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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 March 31, 2022

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 April 30, 2022, there were 33,973,335 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

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

Defaults Upon Senior Securities

62

Item 4.

Mine Safety Disclosures

62

Item 5.

Other Information

62

Item 6.

Exhibits

63

Signature

64

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 successfully integrate the operations of BioDelivery Sciences International, Inc. (“BDSI”) into our organization, and realize projected cost savings associated with the acquisition of BDSI;
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;
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 ingredients for each of our products, manufacture adequate quantities of commercially salable inventory and 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 future 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)

March 31,

December 31,

2022

2021

Assets

 

    

 

    

Current assets

Cash and cash equivalents

$

106,698

$

186,426

Accounts receivable, net

166,345

105,844

Inventory

80,146

17,394

Prepaid expenses and other current assets

 

10,449

 

5,879

Total current assets

 

363,638

 

315,543

Property and equipment, net

 

20,202

 

19,491

Operating lease assets

7,812

7,644

Intangible assets, net

694,799

268,723

Restricted cash

2,547

2,547

Deferred tax assets

25,554

78,042

Other noncurrent assets

77

87

Goodwill

131,512

Total assets

$

1,246,141

$

692,077

Liabilities and shareholders' equity

Current liabilities

Accounts payable

$

3,851

$

4,189

Accrued expenses

 

41,068

 

29,214

Accrued rebates, returns and discounts

227,476

196,996

Current portion of term notes payable

100,000

48,353

Current portion of operating lease liabilities

1,178

814

Total current liabilities

 

373,573

 

279,566

Term notes payable, net of current portion

528,390

61,666

Convertible senior notes

140,189

139,966

Operating lease liabilities, net of current portion

 

7,913

 

7,951

Total liabilities

 

1,050,065

 

489,149

Commitments and contingencies (see Note 15)

Shareholders’ equity:

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

Common stock, $0.001 par value; authorized shares - 100,000,000; 36,380,997 issued and 33,923,148 outstanding shares at March 31, 2022 and 35,806,119 issued and 33,655,402 outstanding shares at December 31, 2021

 

36

 

36

Additional paid-in capital

 

513,312

 

502,095

Accumulated deficit

 

(269,411)

 

(256,342)

Treasury stock, at cost; 2,457,849 shares at March 31, 2022 and 2,150,717 shares at December 31, 2021

(47,861)

(42,861)

Total shareholders’ equity

 

196,076

 

202,928

Total liabilities and shareholders’ equity

$

1,246,141

$

692,077

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 March 31,

2022

2021

Product revenues, net

$

83,751

$

87,721

Cost of product revenues

Cost of product revenues (excluding intangible asset amortization)

16,332

15,328

Intangible asset amortization

18,923

16,795

Total cost of products revenues

 

35,255

32,123

Gross profit

48,496

55,598

Operating expenses

Research and development

3,983

2,930

Selling, general and administrative

 

54,528

 

31,476

Total operating expenses

 

58,511

 

34,406

(Loss) income from operations

 

(10,015)

 

21,192

Interest expense

 

(5,831)

 

(5,721)

Interest income

4

3

(Loss) income before income taxes

(15,842)

15,474

(Benefit from) provision for income taxes

(2,773)

(188)

Net (loss) income

$

(13,069)

$

15,662

(Loss) earnings per share — basic

$

(0.39)

$

0.45

Weighted-average shares — basic

33,673,912

34,951,740

(Loss) earnings per share — diluted

$

(0.39)

$

0.41

Weighted-average shares — diluted

33,673,912

41,160,092

See accompanying notes to the Condensed Consolidated Financial Statements.

