycodone, a widely prescribed opioid medication. On April 26, 2016, the U.S. Food and Drug Administration (‘‘FDA’’) approved the Company’s new drug application (‘‘NDA’’) filing for Xtampza for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.  On June 20, 2016, the Company announced the commercial launch of Xtampza.

 

The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to successfully commercialize products, negative outcome of clinical trials, inability or delay in completing clinical trials or obtaining regulatory approvals, changing market conditions for products and product candidates (including development of competing products), the need to retain key personnel and protect intellectual property, patent infringement litigation and the availability of additional capital financing on terms acceptable to the Company.

 

The Company has an accumulated deficit of $169,180 at June 30, 2016. The Company has financed its operations primarily through private placements of its preferred stock, proceeds from borrowings, an initial public offering completed in 2015 and a follow-on offering completed in 2016.  The Company anticipates that it will continue to incur losses for the next several years, and it expects the losses to increase as it continues the development of, and seeks regulatory approvals for its product candidates, and begins to commercialize Xtampza. The Company believes that its cash, cash equivalents and marketable securities at June 30, 2016, together with expected cash inflows from the commercialization of Xtampza, will enable the Company to fund its operating expenses, debt service and capital expenditure requirements for at least twelve months from the filing date of this Quarterly Report on Form 10-Q. 

 

 

2. Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Collegium Pharmaceutical, Inc. (a Virginia corporation) as well as the accounts of Collegium Securities Corp. (a Massachusetts corporation), incorporated in December 2015, a wholly-owned subsidiary requiring consolidation. The  financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to fairly present the financial position as of June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015. The results of operations for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.  When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates.  The consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report.

 

Public Offerings of Common Stock

 

In May 2015, the Company closed an initial public offering (“IPO”) of its common stock, which resulted in the sale of 6,670,000 shares of its common stock at a public offering price of $12.00 per share, including 870,000 shares of common stock upon the exercise by the underwriters of their option to purchase additional shares at the public offering price. The Company received proceeds from the IPO of approximately $72,029, after deducting underwriting discounts, commissions and expenses payable by the Company.

 

In connection with preparing for the IPO, the Company’s Board of Directors and shareholders approved a one-for-6.9 reverse stock split of the Company’s common stock. The reverse stock split became effective in April 2015. All share and per share amounts in the consolidated interim financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. In connection with the closing of the IPO, all of the Company’s outstanding convertible preferred stock automatically converted to common stock in May 2015, resulting in an additional 12,591,456 shares of common stock of the Company becoming outstanding.

 

In January 2016, the Company issued and sold in a public offering an aggregate of 2,750,000 shares of its common stock at $20.00 per share. This public offering resulted in approximately $51,174 of net proceeds, after deduction of underwriting discounts and commissions and expenses payable by the Company.

 

The significant increase in common stock outstanding in June 2016 is expected to impact the year-over-year comparability of the Company’s net loss per share calculations in future periods.

 

Subsequent Events

 

We consider events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.

 

Significant Accounting Policies

 

Inventory

 

Inventories are stated at the lower of cost or market.  Inventory costs consist of costs related to the manufacturing of Xtampza, which are primarily the costs of contract manufacturing. The Company determines the cost of its inventories on a specific identification 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. Estimates of excess inventory consider various factors, including inventory levels, the level of product in the distribution channel, the Company’s projected sales of the product, as well as the remaining shelf lives of the product. Inventories that are not expected to be used within one year are recorded as a non-current asset.

 

The Company outsources the manufacturing of Xtampza to a sole contract manufacturer that produces the finished product. In addition, the Company currently relies on a sole supplier for the active pharmaceutical ingredient for Xtampza. Accordingly, the Company has concentration risk associated with its manufacturing for supply of Xtampza.

 

Prior to receiving approval from the FDA in April 2016, to market Xtampza, the Company expensed all costs incurred related to the manufacturing of Xtampza as research and development costs because of the inherent risks associated with the development of a product candidate, the uncertainty about the regulatory approval process and the lack of regulatory approval history for the Company’s product candidates.

 

The Company has capitalized $1,214 of inventory as of June 30, 2016. Certain materials used in the manufacture of Xtampza were expensed prior to FDA approval.  The Company expects sales of the capitalized units to occur during the next twelve months.  The Company expects the cost of product revenue to increase as the Company begins to sell inventory that was produced entirely after the FDA approval of Xtampza.

 

 

Revenue Recognition

 

Revenue for product sales is recognized when there is persuasive evidence of an arrangement, title and risk of loss have passed to the customer, when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable, and when collectability is reasonably assured.  Product sales are recorded net of estimated chargebacks, rebates, sales incentives and allowance, distribution service fees, as well as estimated product returns. 

 

The Company has not yet recorded any product revenue, as it has not yet concluded that it meets the revenue recognition criteria under current accounting guidance The requisite historical data on which to base estimates of returns is insufficient due to the uniqueness of the product as compared to other products in the industry.  Therefore revenue is deferred until such time that an estimate can be determined, all the conditions above are met and when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained during the period following launch.

