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Table of Contents

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, 2021

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

A picture containing text, clipart

Description automatically generated

Collegium Pharmaceutical, Inc.

(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)

03-0416362
(I.R.S. Employer
Identification Number)

100 Technology Center Drive
Stoughton, MA
(Address of principal executive offices)

02072
(Zip Code)

(781) 713-3699

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

COLL

The NASDAQ Global Select Market

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 every Interactive Data File required to be submitted 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 such files). Yes   No 

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

Large accelerated filer

  

Accelerated filer

  

Non-accelerated filer

  

Smaller reporting company

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 31, 2021, there were 35,564,465 shares of Common Stock, $0.001 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signature

54

2

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 commercialize and grow sales of our products, particularly in light of current global challenges stemming from the COVID-19 pandemic;
our ability to obtain and maintain regulatory approval of our products, and any related restrictions, limitations, and/or warnings in the label of an approved product;
the size of the markets for our products, and our ability to service those markets;
the success of competing products that are or become available;
our ability to obtain and maintain reimbursement and third-party payor contracts with favorable terms for our products;
the costs of commercialization activities, including marketing, sales and distribution;
the rate and degree of market acceptance of our products;
changing market conditions for our products;
the outcome of any patent infringement, opioid-related or other litigation that may be brought by or against us, including litigation with Purdue Pharma, L.P.;
the outcome of any governmental investigation related to the manufacture, marketing and sale of opioid medications;
the performance of our third-party suppliers and manufacturers;
our ability to secure adequate supplies of active pharmaceutical ingredient for each of our products and to manufacture adequate quantities of commercially salable inventory and to maintain our supply chain in the face of global challenges, such as the COVID-19 pandemic;
our ability to effectively manage our relationships with licensors and to commercialize products that we in-license from third parties;
our ability to attract collaborators with development, regulatory and commercialization expertise;
our ability to obtain funding for our business development;
our ability to comply with the terms of our outstanding indebtedness;
regulatory and legislative developments in the United States, including the adoption of opioid stewardship and similar taxes that may impact our business;
our ability to obtain and maintain sufficient intellectual property protection for our products and any product candidates;
our ability to comply with stringent government regulations relating to the manufacturing and marketing of pharmaceutical products, including U.S. Drug Enforcement Agency (“DEA”) compliance;
our customer concentration, which may adversely affect our financial condition and results of operations;
the accuracy of our estimates regarding expenses, revenue, capital requirements and need for additional financing; and
the other risks, uncertainties and factors discussed under the heading “Risk Factors” in this Quarterly Report on Form 10-Q.

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 this Quarterly Report on Form 10-Q. 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.

3

Table of Contents

 

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)

June 30, 

December 31, 

2021

2020

Assets

 

    

 

    

Current assets

Cash and cash equivalents

$

202,771

$

174,116

Accounts receivable, net

90,098

83,320

Inventory

19,595

15,614

Prepaid expenses and other current assets

 

6,068

 

4,838

Total current assets

 

318,532

 

277,888

Property and equipment, net

 

19,555

 

18,988

Operating lease assets

8,023

8,391

Intangible asset, net

302,314

335,904

Restricted cash

2,547

2,547

Deferred tax assets

62,649

Other noncurrent assets

115

123

Total assets

$

713,735

$

643,841

Liabilities and shareholders' equity

Current liabilities

Accounts payable

$

7,543

$

10,016

Accrued expenses

 

27,386

 

24,656

Accrued rebates, returns and discounts

143,224

156,554

Current portion of term notes payable

47,919

47,495

Current portion of operating lease liabilities

771

730

Total current liabilities

 

226,843

 

239,451

Term notes payable, net of current portion

85,944

110,019

Convertible senior notes

139,511

99,575

Operating lease liabilities, net of current portion

 

8,371

 

8,765

Total liabilities

 

460,669

 

457,810

Commitments and contingencies (see Note 14)

Shareholders’ equity:

Preferred stock, $0.001 par value; authorized shares - 5,000,000

Common stock, $0.001 par value; authorized shares - 100,000,000; issued and outstanding shares - 35,523,917 at June 30, 2021 and 34,612,054 at December 31, 2020

 

36

 

35

Additional paid-in capital

 

492,384

 

519,143

Accumulated deficit

 

(239,354)

 

(333,147)

Total shareholders’ equity

 

253,066

 

186,031

Total liabilities and shareholders’ equity

$

713,735

$

643,841

See accompanying notes to the Condensed Consolidated Financial Statements.