5

Table of Contents

Collegium Pharmaceutical, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended March 31,

2022

    

2021

Operating activities

Net (loss) income

$

(13,069)

$

15,662

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Amortization expense

18,923

16,795

Depreciation expense

715

439

Deferred income taxes

(6,038)

Stock-based compensation expense

 

6,135

 

6,879

Non-cash lease expense

158

7

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

 

913

 

919

Changes in operating assets and liabilities:

Accounts receivable

(5,006)

(9,836)

Inventory

330

(400)

Prepaid expenses and other assets

 

677

 

(115)

Accounts payable

 

(350)

 

(1,350)

Accrued expenses

 

(6,838)

 

(8,029)

Accrued rebates, returns and discounts

(21,865)

(401)

Operating lease assets and liabilities

Net cash (used in) provided by operating activities

 

(25,315)

 

20,570

Investing activities

Purchases of property and equipment

(108)

 

(428)

Acquisition of BDSI (net of cash acquired)

(572,069)

Net cash used in investing activities

 

(572,177)

 

(428)

Financing activities

Proceeds from issuances of common stock from employee stock purchase plans

203

358

Proceeds from the exercise of stock options

 

3,261

 

4,182

Payments made for employee stock tax withholdings

(3,382)

(3,508)

Repayment of term notes

(12,500)

Proceeds from term note modification

517,682

Net cash provided by (used in) financing activities

 

517,764

 

(11,468)

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

 

(79,728)

 

8,674

Cash, cash equivalents and restricted cash at beginning of period

 

188,973

 

176,663

Cash, cash equivalents and restricted cash at end of period

$

109,245

$

185,337

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

Cash and cash equivalents

$

106,698

$

182,790

Restricted cash

2,547

2,547

Total cash, cash equivalents and restricted cash

$

109,245

$

185,337

Supplemental disclosure of cash flow information

Cash paid for interest

$

5,833

$

5,746

Cash paid for income taxes

$

2,114

$

418

Supplemental disclosure of non-cash activities

Acquisition of property and equipment in accounts payable and accrued expenses

$

148

$

560

Inventory used in the construction and installation of property and equipment

$

$

516

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” or “Collegium”) was incorporated in Delaware in April 2002 and then reincorporated in Virginia in July 2014. The Company has its principal operations in Stoughton, Massachusetts. The Company’s mission is to build a leading, diversified specialty pharmaceutical company committed to improving the lives of people living with serious medical conditions. The Company’s portfolio includes the following commercial products: Xtampza ER, Nucynta ER and Nucynta IR (the “Nucynta Products”), Belbuca, Symproic, and Elyxyb.

Xtampza ER

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.

Nucynta Products

In December 2017, the Company entered into a Commercialization Agreement (the “Nucynta Commercialization Agreement”) with Assertio Therapeutics, Inc. (formerly known as Depomed) (“Assertio”), pursuant to which the Company acquired the right to commercialize the Nucynta Products in the United States. In February 2020, the Company entered into an Asset Purchase Agreement with Assertio (the “Nucynta Purchase Agreement”), pursuant to which the Company acquired from Assertio certain assets related to the Nucynta Products (the “Nucynta Acquisition”), including the license from Grünenthal GmbH (“Grünenthal”). Upon closing, the Nucynta Commercialization Agreement was effectively terminated and the Company’s only remaining royalty obligation is to pay 14% of net sales of the Nucynta Products directly to Grünenthal. Nucynta ER is an extended-release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate-release formulation of tapentadol that is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults.

Belbuca, Symproic, and Elyxyb

On March 22, 2022 (the “Acquisition Date”), the Company acquired BioDelivery Sciences International, Inc. (“BDSI”), a specialty pharmaceutical company working to deliver innovative therapies for individuals living with serious and debilitating chronic conditions, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of February 14, 2022, by and among the Company, Bristol Acquisition Company Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Purchaser”), and BDSI, a Delaware corporation (the “BDSI Acquisition”). Upon closing, the Company acquired the Belbuca, Symproic, and Elyxyb products. The Company began shipping and recognizing product sales related to Belbuca, Symproic, and Elyxyb after the closing. Belbuca is a buccal film that contains buprenorphine, a Schedule III opioid, that was approved by the FDA in October 2015 for use in patients with pain severe enough to require daily, around-the-clock, long-term opioid treatment for which alternative options are inadequate. Symproic was approved by the FDA in March 2017 for the treatment of Opioid-Induced Constipation (“OIC”) in adult patients with chronic non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent (e.g., weekly) opioid dosage escalation. Elyxyb was approved by the FDA in May 2020 for the acute treatment of migraine with or without aura in adults.