 

Advertising and Product Promotion Costs

 

Advertising and product promotion costs are included in selling, general and administrative expenses and were $4,680 and $7,006 in the three and six months ended June 30, 2016.  Advertising and product promotion costs are expensed as incurred.

 

Recent Accounting Pronouncements

 

New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates.

 

In May 2014, FASB issued Accounting Standard Update, or ASU, 2014-09 (ASC 606), Revenue from Contracts with Customers, which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2014-09 was initially to be effective for annual periods beginning after December 15, 2016, including interim periods within that period. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which delays the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017.  The standard allows for early adoption as of the original effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, or ASU 2016-08, which clarifies certain principal versus agent considerations. The Company is currently evaluating its effect on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014‑12, Compensation — Stock Compensation (Topic 718): Accounting for Share‑Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. ASU 2014‑12 applies to all reporting entities that grant their employees share‑based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015 and interim periods within those annual periods. The Company adopted this standard in the first quarter of fiscal year 2016 and it did not have a material impact on our financial statements as of and for the quarter and six months ended June 30, 2016.  The Company has stock options with a performance based vesting condition, which if achieved would result in the recognition of $193 in stock compensation expense in the period vested.

In August 2014, the FASB issued ASU No. 2014‑15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014‑15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity’s ability to continue

as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014‑15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. The adoption of ASU 2014‑15 is not expected to have a material effect on the Company’s financial statements or disclosures.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, or ASU 2015-11. ASU 2015-11 applies to all inventory, except for inventory measured using the last-in, first-out method or the retail inventory method. The guidance allows an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and may be applied prospectively with earlier adoption permitted. As the Company is in the early stages of commercialization of Xtampza, the Company has adopted ASU 2015-11 upon the initial capitalization of inventory.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (Topic 740). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax assets and liabilities into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax assets and liabilities be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating its effect on the Company’s consolidated financial statements.

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The ASU requires lessees to put most leases on their balance sheets as a liability for the obligation to make lease payments and as a right-of-use asset, but recognize expenses on the income statements in a manner similar to today’s accounting.  The guidance also eliminates the current real estate-specific provisions for all entities.  For calendar-year public entities, the guidance becomes effective in 2019 and interim periods within that year.  Early adoption is permitted for all entities. The Company has not chosen early adoption for this ASU and is currently evaluating its effect on the Company’s consolidated financial statements

 

In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. ASU 2016-09 intends to simplify various aspects of how share-based payments are accounted for and presented in the financial statements. The main provisions include: all tax effects related to stock awards will now be recorded through the statement of operations instead of through equity, all tax-related cash flows resulting from stock awards will be reported as operating activities on the cash flow statement, and entities can make an accounting policy election to either estimate forfeitures or account for forfeitures as they occur. The amendments in ASU 2016-09 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and may be applied prospectively with earlier adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

3. Earnings (Loss) per Common Share

 

Earnings (loss) per common share is calculated using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares and participating securities. All series of preferred stock contain participation rights in any dividend paid by the Company and are deemed to be participating securities. Earnings available to common shareholders and participating convertible redeemable preferred shares is allocated first to the preferred shareholders based upon the distribution criteria in the Company’s Articles of Incorporation then the remainder to the common shareholders. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss.

 

Diluted earnings per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. The Company allocates earnings first to preferred shareholders based on dividend rights and then to common and preferred shareholders based on ownership interests. The weighted-average number of common shares included in the computation of diluted earnings (loss) gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, warrants, convertible redeemable preferred stock and the potential issuance of stock

upon the conversion of the Company’s convertible notes. Common stock equivalent shares are excluded from the computation of diluted earnings (loss) per share if their effect is antidilutive.

 

The following potentially dilutive securities, which represent all outstanding potentially dilutive securities, were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in common stock equivalent shares):

 

 

 

4. Fair Value of Financial Instruments

 

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy is now established that prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

 

 

The following tables present the Company’s financial instruments carried at fair value using the lowest level input applicable to each financial instrument at June 30, 2016 and December 31, 2015.

 

 

The Company’s cash equivalents are comprised of money market funds that are measured on a recurring basis based on quoted market prices.  As of June 30, 2016 and December 31, 2015, the carrying amounts of cash and cash equivalents, accounts payable, loan payable and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments.

 

 

5. Inventory

 

Upon approval of Xtampza by the FDA in April 2016, the Company began capitalizing inventory costs for Xtampza manufactured in preparation for the product launch. In periods prior to April 2016, the Company expensed costs associated with Xtampza, including raw materials, work in process and finished goods, as development expenses. The Company has not capitalized inventory costs related to its other drug development programs.