4

Table of Contents

Collegium Pharmaceutical, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

Three months ended June 30, 

Six months ended June 30, 

2021

2020

2021

2020

Product revenues, net

$

82,942

$

78,058

$

170,663

$

154,569

Cost of product revenues

Cost of product revenues (excluding intangible asset amortization)

15,908

12,899

31,236

40,128

Intangible asset amortization

16,795

16,795

33,590

27,090

Total cost of products revenues

 

32,703

29,694

 

64,826

 

67,218

Gross profit

50,239

48,364

105,837

87,351

Operating expenses

Research and development

3,462

2,493

6,392

5,159

Selling, general and administrative

 

30,368

 

29,322

 

61,844

60,582

Total operating expenses

 

33,830

 

31,815

 

68,236

 

65,741

Income from operations

 

16,409

 

16,549

 

37,601

21,610

Interest expense

 

(5,421)

 

(8,259)

 

(11,142)

(13,082)

Interest income

3

14

6

226

Income before income taxes

10,991

8,304

26,465

8,754

(Benefit from) provision for income taxes

(61,852)

246

(62,040)

246

Net income

$

72,843

$

8,058

$

88,505

$

8,508

Earnings per share — basic

$

2.06

$

0.23

$

2.52

$

0.25

Weighted-average shares — basic

35,302,608

34,395,266

35,128,144

34,247,977

Earnings per share — diluted

$

1.79

$

0.23

$

2.20

$

0.24

Weighted-average shares — diluted

41,286,853

35,091,906

41,251,749

35,089,740

See accompanying notes to the Condensed Consolidated Financial Statements.

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Collegium Pharmaceutical, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six months ended June 30, 

2021

    

2020

    

Operating activities

Net income

$

88,505

$

8,508

Adjustments to reconcile net income to net cash used in operating activities:

Amortization expense

33,590

27,090

Depreciation expense

864

394

Deferred income taxes

(62,649)

Stock-based compensation expense

 

13,395

 

10,535

Non-cash lease expense

15

36

Non-cash interest expense for amortization of debt discount and issuance costs

 

1,795

 

3,860

Changes in operating assets and liabilities:

Accounts receivable

(6,778)

(8,242)

Inventory

(4,498)

(9,785)

Prepaid expenses and other assets

 

(1,301)

 

(2,005)

Accounts payable

 

(2,472)

 

1,935

Accrued expenses

 

2,969

 

(8,645)

Accrued rebates, returns and discounts

(13,330)

13,504

Net cash provided by operating activities

 

50,105

 

37,185

Investing activities

Purchase of intangible asset

(368,226)

Purchases of property and equipment

(1,153)

 

(1,662)

Net cash used in investing activities

 

(1,153)

 

(369,888)

Financing activities

Proceeds from issuances of common stock from employee stock purchase plans

358

357

Proceeds from the exercise of stock options

 

8,274

 

6,080

Payments made for employee stock tax withholdings

(3,929)

(1,922)

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

(25,000)

(12,500)

Repayment of term loan

(11,500)

Net cash (used in) provided by financing activities

 

(20,297)

 

310,909

Net increase (decrease) in cash, cash equivalents and restricted cash

 

28,655

 

(21,794)

Cash, cash equivalents and restricted cash at beginning of period

 

176,663

 

170,019

Cash, cash equivalents and restricted cash at end of period

$

205,318

$

148,225

Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:

Cash and cash equivalents

$

202,771

$

145,678

Restricted cash

2,547

2,547

Total cash, cash equivalents and restricted cash

$

205,318

$

148,225

Supplemental disclosure of cash flow information

Cash paid for interest

$

9,348

$

8,259

Cash paid for income taxes

$

876

$

Supplemental disclosure of non-cash activities

Acquisition of property and equipment in accounts payable and accrued expenses

$

55

$

1,555

Accrued royalties discharged upon closing of asset acquisition

$

$

1,145

Inventory used in the construction and installation of property and equipment

$

516

$

613

See accompanying notes to the Condensed Consolidated Financial Statements.

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Collegium Pharmaceutical, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in thousands, except share and per share amounts)

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 Stoughton, Massachusetts. The Company is a specialty pharmaceutical company committed to being the leader in responsible pain management. The Company’s first product, Xtampza® ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone. In April 2016, the United States Food and Drug Administration (the “FDA”) approved the Company’s new drug application (“NDA”) for Xtampza ER for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. In June 2016, the Company announced the commercial launch of Xtampza ER.

The Company’s product portfolio also includes Nucynta® ER and Nucynta IR (the “Nucynta Products”). On February 6, 2020, the Company entered into an Asset Purchase Agreement with Assertio Therapeutics, Inc. (“Assertio”), pursuant to which the Company agreed to acquire from Assertio certain assets related to the Nucynta Products (the “Nucynta Acquisition”) that it had previously licensed pursuant to a 2017 commercialization agreement with Assertio (the “Nucynta Commercialization Agreement”). The Nucynta Acquisition included a license from Grünenthal GmbH (“Grünenthal”), pursuant to which the Company assumed all commercialization responsibilities, including sales and marketing, for the Nucynta Products. The Nucynta Acquisition was consummated on February 13, 2020 for an aggregate purchase price of $375,000, subject to certain closing and post-closing adjustments as described in the Nucynta Purchase Agreement. Following the closing, the Company’s prior royalty obligation to Assertio ceased and the Company’s only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal.