The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to continue successfully commercializing products, changing market conditions for products and development of competing products, changing regulatory environment and reimbursement landscape, product-related litigation, manufacture of

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adequate commercial inventory, inability to secure adequate supplies of active pharmaceutical ingredients, key personnel retention, protection of intellectual property, and patent infringement litigation.

The Company believes that its cash and cash equivalents at March 31, 2022, 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 at least one year from the date the consolidated financial statements were issued.

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) and its subsidiaries. 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 March 31, 2022, and the results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 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 most recently filed Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Annual Report”).

Acquisitions

In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values, with some exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair value. If fair value can be determined, the asset or liability is recognized; if fair value is not determinable, then no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition.

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Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination and is not amortized, but is subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment.

Recently Adopted Accounting Pronouncements

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

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 and may be applied prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company adopted this standard effective January 1, 2022 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends Accounting Standards Codification, or ASC, 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606. As a result of the amendments made by the ASU, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements. The ASU’s amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (i) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (ii) prospectively to all business combinations that occur on or after the date of initial application. The Company adopted this standard effective January 1, 2022 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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

3. Revenue from Contracts with Customers

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

Revenue Recognition

In accordance with ASC Topic 606, Revenue from Contracts with Customers, (“ASC 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

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contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the assets is one year or less.

Performance Obligations

The Company determined that performance obligations are satisfied, and revenue is recognized when a customer takes control of the Company’s product, which occurs at a point in time. This generally occurs upon delivery of the products to customers (wholesalers), at which point the Company recognizes revenue and records accounts receivable. Payment is typically received 30 to 90 days after satisfaction of the Company’s performance obligations.

Transaction Price and Variable Consideration

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

The Company bases its estimates of variable consideration, which could include estimates of future rebates, returns, and other adjustments, on historical data and other information. Estimates include: (i) timing of the rebates and returns incurred, (ii) pricing adjustments related to rebates and returns, and (iii) the quantity of product that will be rebated or returned in the future. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period.

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

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

Provisions for product returns are based on product-level returns rates, recent unprocessed return claims, as well as relevant market events and other factors. Estimates of the future product returns are made at the time of revenue recognition to determine the amount of consideration to which the Company expects to be entitled (that is, excluding the products expected to be returned). To the extent the Company receives amounts in excess of what it expects to be entitled to receive due to a product return, the Company does not recognize revenue when it transfers products to

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customers but instead recognizes those excess amounts received as a refund liability. The Company updates the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds with the corresponding adjustments recognized as revenue (or reductions of revenue).

Historically, estimates of the refund liability for product returned for Nucynta Products were based on historical returns rates as these products have been commercially sold in the US since 2009 for Nucynta IR and since 2011 for Nucynta ER. Because the Company began selling the Nucynta Products in 2018, the majority of Nucynta Products sold to customers by the Company were not eligible for return until the year ended December 31, 2021, or beyond. For Xtampza ER, estimates of the refund liability for product returns were historically based on a combination of historical actual returns processed to date, taking into consideration the expiration date of product upon delivery to customers, as well as forecasted customer buying and return patterns, channel inventory levels, and other specifically known market events and trends. Sales of Xtampza increased significantly starting in 2018; as a result, the majority of Xtampza sold to customers by the Company has not been eligible for return until the year ended December 31, 2021, or beyond.

The Company provides the right of return to its customers for an 18-month window beginning six months prior to expiration and up until twelve months after expiration. The Company’s customers short-pay an existing invoice upon notice of a product return claim. Adjustments to the preliminary short-paid claims are processed when the return claim is validated and finalized. For Xtampza and the Nucynta Products, the Company’s return policy requires that product is physically returned within the 18-month window.