 

The following table sets forth the Company’s inventories as of June 30, 2016:

 

 

 

6. Intangible Asset

 

In May 2016, the Company entered into an agreement with BioDelivery Sciences International, Inc. (BDSI) to license the rights to develop, manufacture, and commercialize ONSOLIS® (fentanyl buccal soluble film) in the United States.  ONSOLIS is a Transmucosal Immediate-Release Fentanyl (TIRF) film indicated for the management of breakthrough pain in certain cancer patients. The Company expects to launch the product after the completion of the transfer of manufacturing and required submission to the FDA of a Prior Approval Supplement. Subject to FDA approval of the Prior Approval Supplement, the Company expects to launch ONSOLIS during the second half of 2017. In addition, during the term of the License Agreement, milestone payments in the aggregate amount of $21.0 million may become payable by the Company subject to the satisfaction of certain commercialization, intellectual property, and net sales milestones, including $4 million upon the first commercial sale of the product in the U.S.  Finally, the Company will be required to pay royalties in the upper teens based on annual net sales of the product in the U.S

 

The Company made an upfront payment of $2.5 million and is contractually committed to reimburse BDSI up to a maximum of $2.0 million for its out-of-pocket expenses incurred in conjunction with the manufacturing transfer.  The Company recorded the upfront payment as an intangible asset on the Condensed Consolidated Balance Sheet at June 30, 2016 and will amortize it over the shorter of the remaining patent life or the estimated period of economic benefit.

 

7. Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

8. Convertible Bridge Note with Related Party

 

In November and December 2014, the Company entered into a Note Purchase Agreement (the "Bridge Notes") allowing for the issuance of $5,000 of convertible promissory notes to a group of investors (the "Holders") bearing interest at a rate per annum of 6.0%. The Holders are related parties of the Company.  In connection with the Series D convertible preferred stock financing (see note 8), the Bridge Notes converted into Series D convertible preferred stock. Upon the conversion, the Company recognized a gain on extinguishment of $91.

 

9. Convertible Preferred Stock and Equity

 

In March 2015, the Company issued and sold an aggregate of 41,666,667 shares of Series D convertible preferred stock for aggregate consideration of $50,000, comprised of $45,000 in cash and conversion of $5,000 in Bridge Notes.  The accrued interest on the convertible notes was waived.

 

Concurrently with the issuance of the Series D convertible preferred stock, the Company amended and restated its Articles of Incorporation (the “Amended Articles”).   The Company made certain amendments to the terms of the Series A, Series B, and Series C Preferred Stock (together, the “Prior Preferred Stock”). Prior to the adoption of the Amended Articles, the Series A, Series B, and Series C Preferred Stock accrued dividends at a rate of 4.5%, 8.0% and 8.0% per annum, respectively, per share. All accrued and unpaid dividends on the Prior Preferred Stock were automatically cancelled and forfeited and the Prior Preferred Stock no longer accrued dividends. Prior to the cancellation and forfeiture of accrued dividends, the Prior Preferred Stock had accrued dividends of $622 during 2015. The holders of outstanding shares of Prior Preferred Stock were entitled to receive dividends, when, as and if declared by the Board of Directors. The mandatory conversion for all series of Prior Preferred Stock was modified so as to occur upon an initial public offering with gross proceeds in excess of $50,000. The amendments to the Prior Preferred Stock were treated as an extinguishment which resulted in a gain on extinguishment of $31,806. The gain on extinguishment was added to net loss to arrive at income available to common shareholders in the calculation of earnings per share.

 

In connection with the closing of the IPO, all of the Company’s outstanding convertible preferred stock automatically converted to common stock in May 2015, resulting in an additional 12,591,456 shares of common stock of the Company becoming outstanding.

 

The changes in shareholders’ equity for the six-month period ended June 30, 2016 were as follows:

 

 

 

 

10. Stock-based Compensation

 

Restricted Stock Awards and Stock Options 

 

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 are authorized for issuance to employees, officers, directors, consultants and advisors of the Company, plus an annual increase to be added 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 board of directors prior to January 1st). As of June 30, 2016, there were 1,358,694 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 (“ISOs”) and non-qualified options (“NQs”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). Stock options generally vest over a four year period of service; however, certain options are also subject to performance conditions. The 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.

 

Restricted common stock

 

A summary of the Company’s restricted stock award (RSAs) activity for the six months ended June 30, 2016 and related information is as follows:

 

(1)Excludes 48,307 shares of unvested restricted stock remaining from the early exercise of stock options as of June 30, 2016.

 

 

 

A summary of the Company’s restricted stock units (RSUs) activity for the six months ended June 30, 2016 and related information is as follows:

 

 

Stock options

 

A summary of the Company’s stock option activity and related information follows:

 

The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model using the following assumptions:

 

 

 

A summary of the Company’s compensation expense from stock-based payment awards follows:

At June 30, 2016, there was approximately $17,483 of unrecognized compensation expense related to unvested options, restricted stock units and restricted stock awards under the Plan, which is expected to be recognized as expense over a weighted average period of approximately 3.2 years.

 

 

11. Commitments and Contingencies

 

From time to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss. Except as disclosed below, the Company is not currently a party to any litigation and, accordingly, does not have any amounts recorded for any litigation related matters.