The Company periodically reviews its accounting estimates in light of changes in circumstances, facts and experience. As of the date of the filing of this Quarterly Report on Form 10-Q, we expect the COVID-19 pandemic and actions taken to contain it to continue to impact our revenue, primarily due to fewer new patients beginning therapy with our products and an adverse impact on our ability to promote our products due to restrictions in access to certain physicians’ offices. Notwithstanding the lifting of COVID-19 restrictions in many jurisdictions, the offices that our sales force call upon continue to limit in-person patient visits and the ability of our sales force to make in person office visits. In addition, we have experienced a decrease in certain operating expenses since the onset of the COVID-19 pandemic, including travel, marketing and expenses associated with participation in congresses that have been postponed. We believe that the disruptions caused by COVID-19 will continue and there remains substantial uncertainty as to when such disruptions will cease. Although travel and other restrictions have been lifted in certain jurisdictions, there remains substantial uncertainty as to the possibility of further surges in infections, including surges resulting from the development of new variants of COVID-19, such as the Delta variant, which could lead to travel and other restrictions being re-imposed.

The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to continue successfully commercializing products, changing market conditions for products and development of competing products, changing regulatory environment and reimbursement landscape, litigation related to opioid marketing and distribution practices, inability to manufacture adequate commercial inventory, inability to secure adequate supplies of active pharmaceutical ingredients, protection of intellectual property, and patent infringement litigation.

The Company believes that its cash and cash equivalents at June 30, 2021, together with expected cash inflows from the commercialization of its products, will enable the Company to fund its operating expenses, debt service and capital expenditure requirements under its current business plan for the foreseeable future.

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

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corporation), incorporated in December 2015, and Collegium NF, LLC (a Delaware limited liability company), organized in December 2017, both wholly owned subsidiaries requiring consolidation. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 consolidated 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 of the Company as of June 30, 2021, and the results of operations and cash flows for the three and six months ended June 30, 2021 and 2020. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year.

The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues, costs and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. Estimates in the Company’s consolidated financial statements include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of products, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, impairment of intangible assets and tax valuation allowances. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates under different assumptions or conditions. 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 on Form 10-K for the fiscal year ended December 31, 2020 (the “Annual Report”).

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report. There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting pronouncements below, as compared to the significant accounting policies described in the Annual Report.

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“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. This guidance is required to be adopted by January 1, 2022, and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

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 was decreased by and net income

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was increased by $1,601, basic earnings per share was increased by $0.05, and diluted earnings per share was decreased by $0.17 for the three months ended June 30, 2021. Interest expense was decreased by and net income was increased by $3,152, basic earnings per share was increased by $0.09, and diluted earnings per share was decreased by $0.15 for the six months ended June 30, 2021.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 affect a wide variety of income tax accounting standards with the objective of reducing their complexity. The new standard became effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard during the three months ended March 31, 2021 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The new standard became effective immediately and may be applied prospectively to contracts and transactions through December 31, 2022. Subsequent to issuance, the FASB issued ASU 2021-01 in January 2021 to refine and clarify some of its guidance on ASU 2020-04. Upon the transition of the Company’s contracts and transactions to new reference rates in connection with reference rate reform, the Company will prospectively apply the standard and disclose the effect on its condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated financial statements upon future adoption.

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3. Revenue from Contracts with Customers

The Company’s revenue to date is from sales of the Company’s products, which are primarily sold to distributors (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”).

Revenue Recognition

In accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Performance Obligations

The Company determined that performance obligations are satisfied and revenue is recognized when a customer takes control of the Company’s product, which occurs at a point in time. This generally occurs upon delivery of the products to customers, at which point the Company recognizes revenue and records accounts receivable. Payment is typically received 30 to 90 days after satisfaction of the Company’s performance obligations. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the assets is one year or less.

Transaction Price and Variable Consideration

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to sales deductions, including (1) rebates and incentives, including managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances; (2) product returns, including return estimates for both Xtampza ER and the Nucynta Products; and, (3) trade allowances and chargebacks, including fees for distribution service fees, prompt pay discounts, and chargebacks. The Company will estimate the amount of variable consideration that should be included in the transaction price under the expected value method for all sales deductions other than trade allowances, which are estimated under the most likely amount method. These provisions reflect the expected amount of consideration to which the Company is entitled based on the terms of the contract. In addition, the Company made a policy election to exclude from the measurement of the transaction price all taxes that are assessed by a governmental authority that are imposed on revenue-producing transactions.

Provisions for rebates and incentives are based on the estimated amount of rebates and incentives to be claimed on the related sales from the period. As the Company’s rebates and incentives are based on products dispensed to patients, the Company is required to estimate the expected value of claims at the time of product delivery to distributors. Given that distributors sell the product to pharmacies, which in turn dispense the product to patients, claims can be submitted significantly later than the related sales are recognized. The Company’s estimates of these claims are based on the historical experience of existing or similar programs, including current contractual and statutory requirements, specific known market events and trends, industry data, and estimated distribution channel inventory levels. Accruals and related reserves required for rebates and incentives are adjusted as new information becomes available, including actual claims. If actual results vary, the Company may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.