2021 Returns Adjustment

During the year ended December 31, 2021, there were unprecedented and significant disruptions in the processing of product returns. Specifically, the Company’s customers, via the third-party returns processor that they and many pharmacies engage to process the majority of the Company’s product returns, failed to return products to the Company in the ordinary course. The value of actual returned product during the year ended December 31, 2021 represented less than 20% of the value of the product returns claimed during that period. Due to the failure of the customers and their vendor to return product timely in the ordinary course, the Company did not physically receive returned products corresponding to the substantial majority of the returns claimed and could not validate or finalize customer return claims, nor determine if the return was or would be eligible for refund upon the physical return. The lack of timely processing of requested product returns obscures information related to the validation of product returns and increases uncertainty related to the actual volume of product that will be physically returned and credited in accordance with the Company’s returns policy.

During the fourth quarter of 2021, after significant and sustained efforts with customers to resolve the unprocessed return claims, the Company formally denied a significant portion of these claims under the Company’s return policy. The Company subsequently received payment for only a portion of the denied claims and intends to vigorously pursue collections of the full amount of these short-pay receivables. Additional unprocessed return claims have and are expected to continue to expire prior to their physical return.

Although the Company has denied and expects to continue to deny credit for product returns that are not in accordance with its return policy, uncertainty exists related to the ultimate resolution of these claims. At the end of each reporting period, the Company updates the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. Variable consideration, including the risk of customer concessions, is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. In particular, resolution of the unprocessed return claims includes the risk of concession for those that are outside of the Company’s return policy. There were no material adjustments related to these estimates in the three months ended March 31, 2022.

Significant judgment is required to determine the variable consideration included in the transaction price as described above. Adjustments to the estimated variable consideration included in the transaction price occurs when new information indicates that the estimate should be revised. If the value of accepted and processed claims is different than the amount estimated and included in variable consideration, then adjustments would impact product revenue, net and earnings in the period such revisions become known. The amount of variable consideration ultimately received and included in the transaction price may materially differ from the Company’s estimates, resulting in additional adjustments recorded to increase or decrease product revenue, net.

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Summary of Activity in Product Revenue Provision and Allowance Categories

The following tables summarize activity in each of the Company’s product revenue provision and allowance categories for the three months ended March 31, 2022 and 2021:

    

    

Trade

Rebates and

Product

Allowances and

Incentives (1)

Returns (2)

Chargebacks (3)

Balance at December 31, 2021

$

142,379

$

54,617

$

13,226

Acquired from BDSI

34,158

18,187

7,575

Provision related to current period sales

95,413

7,072

22,612

Changes in estimate related to prior period sales

(514)

(37)

Credits/payments made

(118,937)

(4,899)

(22,001)

Balance at March 31, 2022

$

152,499

$

74,977

$

21,375

    

    

Trade

Rebates and

Product

Allowances and

Incentives (1)

Returns (2)

Chargebacks (3)

Balance at December 31, 2020

$

132,775

$

23,779

$

19,055

Provision related to current period sales

86,716

3,730

21,002

Changes in estimate related to prior period sales

(441)

Credits/payments made

(75,442)

(14,964)

(23,853)

Balance at March 31, 2021

$

143,608

$

12,545

$

16,204

(1)Provisions for rebates and incentives includes managed care rebates, government rebates and co-pay program incentives. Provisions for rebates and incentives are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Consolidated Balance Sheets.
(2)Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Consolidated Balance Sheets.
(3)Provisions for trade allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks. Trade allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Consolidated Balance Sheets.

As of March 31, 2022, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

Disaggregation of Revenue

The Company discloses disaggregated revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. When selecting the type of category to use to disaggregate revenue, the Company considers 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 March 31,

2022

2021

Xtampza ER

$

31,518

    

$

35,409

Nucynta IR

29,335

30,526

Nucynta ER

19,263

21,786

Belbuca

3,310

Symproic

300

Elyxyb

25

Total product revenues, net

$

83,751

$

87,721

The Company began recognizing revenue from net product sales of Belbuca, Symproic, and Elyxyb following the Acquisition Date.