 

The Company’s NDA filing for Xtampza is a 505(b)(2) application, which allows the Company to reference data from an approved drug listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the ‘‘Orange Book’’), in this case OxyContin OP.  In connection with the 505(b)(2) process, the Company certified to the FDA and notified Purdue Pharma, L.P. (‘‘Purdue’’), as the holder of the NDA and any other Orange Book-listed patent owners, that the Company does not infringe any of the patents listed for OxyContin OP in the Orange Book.  Under the Hatch-Waxman Act of 1984 (the ‘‘Hatch-Waxman Act’’), Purdue had the option to sue the Company for infringement and receive a stay of up to 30 months before the FDA can issue a final regulatory approval for Xtampza, unless the stay is earlier terminated. Purdue exercised its option and elected to sue the Company for

infringement in the District of Delaware in March 2015 asserting infringement of three of Purdue’s Orange Book‑listed patents and one non-Orange Book-listed patent. Purdue filed another case in Massachusetts asserting the same four patents as in the Delaware case. In October 2015, the Delaware case was transferred to Massachusetts.  In November 2015, Purdue filed suit asserting infringement of another non-Orange Book-listed patent. On November 9, 2015, the Company filed a motion for partial judgment on the pleadings in relation to three Orange Book-listed patents asserted against the Company, which had been previously invalidated by the court in the Southern District of New York in Purdue’s suit against another company. On February 1, 2016, the Court of Appeals for the Federal Circuit affirmed the New York judgment of invalidity. On May 4, 2016, the Court of Appeals for the Federal Circuit denied Purdue’s request for rehearing and rehearing en banc review was denied. On February 9, 2016, the District Court of Massachusetts ordered judgment in favor of the Company on the three Orange Book-listed patents that were the basis of the 30-month stay, Patent Nos. 7,674,799, 7,674,800, and 7,683,072 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.  Purdue continues to assert infringement of two patents against the Company, neither of which is associated with any stay of FDA approval.

 

At this time the Company is unable to provide meaningful quantification of how this litigation may impact its future financial condition, results of operations, or cash flows.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this quarterly report. The following discussion contains forward-looking statements that involve risks uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors.  We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this quarterly report, including those set forth under “Forward-looking Statements” and “Risk Factors”, under the heading “Risk Factors” in the Company’s Annual Report and those risks described from time to time in other reports which we file with the SEC.

 

OVERVIEW

 

We are a specialty pharmaceutical company developing and beginning to commercialize next-generation abuse-deterrent products that incorporate our patented DETERx platform technology for the treatment of chronic pain and other diseases. Our first product, Xtampza, is an abuse-deterrent, extended-release, oral formulation of oxycodone, a widely prescribed opioid medication. On April 26, 2016, the U.S. Food and Drug Administration, or FDA, approved our new drug application, or NDA, filing for Xtampza for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.  Certain human abuse potential studies are included in the approved label, as well as data supporting the administration of the product as a sprinkle or administered via an NG/G Tube.  On June 20, 2016, we announced the commercial launch of Xtampza.

 

Xtampza has the same active ingredient as OxyContin OP, which is the largest selling abuse-deterrent, extended-release opioid in the United States by dollars, with $2.5 billion in U.S. sales in 2014. We conducted a comprehensive preclinical and clinical program for Xtampza consistent with FDA guidance on abuse-deterrence. These studies and clinical trials demonstrated that chewing, crushing and/or dissolving Xtampza, and then taking it orally or smoking, snorting, or injecting it did not meaningfully change its drug release profile or safety characteristics. By contrast, clinical trials performed by us and others — including a head-to-head clinical trial comparing Xtampza with OxyContin OP — have shown that drug abusers can achieve rapid release and absorption of the active ingredient by manipulating OxyContin OP using common household tools and methods commonly available on the Internet.

 

In addition, our preclinical studies and clinical trials have shown that the contents of the Xtampza capsule can be removed from the capsule and sprinkled on food or into a cup, and then directly into the mouth, or administered through feeding tubes, without compromising their drug release profile, safety or abuse-deterrent characteristics. By contrast, OxyContin OP, which is formulated in hard tablets, has a black box warning label stating that crushing, dissolving, or chewing can cause rapid release and absorption of a potentially fatal dose of the active ingredient. We believe that Xtampza can address the pain management needs of the approximately 11 million patients in the United States who suffer from chronic pain and have difficulty swallowing.

 

In May 2016, we entered into a License and Development Agreement with BioDelivery Science International, Inc., or BDSI, which grants us an exclusive license to make, use, sell, offer for sale, import, develop and commercialize ONSOLIS in the United States.  We plan to commercialize ONSOLIS upon receipt of FDA approval of a Prior Approval Supplement for the manufacturing transfer.  Subject to such approval, we expect to launch ONSOLIS during the second half of 2017. 