Provisions for product returns are based on product-level historical trends, as well as relevant market events and other factors. For Xtampza ER, since the product has only been commercially sold since June 2016, estimates of product returns are based on a combination of historical returns processed to date—taking into consideration the expiration date

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of the product upon delivery to customers—as well as forecasted customer buying patterns, shipment and prescription trends, channel inventory levels, and other specifically known market events and trends. For the Nucynta Products, estimates of product returns are primarily based on historical trends as the Nucynta Products have been commercially sold for a number of years.

Provisions for trade allowances and chargebacks are primarily based on customer-level contractual terms. Accruals and related reserves are adjusted as new information becomes available, which generally consists of actual trade allowances and chargebacks processed relating to sales recognized in the period.

The amount of variable consideration that is included in the transaction price may be constrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. In general, performance obligations do not include any estimated amounts of variable consideration that are constrained. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

The following tables summarize activity in each of the Company’s product revenue provision and allowance categories for the six months ended June 30, 2021 and 2020:

    

    

Trade

Rebates and

Product

Allowances and

Six months ended June 30, 2021

Incentives (1)

Returns (2)

Chargebacks (3)

Balance at December 31, 2020

$

132,775

$

23,779

$

19,055

Provision related to current period sales

179,571

7,491

42,059

Changes in estimate related to prior period sales

(441)

Credits/payments made

(178,508)

(21,443)

(33,764)

Balance at June 30, 2021

$

133,397

$

9,827

$

27,350

    

Trade

Rebates and

Product

Allowances and

Six months ended June 30, 2020

Incentives (1)

Returns (2)

Chargebacks (3)

Balance at December 31, 2019

$

129,901

$

27,648

$

14,020

Provision related to current period sales

162,637

6,703

37,230

Changes in estimate related to prior period sales

(171)

85

Credits/payments made

(154,145)

(1,520)

(36,482)

Balance at June 30, 2020

$

138,222

$

32,831

$

14,853

(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 Condensed 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 Condensed 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 Condensed Consolidated Balance Sheets.

As of June 30, 2021, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

Disaggregation of Revenue

The Company 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. When selecting the type of category to use to disaggregate revenue, the Company considered how information about the Company’s revenue has been presented for other purposes as well as what information is regularly reviewed and used for evaluating financial

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performance. As such, the Company disaggregates its product revenue, net from contracts with customers by product, as disclosed in the table below.

Three months ended June 30, 

Six months ended June 30, 

2021

2020

2021

2020

Xtampza ER

$

33,023

    

$

33,557

$

68,432

65,064

Nucynta Products(1)

49,919

44,501

102,231

89,505

Total product revenues, net

$

82,942

$

78,058

$

170,663

$

154,569

(1) For the three months ended June 30, 2021, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $29,241 and $20,678, respectively. For the three months ended June 30, 2020, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $29,073 and $15,427, respectively. For the six months ended June 30, 2021, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $59,767 and $42,464, respectively. For the six months ended June 30, 2020, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $57,044 and $32,461, respectively.

4. License Agreements

The Company periodically enters into license agreements to develop and commercialize its products. As of December 31, 2019, the Company’s only license agreement was the Nucynta Commercialization Agreement. Upon the closing of the Nucynta Acquisition in February 2020, the Nucynta Commercialization Agreement was effectively terminated. Prior to the Nucynta Acquisition, the Company was conditionally obligated to make royalty payments to Assertio conditional upon net sales.

Upon the closing of the Nucynta Acquisition, the Nucynta Commercialization Agreement was effectively terminated and the Company’s royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company no longer pays royalties to Assertio and the Company’s only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal.

The assets acquired, liabilities assumed, and equity interests issued by the Company in connection with the Nucynta Commercialization Agreement are further described in Note 8.

5. Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income 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 or if-converted accounting method. Potentially dilutive securities outstanding

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include stock options, unvested restricted stock units (“RSUs”), performance share units (“PSUs”), warrants, and shares related to the convertible senior notes, but are only included to the extent that their addition is dilutive.

The following table presents the computations of basic and dilutive earnings per common share:

Three months ended June 30, 

Six months ended June 30, 

2021

 

2020

    

2021

 

2020

Numerator:

Net income

$

72,843

$

8,058

$

88,505

$

8,508

Adjustment for interest expense recognized on convertible senior notes:

1,168

2,333

Net income — diluted

$

74,011

$

8,058

$

90,838

$

8,508

Denominator:

Weighted-average shares outstanding — basic

35,302,608

    

34,395,266

35,128,144

    

34,247,977

Effect of dilutive securities:

Stock options

580,329

432,688

624,602

491,985

Restricted stock units

302,737

212,221

384,908

262,849

Performance share units

8,796

8,459

Employee stock purchase plan

125

22,822

1,149

31,608

Warrants

175,920

20,113

187,812

46,862

Convertible senior notes

4,925,134

4,925,134

Weighted average shares outstanding — diluted

41,286,853

35,091,906

41,251,749

35,089,740

Earnings per share — basic

$

2.06

$

0.23

$

2.52

$

0.25

Earnings per share — diluted

$

1.79

$

0.23

$

2.20

$

0.24

The Company has the option to settle the conversion obligation for its convertible senior notes due in 2026 in cash, shares or a combination of the two. Since the Company intends to settle the principal amount of the convertible senior notes in cash, the Company used the treasury stock method for determining the potential dilution in the diluted earnings per share computation for the three and six months ended June 30, 2020. Effective for the three and six months ended June 30, 2021, the Company used the if-converted method for the convertible senior notes as a result of the adoption of ASU 2020-06, as described in Recently Adopted Accounting Pronouncements above.

The following table presents dilutive securities excluded from the calculation of diluted earnings per share:

Three months ended June 30, 

 

Six months ended June 30, 

2021

 

2020

 

2021

 

2020

Stock options

1,416,696

2,361,601

1,415,431

2,269,895

Restricted stock units

677,824

722,388

677,824

648,842

Performance share units

392,220

267,498

392,220

267,498

Convertible senior notes

4,925,134

4,925,134

For performance share units, these securities were excluded from the calculation of diluted earnings per share as the performance-based or market-based vesting conditions were not met as of the end of the reporting period. For all other securities, these securities were excluded from the calculation of diluted earnings per share as their inclusion would have had an anti-dilutive effect.

6. Fair Value of Financial Instruments

Disclosures of fair value information about financial instruments are required, whether or not recognized in the balance sheet, for financial instruments with respect to which it is practicable to estimate that value. Fair value measurements and

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disclosures describe the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:

Level 1 inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 inputs:

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 inputs:

Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

Transfers are calculated on values as of the transfer date. There were no transfers between Levels 1, 2 and 3 during the six months ended June 30, 2021 and 2020.

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, 2021 and December 31, 2020:

Significant

Quoted Prices

other

Significant

in active

observable

unobservable

markets

inputs

inputs

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

June 30, 2021

Money market funds, included in cash equivalents

$

45,074

$

45,074

$

$

December 31, 2020

Money market funds, included in cash equivalents

$

45,069

$

45,069

$

$

As of June 30, 2021, the convertible senior notes had a fair value of approximately $162,337 and a net carrying value of $139,511. The fair value of the Company’s convertible senior notes fall into the Level 2 category within the fair value level hierarchy. The fair value was determined using broker quotes in a non-active market for valuation.

The fair value of 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 June 30, 2021, and December 31, 2020, the carrying amounts of the cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued rebates, returns and discounts, and term notes payable reasonably approximated their estimated fair values.

7. Inventory

Inventory as of June 30, 2021 and December 31, 2020 consisted of the following:

As of June 30, 

As of December 31, 

2021

2020

Raw materials

$

6,100

$

3,514

Work in process

3,995

1,096

Finished goods

9,500

11,004

Total inventory

$

19,595

$

15,614

The aggregate charges related to excess inventory for the three and six months ended June 30, 2021 and 2020 were immaterial. These expenses were recorded as a component of cost of product revenues. During the three and six months ended June 30, 2021, inventory used in the construction and installation of property and equipment was zero and $516, respectively. During the three and six months ended June 30, 2020, inventory used in the construction and installation of property and equipment was $219 and $613, respectively.

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8. Intangible Asset

As of June 30, 2021 and December 31, 2020, the Company’s only intangible asset (the “Nucynta Intangible Asset”) is related to the Nucynta Acquisition and Nucynta Commercialization Agreement. The gross carrying amount and accumulated amortization of the Nucynta Intangible Asset were as follows:

As of June 30, 

As of December 31, 

2021

2020

Gross carrying amount

$

521,170

$

521,170

Accumulated amortization

(218,856)

 

(185,266)

Intangible asset, net

$

302,314

$

335,904

Nucynta Acquisition

In February 2020, the Company entered into the Nucynta Purchase Agreement with Assertio, pursuant to which the Company acquired certain intellectual property and manufacturing rights related to the Nucynta Products, including U.S. commercialization rights, U.S. manufacturing rights, and inventory, for an aggregate purchase price of $375,000, subject to certain closing and post-closing adjustments. The Company also agreed to assume certain regulatory and supply chain contracts, and obligations related to Nucynta Products (see Note 4). In February 2020, the Company entered into a loan agreement (see Note 10) and issued convertible senior notes (see Note 11) to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement.

The consideration transferred in the asset acquisition was measured at cost, including transaction costs, assets transferred by the Company, and royalty obligations discharged by the seller. The table below represents the costs accumulated to acquire the commercial rights for the Nucynta Products based on the terms of the Nucynta Purchase Agreement, as amended:

Acquisition consideration:

Base purchase price

$

375,000

Cash paid for inventory

6,030

Transaction costs

6,297

Reduction for 2020 cash transferred to Assertio under the prior Nucynta Commercialization Agreement(1)

(13,071)

Reduction for accrued royalty obligation discharged upon closing(1)

(1,145)

Total acquisition consideration:

$

373,111

(1)Represents $14,216 total reduction to the base purchase price comprising of $13,071 of cash payments transferred to Assertio under the prior Nucynta Commercialization Agreement as well as a reduction for discharged pre-acquisition accrued royalties based on sales from January 1, 2020 through closing.