4. Acquisitions

On March 22, 2022, the Company closed the BDSI Acquisition pursuant to the Merger Agreement, with BDSI surviving the Merger as a wholly owned subsidiary of the Company. The BDSI Acquisition was completed to leverage the Company’s existing sales force and other operations to commercialize additional products that are typically marketed to similar physicians and to develop other synergies. The Company obtained control through the acquisition of shares in an all-cash transaction which closed on March 22, 2022.

The total consideration paid for the BDSI acquisition was approximately $669.4 million consisting of the following (in thousands, except per share amounts):

Fair Value of Purchase Price Consideration

Amount

Fair value of purchase price consideration paid at closing:

Cash consideration for all outstanding shares of BDSI's common and preferred stock (103,235,298 shares acquired at $5.60 per share)

$

578,118

Cash consideration paid to settle RSUs and in-the-money options

28,309

Cash paid to settle BDSI debt

63,004

Total purchase consideration

$

669,431

The Company has accounted for the BDSI Acquisition as a business combination and, accordingly, has included the assets acquired, liabilities assumed and results of operations in its financial statements following the Acquisition Date.

The preliminary purchase price allocation is based on estimates, assumptions, valuations and other studies which have not yet been finalized. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change the carrying value of goodwill. The Company is finalizing its valuation of intangible assets, tangible assets, liabilities and tax analyses, and anticipates finalizing the purchase price allocation as the information necessary to complete the analysis is obtained, but no later than one year after the Acquisition Date.

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The following tables set forth the preliminary allocation of the BDSI Acquisition purchase price to the estimated fair value of the net assets acquired at the Acquisition Date (in thousands):

Amounts Recognized at the Acquisition Date

Assets Acquired

Cash and cash equivalents

$

97,362

Accounts receivable

55,495

Inventory

63,082

Prepaid expenses and other current assets

5,237

Property and equipment

1,242

Operating lease assets

481

Intangible assets

445,000

Total assets

$

667,899

Liabilities Assumed

Accounts payable

$

12

Accrued expenses

18,617

Accrued rebates, returns and discounts

52,345

Operating lease liabilities

481

Deferred tax liabilities

58,525

Total liabilities

$

129,980

Total identifiable net assets acquired

537,919

Goodwill

131,512

Total consideration transferred

$

669,431

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the $445,000 of intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with risk. The Company is amortizing the identifiable intangible assets on a straight-line over their respective useful lives (refer to Note 9, Goodwill and Intangible Assets).

The excess of the purchase price over the fair value of identifiable net assets acquired represents goodwill. This goodwill is primarily attributable to synergies of merging operations. The acquired goodwill is not deductible for tax purposes.

Total revenues attributable to BDSI from the Acquisition Date through March 31, 2022 were $3,635. However, earnings attributable to BDSI from the Acquisition Date through March 31, 2022 are not distinguishable due to the rapid integration of BDSI’s core operations into the Company.

Unaudited Pro Forma Summary of Operations

The following table shows the unaudited pro forma summary of operations for the three months ended March 31, 2022 and 2021, as if the BDSI Acquisition had occurred on January 1, 2021. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of January 1, 2021, and is not indicative of what such results would be expected for any future period (in thousands, except per share amounts):

Three Months Ended March 31,

2022

2021

Total revenues

$

117,018

$

128,741

Net loss

$

(18,319)

$

(39,010)

The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of the Company and BDSI. The summary pro forma financial information primarily reflects the following pro forma adjustments:

The Company’s acquisition related transaction costs of $14,557 were reflected as of January 1, 2021
Employee severance related expense of $6,619 was reflected as of January 1, 2021
Additional amortization expense from the acquired intangibles

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Additional cost of product revenues related to the step-up basis in inventory to record inventory at fair value; and
Adjustments to the Company’s interest expense related to repayment of the 2020 Term Notes and entering into the 2022 Term Loan as defined in Note 11, Term Notes Payable.

In addition, all of the above adjustments were adjusted for the applicable tax impact.