 

Since 2010, when we divested our former subsidiary, Onset Therapeutics, LLC, to PreCision Dermatology, Inc., we have devoted substantially all of our resources to the development of our patented DETERx platform technology, the preclinical and clinical advancement of our product candidates, and the creation and protection of related intellectual property. Since 2011, we have not generated any revenue from product sales and we continue to incur significant research, development and other expenses related to our ongoing operations. Prior to our initial public offering of common stock, or IPO, in May 2015, we funded our operations primarily through the private placement of preferred stock, convertible notes and commercial bank debt. Since our IPO, we have funded our operations primarily through the public offering and sale of our equity securities.

 

Outlook

 

We expect to incur significant commercialization expenses related to marketing, manufacturing, distribution, product sales and reimbursement activities. Initially, we plan to detail Xtampza to approximately 11,000 physicians who write more than 55% of the branded extended-release oral opioid prescriptions in the United States with a sales team of approximately 120 sales representatives. In addition, we are deploying a separate, focused sales team to detail Xtampza to nursing homes, hospices and other institutions treating large populations of the elderly and other patients who need chronic pain relief and have difficulty swallowing. Accordingly, we will seek to fund our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and ability to develop and generate revenues from our products and product candidates.

 

We have never been profitable and have incurred net losses in each year since inception. We incurred net losses of $40.2 million and $8.4 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, we had an accumulated deficit of $169.2 million. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations. We expect to continue to incur net losses in the foreseeable future as we begin to commercialize Xtampza. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will increase substantially in connection with our ongoing activities as we:

 

conduct clinical trials of our product candidates;

continue scale-up and improvement of our manufacturing processes;

continue our research and development efforts;

manufacture preclinical study and clinical trial materials;

maintain, expand and protect our intellectual property portfolio;

seek regulatory approvals for our product candidates that successfully complete clinical trials;

hire additional clinical, quality control and technical personnel to conduct our clinical trials;

hire additional scientific personnel to support our product development efforts;

implement operational, financial and management systems; and

hire additional general and administrative personnel to operate as a public company.

 

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

 

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

 

The critical accounting policies we identified our Annual Report related to accrued expenses, impairment of long-lived assets, convertible redeemable preferred stock, stock-based compensation and income taxes. We have identified critical accounting policies related to inventory and revenue recognition in the quarter ended June 30, 2016. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in the Annual Report.

 

Inventory

 

Upon approval of Xtampza by the FDA in April 2016, we began capitalizing inventory costs for Xtampza manufactured in preparation for the product launch. In periods prior to April 2016, we expensed costs associated with Xtampza, including raw materials, work in process and finished goods, as development expenses. We have not capitalized inventory costs related to its other drug development programs.

 

We have capitalized $1.2 million of inventory as of June 30, 2016. Certain materials used in the manufacture of Xtampza were expensed prior to FDA approval.  We expect sales of the capitalized units to occur during the next twelve months.  We expect the cost of product revenue to increase as we begin to sell inventory that was produced entirely after the FDA approval of Xtampza.

 

 

Revenue Recognition

 

Our accounting policy for revenue recognition will have a substantial impact on reported results and relies on certain estimates. Revenue for product sales is recognized when there is persuasive evidence of an arrangement, title and risk of loss have passed to the customer, when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable, and when collectability is reasonably assured.  Product sales are recorded net of estimated chargebacks, rebates, sales incentives and allowance, distribution service fees, as well as estimated product returns. 

 

We have not yet recorded any product revenue, as we have not yet concluded that we meet the revenue recognition criteria under current accounting guidance. The requisite historical data on which to base estimates of returns is insufficient due to the uniqueness of the product as compared to other products in the industry.  Therefore, revenue is deferred until such time that an estimate can be determined, all the conditions above are met and when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained during the period following launch.

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

Comparison of the six months ended June 30, 2016 and June 30, 2015

 

Research and development expenses were $3.1 million for the six months ended June 30, 2015, or the 2015 Period, compared to $8.4 million for the six months ended June 30, 2016, or the 2016 Period.  The $5.3 million increase was primarily related to:

 

an increase in clinical trial costs of $3.5 million due to the commencement of clinical trials with Xtampza and our second product candidate;

an increase in manufacturing costs of $668,000 related to Xtampza.

 

Selling, general and administrative expenses were $5.1 million for the 2015 Period compared to $31.7 million for the 2016 Period. The $26.6 million increase was primarily related to:

 

 

Comparison of the three months ended June 30, 2016 and June 30, 2015

 

Research and development expenses were $1.6 million for the three months ended June 30, 2015, or the 2015 Quarter, compared to $4.3 million for the three months ended June 30, 2016, or the 2016 Quarter.  The $2.7 million increase was primarily related to:

 

 

General and administrative expenses were $2.9 million for the 2015 Quarter compared to $20.2 million for the 2016 Quarter. The $17.3 million increase was primarily related to:

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources of liquidity

 

We have incurred net losses and negative cash flows from operations since inception.  Since inception, we have funded our operations primarily through the private placement of our preferred stock, our IPO, convertible notes and commercial bank debt.  As of June 30, 2016, we had $110.7 million in cash and cash equivalents.