The Company then allocated the consideration transferred to the individual assets acquired on a relative fair value basis as summarized in the table below:

Assets acquired:

Nucynta Intangible Asset

$

367,081

Inventory

6,030

Total consideration allocated to assets acquired:

$

373,111

The Company concluded that the consideration allocable to the Nucynta Intangible Asset for the additional intellectual property and manufacturing rights it acquired as part of the Nucynta Acquisition were incremental costs associated with the pre-existing intangible asset from the former Nucynta Commercialization Agreement, as such costs result in probable future economic benefits. Specifically, the additional intellectual property rights acquired in the Nucynta Acquisition enable the Company to eliminate royalty obligations otherwise payable to Assertio under the former Nucynta Commercialization Agreement.

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Effective February 13, 2020, upon the closing of the Nucynta Acquisition, the Nucynta Commercialization Agreement was effectively terminated and the Company’s royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company no longer pay royalties to Assertio and the Company’s only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal.

A summary of the gross carrying amount, accumulated amortization, and net book value of the Nucynta Intangible Asset is as follows:

Gross Carrying Value

Accumulated Amortization

Net Book Value

Balance as of December 31, 2019

$

154,089

$

(124,586)

$

29,503

Amortization expense through Nucynta Acquisition

(1,754)

(1,754)

Additional cost incurred from Nucynta Acquisition

367,081

367,081

Amortization expense from Nucynta Acquisition through period end

(58,926)

(58,926)

Balance as of December 31, 2020

$

521,170

$

(185,266)

$

335,904

Amortization expense through period end

(33,590)

(33,590)

Balance as of June 30, 2021

$

521,170

$

(218,856)

$

302,314

Amortization

The Company has been amortizing the Nucynta Intangible Asset over its useful life, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company had initially determined that the useful life for the intangible asset was approximately 4.0 years from the closing date of the Nucynta Commercialization Agreement, January 9, 2018 on the basis of the majority of the cash flows expected to be realized for future product sales under the Nucynta Commercialization Agreement. The Nucynta Acquisition significantly impacted the timing and amount of future cash inflows from the sales of the Nucynta Products, and, therefore, the Company considered it to be a triggering event to remeasure the expected useful life of the Nucynta Intangible Asset. The Company determined that the useful life for the Nucynta Intangible Asset was approximately 5.9 years from the Closing Date of the Nucynta Acquisition and accordingly, the intangible asset is amortized prospectively over its revised useful life. The Company recognizes amortization expense as a component of cost of product revenues in the Condensed Consolidated Statement of Operations on a straight-line basis over its useful life as it approximates the period of economic benefits expected to be realized from future cash inflows from sales of the Nucynta Products.

The following table presents amortization expense recognized for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, 

Six months ended June 30, 

2021

 

2020

2021

2020

Nucynta amortization expense included in cost of product revenues

$

16,795

$

16,795

$

33,590

$

27,090

As of June 30, 2021, the remaining amortization period is approximately 4.5 years and is expected to be recognized in the following periods:

Years ended December 31,

Amortization Expense

2021

$

33,591

2022

67,181

2023

67,181

2024

67,181

2025

67,180

Remaining amortization expense:

$

302,314

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9. Accrued Expenses

Accrued expenses as of June 30, 2021 and December 31, 2020 consisted of the following:

As of June 30, 

As of December 31, 

2021

 

2020

Accrued royalties

$

14,312

$

12,954

Accrued product taxes and fees

2,205

1,817

Accrued bonuses

1,860

 

4,571

Accrued payroll and related benefits

1,827

892

Accrued audit and legal

 

1,775

445

Accrued incentive compensation

1,504

1,417

Accrued interest

 

1,415

 

1,415

Accrued sales and marketing

839

261

Accrued income taxes

104

Accrued other operating costs

1,545

884

Total accrued expenses

$

27,386

$

24,656

10. Term Notes Payable

Pharmakon Term Notes

On February 6, 2020, in connection with the execution of the Nucynta Purchase Agreement, the Company, together with its subsidiary, Collegium Securities Corporation, entered into a Loan Agreement (the “Loan Agreement”) with BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender (collectively “Pharmakon”). The Loan Agreement provides for a $200,000 secured term loan (the “term notes”), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement. On February 13, 2020 (the “Closing Date”), the Company received the $200,000 proceeds from the term notes.