Acquisition Related Expenses

In the three months ended March 31, 2022, the Company incurred $27,167 of acquisition related expenses as a result of the BDSI Acquisition and the substantial majority were included in the Selling, general, and administrative expense in the condensed consolidated statements of operations. These costs include $14,557 of transaction costs, which primarily consisted of financial advisory, banking, legal, and regulatory fees, and other consulting fees, incurred to complete the acquisition; $6,619 of employee-related expenses (severance cost and benefits) for terminated employees after the acquisition, $4,492 of BDSI directors and officers insurance, and $1,499 of miscellaneous other acquisition expenses incurred. The Company has accrued $2,607 related to employee severance costs incurred as of March 31, 2022 but not yet paid. Additional charges related to severance or retention payments are not expected to be material and the remaining employee termination costs are expected to be paid by June 30, 2022. However, the Company expects to incur additional acquisition related expenses relating to consulting fees, contract termination costs, and other integration related expenses during the remainder of 2022.

Three Months Ended
March 31, 2022

Transaction costs

$

14,557

Employee-related expenses

6,619

BDSI directors and officers insurance

4,492

Other acquisition expenses

1,499

Total acquisition related expenses

$

27,167

5. License Agreements

The Company periodically enters into license agreements to develop and commercialize its products.

Dr. Reddy’s acquired product rights

Prior to the BDSI Acquisition, BDSI and Dr. Reddy’s Laboratories Limited (“DRL”), entered into an asset purchase agreement (the “Elyxyb Asset Purchase Agreement”) for the acquisition by BDSI from DRL of certain patents, trademarks, regulatory approvals and other rights related to Elyxyb and its commercialization in the United States and Canada (the “DRL Territory”).

Pursuant to the terms of the Elyxyb Asset Purchase Agreement, a $9,000 payment is due to DRL on August 3, 2022. In addition, up to an additional $9,000 of payments are due to DRL upon achievement of certain regulatory milestones as well as for quarterly earn-out payments on potential sales of the Elyxyb Product in the DRL Territory that range from high single digits to the low double digits (subject to reduction in certain circumstances) of net sales based on volume of sales. DRL will also be entitled to one-time payments upon the achievement of six escalating sales milestones, which range from $4,000 to be paid upon the achievement of $50,000 in net sales in a calendar year to $100,000 to be paid upon the achievement of $1,000,000 in net sales in a calendar year up to a total of $262,000.

Shionogi license and supply agreement

Prior to the BDSI Acquisition, BDSI and Shionogi Inc. (“Shionogi”) entered into an exclusive license agreement (the “Shionogi License Agreement”) for the commercialization of Symproic in the United States including Puerto Rico (the

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“Shionogi Territory”) for opioid-induced constipation in adult patients with chronic non-cancer pain (the “Shionogi Field”).

Pursuant to the terms of the Shionogi License Agreement, tiered royalty payments on net sales of Symproic in the Shionogi Territory are payable quarterly based on a royalty rate that ranges from 8.5% to 17.5% (plus an additional 1% of net sales on a pass-through basis to a third-party licensor of Shionogi) based on volume of net sales and whether Symproic is being sold as an authorized generic. Unless earlier terminated, the Shionogi License Agreement will continue in effect until the expiration of the royalty obligations, as defined therein. Upon expiration of the Shionogi License Agreement, all licenses granted for Symproic in the Shionogi Field and in the Shionogi Territory survive and become fully-paid, royalty-free, perpetual and irrevocable.

BDSI and Shionogi also had entered into a supply agreement under which Shionogi will supply Symproic at cost plus an agreed upon markup. In the event that Symproic is sourced from a third-party supplier, Shionogi would continue to supply naldemedine tosylate for use in Symproic manufacturing at cost plus such agreed upon markup for the duration of the Shionogi License Agreement.

6. Earnings Per Share

Basic earnings per share is calculated by dividing the net (loss) income by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted earnings per share is computed by dividing the net (loss) 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, if-converted, or contingently issuable accounting methods, depending on the nature of the security. For purposes of the diluted earnings per share calculation, stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), and shares potentially issuable in connection with our employee stock purchase plan and convertible senior notes are considered potentially dilutive securities and included to the extent that their addition is not anti-dilutive.