 

In January 2016, the Company issued and sold in a public offering an aggregate of 2,750,000 shares of its common stock at $20.00 per share. This public offering resulted in net proceeds of $51.2 million, after deducting underwriting discounts and commissions and expenses payable by the Company.

 

Although it is difficult to predict future liquidity requirements, we believe that our existing cash will be sufficient to fund our operations into early 2018, including the commercialization of Xtampza and the continuation of our development of our product candidates. We have based this estimate on assumptions that may prove to be incorrect and we could use our available capital resources sooner than we currently expect. We may never become profitable, or if we do, we may not be able to sustain profitability.

 

Cash flows

 

Operating activities.  Cash used in operating activities was $32.4 million in the 2016 Period and $6.1 million in the 2015 Period. The increase in cash used in operating activities was due primarily to the change in net loss partially offset by changes in the working capital accounts. We expect cash used in operating activities to increase for the

foreseeable future as we continue to commercialize Xtampza and fund research, development and clinical activities for additional product candidates.

 

Investing activities.  Cash used for investing activities was $2.5 million in the 2016 Period and nominal in the 2015 Period.  The increase in cash used in investing activities was due to the payment of a one-time upfront fee to BDSI for the ONSOLIS License Agreement.

 

Financing activities.  Cash provided by financing activities for the 2016 Period primarily represents net proceeds of $51.2 million from the issuance of common stock partially offset by the repayment of term notes. Cash provided by financing activities for the 2015 Period primarily reflects net proceeds from the IPO and from the sale of  Series D convertible preferred stock of $72.0 million and $44.8 million respectively.

 

Funding requirements

 

Since 2011, we have not generated any product revenue. We are in the early stages of commercialization of Xtampza. We anticipate that we will continue to incur losses for the next several years, and we expect the losses to increase as we begin to commercialize Xtampza and continue the development of, and seek regulatory approvals for other product candidates. We are subject to all of the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We will also incur additional costs associated with operating as a commercial stage company. We anticipate that we will need substantial additional funding in connection with our continuing operations.

 

Until we can generate a sufficient amount of cash flow from the sale of our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including:

the cost of establishing sales, marketing and distribution capabilities for Xtampza and any other products for which we may receive regulatory approval;

the generation of reasonable levels of revenue from the sale of Xtampza;

the design, initiation, progress, size, timing, costs and results of preclinical studies and clinical trials for our product candidates;

the outcome, timing and cost of regulatory approvals by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than, or evaluate clinical endpoints other than those that we currently expect;

the timing and costs associated with manufacturing Xtampza and our product candidates for preclinical studies, clinical trials and, if approved, for commercial sale;

the number and characteristics of product candidates that we pursue;

the cost of patent infringement litigation, including the Company’s litigation with Purdue Pharma, L.P., or Purdue, relating to Xtampza or our product candidates, which may be expensive to defend and delay the commercialization of Xtampza or our product candidates;

our need to expand our research and development activities, including our need and ability to hire additional employees;

our need to implement additional infrastructure and internal systems and hire additional employees to operate as a public company;

the effect of competing technological and market developments.

 

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

 

CONTRACTUAL OBLIGATIONS

 

There have been no material changes to the contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report, apart from our commitment to reimburse BioDelivery Sciences International, Inc. up to a maximum of $2.0 million for its out-of-pocket expenses incurred in conjunction with the manufacturing transfer of ONSOLIS.  

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk related to changes in interest rates. As of June 30, 2016, we had cash and cash equivalents consisting of cash and money market funds of $110.7 million. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our money market funds are short-term highly liquid investments. Due to the short-term duration and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting  

 

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.  Legal Proceedings. 

 

We filed the NDA for Xtampza as a 505(b)(2) application, which allows us to reference data from an approved drug listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), in this case OxyContin OP. The 505(b)(2) process requires that we certify to the FDA and notify Purdue, as the holder of the NDA and any other Orange Book-listed patent owners, that we do not infringe any of the patents listed for OxyContin OP in the Orange Book, or that the patents are invalid. We made such certification and provided such notice on February 11, 2015 and such certification documented why Xtampza does not infringe any of the 11 Orange Book listed patents for OxyContin OP, five of which stand invalidated by the Federal District Court for the Southern District of New York, subject to a pending appeal. Under the Hatch-Waxman Act of 1984, Purdue had the option to sue us for infringement and receive a stay of up to 30 months before the FDA can issue a final approval for Xtampza, unless the stay is earlier terminated.

 

Purdue exercised its option and elected to sue us for infringement in the District of Delaware on March 24, 2015 asserting infringement of three of Purdue’s Orange Book-listed patents (all of which stand invalidated subject to a pending appeal by Purdue) and a non-Orange Book-listed patent, and accordingly, received a stay of up to 30 months before the FDA can issue a final approval for Xtampza.