The term notes bear interest at a rate based upon the three-month LIBOR rate, subject to a LIBOR floor of 2.0%, plus a margin of 7.5% per annum, payable quarterly in arrears. The Company is required to repay the term notes by making equal quarterly payments of principal beginning in the first quarter immediately following the third month anniversary of the Closing Date. The term notes will mature on the calendar quarter end immediately following the 48-month anniversary of the Closing Date and are guaranteed by the Company’s material domestic subsidiaries and also secured by substantially all of the Company’s material assets. On the Closing Date, the Company paid to Pharmakon a facility fee equal to 2.50% of the aggregate principal amount of the term notes, or $5,000, in addition to $427 of other expenses incurred by Pharmakon and reimbursed by the Company (together, the “discount”). Net proceeds of $194,573 were transferred to Assertio by the Company as agent in partial satisfaction of the Nucynta Purchase Agreement. In addition, the Company capitalized $2,456 of term notes issuance costs, related to legal and advisory fees.

Except with respect to certain prepayments made with the proceeds from new equity issuances as described below, the Loan Agreement permits voluntary prepayment at any time, subject to a prepayment premium. The prepayment premium is equal to 3.00% of the principal amount being prepaid prior to the second-year anniversary of the Closing Date, 2.00% of the principal amount being prepaid on or after the second-year anniversary, but on or prior to the third-year anniversary, of the Closing Date, and 1.00% of the principal amount being prepaid on or after the third-year anniversary of the Closing Date, but prior to the fourth-year anniversary of the Closing Date. The Loan Agreement also includes a make-whole premium if there is a voluntary prepayment, a prepayment due to a change in control or acceleration following an Event of Default on or prior to the second-year anniversary of the Closing Date, in 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 triggers a mandatory prepayment of the term notes.

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The Loan Agreement also permits single voluntary prepayments of the Loan Agreement of less than or equal to $50,000 made solely from the proceeds of an equity issuance by the Company. If equity prepayment occurs prior to the second-year anniversary of the Closing Date, a prepayment premium of 5.00% would apply, with no make-whole premium.

The Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that require the Company to maintain $200,000 in annual net sales and covenants that limit the Company’s ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary course of business, restrictions which limit the Company’s ability to pay dividends and restrictions of net assets of subsidiaries. The Loan Agreement also contains customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Failure to comply with these covenants would constitute an event of default under the Loan Agreement, notwithstanding the Company’s ability to meet its debt service obligations. The Loan Agreement also includes various customary remedies for Pharmakon following an event of default, including the acceleration of repayment of outstanding amounts under the Loan Agreement and execution upon the collateral securing obligations under the Loan Agreement. Under certain circumstances, a default interest rate will apply on outstanding obligations during the occurrence and continuance of an event of default.

During the three and six months ended June 30, 2021, the Company recognized interest expense of $4,254 and $8,810, respectively, related to the term notes.

As of June 30, 2021, principal repayments under the term notes are estimated to be paid as follows:

Years ended December 31,

Principal Payments

2021

$

25,000

2022

50,000

2023

50,000

2024

12,500

Total before unamortized discount and issuance costs

$

137,500

Less: unamortized discount and issuance costs

(3,637)

Total term notes

$

133,863

Silicon Valley Bank Term Loan Facility

From August 2012 until January 2020, the Company maintained a term loan facility with Silicon Valley Bank (“SVB”), which was amended in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement. Under the amended term loan (“Consent and Amendment”), the Company had a term loan facility in an amount of $11,500, which replaced the Company’s previously existing term loan facility. The proceeds of the Consent and Amendment were used to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the previously existing term loan.

The Consent and Amendment bore interest at a rate per annum of 0.75% above the prime rate (as defined in the Consent and Amendment). The Company was eligible to repay the Consent and Amendment in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing in January 2020.

In January 2020, the Company prepaid the outstanding principal and accrued interest on the Consent and Amendment along with the required prepayment fees. The loss on extinguishment of the term loan was immaterial and was recorded as a component of interest expense.

11. Convertible Senior Notes

On February 13, 2020, the Company issued 2.625% convertible senior notes due in 2026 (the “convertible notes”) in the aggregate principal amount of $143,750, in a public offering registered under the Securities Act of 1933, as amended. The convertible notes were issued in connection with funding the Nucynta Acquisition, and the proceeds of the convertible notes were used to finance a portion of the purchase price payable pursuant to the Nucynta Purchase Agreement. Some of the Company’s existing investors participated in the convertible notes offering.

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The Company may, at its option, settle the convertible notes in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. Accordingly, the Company separately accounted for the liability component (the “Liability Component”) and the embedded derivative conversion option (the “Equity Component”) of the convertible notes by allocating the proceeds between the Liability Component and the Equity Component. In connection with the issuance of the convertible notes, the Company incurred approximately $5,473 of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs between the Liability Component and the Equity Component based on the allocation of the proceeds. Of the total debt issuance costs, $1,773 was allocated to the Equity Component and recorded as a reduction to additional paid-in capital and $3,700 was allocated to the Liability Component and recorded as a debt discount of the convertible notes. The portion allocated to the Liability Component is amortized to interest expense using the effective interest method over six years.