 

On October 7, 2015, the Delaware court transferred the case to the District of Massachusetts. In November 2015, Purdue filed suit asserting infringement of another non-Orange Book-listed patent. On November 9, 2015, the Company filed a motion for partial judgment on the pleadings in relation to three Orange Book-listed patents asserted against the Company, which had been previously invalidated by the court in the Southern District of New York in Purdue’s suit against another company. On February 1, 2016, the Court of Appeals for the Federal Circuit affirmed the New York judgment of invalidity. On February 9, 2016, the District Court of Massachusetts ordered judgment in favor of the Company on the three Orange Book-listed patents that were the basis of the 30-month stay, Patent Nos. 7,674,799, 7,674,800, and 7,683,072 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. Purdue continues to assert infringement of two patents against the company, neither of which is associated with any stay of FDA approval. We plan to continue to take all steps necessary to vigorously defend ourselves against these claims. 

 

From time to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss.

 

 

Item 1A.  Risk Factors.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all other information included in this Quarterly Report on Form 10-Q, including our financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If any of the following risks actually occurs, our business, financial condition, operating results, prospects and ability to accomplish our strategic objectives could be materially harmed. As a result, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and the market price of our common stock.

 

 

Risks Related to Our Financial Position and Capital Needs

We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.

We are an early commercial-stage pharmaceutical company. To date, we have focused on developing our first product, Xtampza. Investment in pharmaceutical product development is highly speculative because it entails substantial upfront

capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or become commercially viable. Since 2010, when we divested our former subsidiary, Onset Therapeutics, LLC, to PreCision Dermatology, Inc., we have not generated any material revenue from product sales, and we continue to incur significant research, development, commercialization and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since January 1, 2011. For the year ended December 31, 2015, we reported a net loss of $27.3 million, and we had an accumulated deficit of $129.0 million at December 31, 2015.  We incurred a net loss of $40.2 million for the six months ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $169.2 million.

We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize Xtampza. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. If any of our product candidates fails in clinical trials or does not gain final regulatory approval, or if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses and expected future losses have had and will continue to have an adverse effect on our shareholders’ equity and working capital.

We currently generate no material revenue from the sale of products and may never become profitable.

We began the commercial launch of our first product, Xtampza, in June 2016. Accordingly, we have not generated any material revenue from product sales since we divested our former subsidiary in 2010. Our ability to generate additional revenue and become profitable depends upon our ability to successfully commercialize Xtampza, our existing product candidates, and any other product candidates that we may in-license or acquire in the future. Even if we are able to successfully achieve regulatory approval for these product candidates, we do not know when any of these product candidates will generate revenue for us, if at all. Our ability to generate revenue from our current or future product candidates depends on a number of factors, including our ability to:

 

 

 

 

 

 

 

 

 

 

 

 

In addition, because of the numerous risks and uncertainties associated with product development, including that our product candidates may not advance through development or achieve the safety and efficacy (including the efficacy of our abuse-deterrent technology) endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Furthermore, we anticipate incurring significant costs associated with commercializing these products.

Even if we are able to generate revenues from the sale of our products, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

If we require additional capital to fund our operations and we fail to obtain necessary financing, we may be unable to complete the development and commercialization of our product candidates.

Our operations have consumed substantial amounts of cash. We expect to continue to spend substantial amounts to advance the clinical development of our product candidates and launch and commercialize Xtampza and any product candidates for which we may receive regulatory approval. We believe that our existing cash and cash equivalents, including the net proceeds from our January 2016 follow-on offering, will be sufficient to fund our operations into 2018, including the commercialization of Xtampza, and the continuation of our development of our product candidates. However, we may require additional capital for the further development and commercialization of our product candidates and may also need to raise additional funds sooner in order to accelerate development of our product candidates.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts, when required or on acceptable terms, we also could be required to:

 

 

 

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

 

 

 

 

 

 

 

Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to Xtampza, our technologies or product candidates.

We may seek additional capital through a combination of private and public equity offerings, debt financings, receivables or royalty financings, strategic collaborations and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing shareholders’ ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing shareholders. Debt, receivables and royalty financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing shareholders’ ownership. The incurrence of additional indebtedness beyond our existing indebtedness with Silicon Valley Bank could result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur further debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could have a material adverse effect on our ability to conduct our business and may result in liens being placed on our assets and intellectual property. If we were to default on any of our indebtedness, we could lose such assets and intellectual property. If we raise additional funds through strategic collaborations and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market our technologies that we would otherwise prefer to develop and market ourselves.