Prior to the adoption of ASU 2020-06 on January 1, 2021, the initial carrying amount of the Liability Component of $97,200 was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible borrowing rate for similar debt. The Equity Component of the Notes of $46,550 was recognized as a debt discount. The excess of the principal amount of the Liability Component over its carrying amount was amortized to interest expense using the effective interest method over six years.

Subsequent to the adoption of ASU 2020-06 on January 1, 2021, which the Company elected to adopt using the modified retrospective method, the Company removed the impact of recognizing the Equity Component of the senior convertible notes (at issuance and the subsequent accounting impact of additional interest expense from debt discount amortization). The cumulative effective of the accounting change as of January 1, 2021 was an increase to the carrying amount of the convertible notes of $39,489, a reduction to accumulated deficit of $5,288, and a reduction to additional paid-in capital of $44,777.

The convertible notes are the Company’s senior unsecured obligations and bear interest at a rate of 2.625% per year payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. Before August 15, 2025, noteholders will have the right to convert their notes only upon the occurrence of certain events. From and after August 15, 2025, noteholders may convert their notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The notes will mature on February 15, 2026, unless earlier repurchased, redeemed or converted. The initial conversion rate is 34.2618 shares of common stock per $1 principal amount of notes, which represents an initial conversion price of approximately $29.19 per share of common stock. The conversion rate and conversion price are subject to adjustment upon the occurrence of certain events.

Holders of the convertible notes may convert all or any portion of their convertible notes, in multiples of $1 principal amount, at their option only under the following circumstances:

(1)during any calendar quarter commencing after the calendar quarter ending on March 31, 2020, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2)during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the “trading price” per $1 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
(3)upon the occurrence of certain corporate events or distributions on the Company’s common stock;
(4)if the Company calls the convertible notes for redemption; or
(5)at any time from, and including, August 15, 2025 until the close of business on the scheduled trading day immediately before the maturity date.

As of June 30, 2021, none of the above circumstances had occurred and as such, the convertible notes could not have been converted.

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The Company may not redeem the convertible notes prior to February 15, 2023. On or after February 15, 2023, the Company may redeem the convertible notes, in whole and not in part, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on:

(1)each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and
(2)the trading day immediately before the date the Company sends such notice.

Calling any convertible note for redemption will constitute a make-whole fundamental change with respect to that convertible note, in which case the conversion rate applicable to the conversion of that convertible note, if it is converted in connection with the redemption, will be increased in certain circumstances for a specified period of time.

The convertible notes have customary default provisions, including (i) a default in the payment when due (whether at maturity, upon redemption or repurchase upon fundamental change or otherwise) of the principal of, or the redemption price or fundamental change repurchase price for, any note; (ii) a default for 30 days in the payment when due of interest on any note; (iii) a default in the Company’s obligation to convert a note in accordance with the indenture; (iv) a default with respect to the Company’s obligations under the indenture related to consolidations, mergers and asset sales; (v) certain payment or other defaults by the Company or certain subsidiaries with respect to mortgages, agreements or other instruments for indebtedness for money borrowed of at least $20,000; and (vi) certain events of bankruptcy, insolvency and reorganization with respect to the Company or any of its significant subsidiaries.

As of June 30, 2021, the convertible notes outstanding consisted of the following:

Principal

$

143,750

Less: unamortized issuance costs

(4,239)

Net carrying amount

$

139,511

The Company determined the expected life of the convertible notes was equal to its six-year term. Subsequent to the adoption of ASU 2020-06, the effective interest rate on the convertible notes was 3.26%. As of June 30, 2021, the if-converted value did not exceed the remaining principal amount of the convertible notes.

The following table presents the total interest expense recognized related to the convertible notes during the three and six months ended June 30, 2021:

Three months ended June 30, 

Six months ended June 30, 

2021

2020

2021

2020

Contractual interest expense

$

943

$

933

$

1,887

$

1,436

Amortization of debt discount

1,540

2,359

Amortization of debt issuance costs

225

122

446

188

Total interest expense

$

1,168

$

2,595

$

2,333

$

3,983

As of June 30, 2021, the future minimum payments on the convertible notes were as follows:

Years ended December 31,

Future Minimum Payments

2021

$

1,887

2022

3,773

2023

3,773

2024

3,773

2025

3,773

Thereafter

145,638

Total minimum payments

$

162,617

Less: interest

(18,867)

Less: unamortized issuance costs

(4,239)

Convertible senior notes

$

139,511

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12. Equity

The changes in shareholders’ equity for the three and six months ended June 30, 2021 were as follows:

    

Additional

    

    

Total

Common Stock

 

Paid- In

 

Accumulated

 

Shareholders’

Shares

    

Amount

 

Capital

 

Deficit

 

Equity

Balance, December 31, 2020

34,612,054

$

35

$

519,143

$

(333,147)

$

186,031

Cumulative effect adjustment for adoption of ASU 2020-06

(44,777)

5,288

(39,489)

Exercise of common stock options