We have a limited operating history, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

Our predecessor was originally incorporated in Delaware in April 2002 under the name Collegium Pharmaceuticals, Inc. In October 2003, our predecessor changed its name to Collegium Pharmaceutical, Inc. In July 2014, we reincorporated in the Commonwealth of Virginia pursuant to a merger whereby Collegium Pharmaceutical, Inc., a Delaware corporation, merged with and into Collegium Pharmaceutical, Inc., a Virginia corporation, with the Virginia corporation surviving the merger. From 2002 until 2010, our operations focused primarily on marketing proprietary therapies to the wound care and dermatology industry through our former subsidiary, Onset Therapeutics, LLC, which was spun off and became a part of PreCision Dermatology, Inc. in 2010. Since 2010, our operations have focused primarily on developing the DETERx technology platform and identifying and developing product candidates that utilize the DETERx technology, including our first product, Xtampza. Although the FDA has approved Xtampza, we have not yet obtained final regulatory approval for any of our product candidates or demonstrated an ability to commercialize a product successfully. Consequently, any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2015, we had net operating loss, or NOL, carryforwards of approximately $104.9 million for U.S. federal income tax and state tax purposes available to offset future taxable income and U.S. federal and state research and development tax credits of $59.9 million, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382. These carryforwards begin to expire in 2022. Under Section 382, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research and development tax credits) to offset its post-change income may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership some of which are outside our control. We have not performed any current analyses under Section 382 and cannot forecast or otherwise rely on deriving benefit from our various federal or state tax attribute carryforwards. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Risks Related to our Products and Product Candidates

Our success depends in large part on the commercial success of our lead product, Xtampza.

To date, we have invested substantial resources in the development of our lead product, Xtampza, which has been approved by the FDA. Our business and future success are substantially dependent on our ability to successfully and timely commercialize this product, which may never occur. We currently generate no material revenues from product sales and we may never be able to commercialize Xtampza, or any product candidates that are approved by the FDA, successfully.

Our ability to successfully commercialize Xtampza will depend on many factors, including but not limited to:

 

 

 

 

 

 

 

 

Many of these matters are beyond our control and are subject to other risks described elsewhere in this “Risk Factors” section and in the “Risk Factors” section of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 18, 2016. Accordingly, we cannot assure you that we will be able to successfully commercialize or generate revenue from Xtampza. If we cannot do so, or are significantly delayed in doing so, our business will be materially harmed.

Despite receiving approval by the FDA, additional data may emerge that could change the FDA’s position on the product labeling, and our ability to successfully market Xtampza may be adversely affected.

It is estimated that the U.S. market includes approximately 11 million patients with chronic pain with dysphagia. Our Xtampza microspheres are designed to be removed from the capsule and sprinkled on food or into a cup, and then directly into the mouth, or in feeding tubes, without compromising their extended-release properties. On April 26, 2016, the FDA granted approval for the Xtampza NDA, including an approved product label. The FDA could change the product labeling. If the product label for Xtampza is modified in the future so as to exclude the flexible dose administration options, including the ability to sprinkle the Xtampza microspheres on food or into a cup, then directly in the mouth, or in feeding tubes, or the FDA requires us to have a boxed warning similar to competitor product labeling stating that “crushing, dissolving or chewing can cause rapid release and absorption of a potentially fatal dose of the active drug,” it will limit our ability to differentiate Xtampza from other abuse-deterrent opioid formulations on the basis of alternative dosing options, and we may not be able to market Xtampza to patients with chronic pain with dysphagia. As a result, this may have an adverse effect on our business and our prospects for future growth.

If the FDA does not conclude that our product candidates in development are sufficiently bioequivalent, or demonstrate comparable bioavailability to their respective listed drugs, or if the FDA otherwise does not conclude that our product candidates satisfy the requirements for the Section 505(b)(2) approval pathway, the approval pathway for those product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and the FDA may not approve those product candidates.

A key element of our strategy is to seek FDA approval for our product candidates through the Section 505(b)(2) regulatory pathway. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FD&C Act, permits the filing of an NDA that contains full safety and efficacy reports but where at least some of the information required for approval comes from studies not conducted by or for the applicant, such as the FDA’s findings of safety and efficacy in the approval of a similar drug, and for which the applicant has not obtained a right of reference and/or published literature. Such reliance is typically predicated on a showing of bioequivalence or comparable bioavailability to an approved drug.

If the FDA does not allow us to pursue the Section 505(b)(2) approval pathway for our product candidates, or if we cannot demonstrate bioequivalence or comparable bioavailability of our product candidates to approved products, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates would increase. Moreover, our inability to pursue the Section 505(b)(2) approval pathway could result in new competitive products reaching the market sooner than our product candidates, which could have a material adverse effect on our competitive position and our business prospects. Even if we are allowed to pursue the Section 505(b)(2) approval pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization on a timely basis, if at all.

In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its policies and practices with respect to Section 505(b)(2) regulatory approvals, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).

Even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products, including additional preclinical studies and clinical trials.

Our decision to seek approval of our product candidates, including Xtampza, under Section 505(b)(2) increases the risk that a patent infringement suit may be filed against us, which would delay the FDA’s final regulatory approval of such product candidates.

In connection with any NDA that we file under Section 505(b)(2), we are required to notify the patent holders of the reference listed drug that we have certified to the FDA that any patents listed for the listed drug in the FDA’s Orange