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

Three Months Ended March 31,

2022

2021

Numerator:

Net (loss) income

$

(13,069)

$

15,662

Adjustment for interest expense recognized on convertible senior notes:

1,165

Net (loss) income - diluted

$

(13,069)

$

16,827

Denominator:

Weighted-average shares outstanding — basic

33,673,912

    

34,951,740

Effect of dilutive securities:

Stock options

663,921

Restricted stock units

404,646

Performance share units

5,201

Employee stock purchase plan

9,693

Warrants

199,757

Convertible senior notes

4,925,134

Weighted average shares outstanding — diluted

33,673,912

41,160,092

(Loss) earnings per share — basic

$

(0.39)

$

0.45

(Loss) earnings per share — diluted

$

(0.39)

$

0.41

The Company has the option to settle the conversion obligation for its convertible senior notes due in 2026 in cash, shares or a combination of the two. The Company uses the if-converted method for the convertible senior notes.

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

Three Months Ended March 31,

2022

 

2021

Stock options

2,401,110

1,539,731

Restricted stock units

2,039,179

671,854

Performance share units

484,292

416,820

Employee stock purchase plan

Warrants

1,041,667

Convertible senior notes

4,925,134

For PSUs, these securities were excluded from the calculation of diluted earnings per share as the performance-based or market-based vesting conditions were not met as of the end of the reporting period. All other securities presented in the table above were excluded from the calculation of diluted earnings per share as their inclusion would have had an antidilutive effect.

7. 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 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 three months ended March 31, 2022 and 2021.

The following tables present the Company’s financial instruments carried at fair value using the lowest level input applicable to each financial instrument at March 31, 2022 and December 31, 2021:

Significant

Quoted Prices

other

Significant

in active

observable

unobservable

markets

inputs

inputs

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

March 31, 2022

Money market funds, included in cash equivalents

$

2,003

$

2,003

$

$

December 31, 2021

Money market funds, included in cash equivalents

$

45,078

$

45,078

$

$

The Company’s cash equivalents, which consist of money market funds, are measured at fair value on a recurring basis

using quoted market prices. Accordingly, these securities are categorized as Level 1.

The Company’s convertible senior notes fall into the Level 2 category within the fair value level hierarchy. The fair value was determined based on data points other than quoted prices that are observable, either directly or indirectly, such as broker quotes in a non-active market. As of March 31, 2022, the convertible senior notes had a fair value of

approximately $135,388 and a net carrying value of $140,189.

The Company’s term notes fall into the Level 2 category within the fair value level hierarchy and the fair value was

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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 March 31, 2022, the outstanding principal balance of the term notes of $650,000 reasonably approximated the estimated fair value.

As of March 31, 2022, and December 31, 2021, the carrying amounts of the cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and accrued rebates, returns and discounts reasonably approximated their estimated fair values.

8. Inventory

Inventory as of March 31, 2022 and December 31, 2021 consisted of the following:

March 31,

December 31,

2022

2021

Raw materials

$

8,360

$

3,685

Work in process

34,907

1,007

Finished goods

36,879

12,702

Total inventory

$

80,146

$

17,394

9. Goodwill and Intangible Assets

The following table sets forth the cost, accumulated amortization, and carrying amount of intangible assets and goodwill as of March 31, 2022 and December 31, 2021:

As of March 31, 2022

As of December 31, 2021

Amortization Period
(Years)

Cost

Accumulated Amortization

Carrying Amount

Cost

Accumulated Amortization

Carrying Amount

Goodwill

$

131,512

$

131,512

$

$

Nucynta Products

8.0

$

521,170

$

(269,243)

$

251,927

$

521,170

$

(252,447)

$

268,723

Belbuca

4.8

370,000

(1,937)

368,063

Symproic

9.6

70,000

(182)

69,818

Elyxyb

14.2

5,000

(9)

4,991

Total intangibles

$

966,170

$

(271,371)

$

694,799

$

521,170

$

(252,447)

$

268,723

The Company’s goodwill resulted from the BDSI Acquisition.

The following table presents amortization expense recognized in cost of product revenues for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

2022

 

2021

Nucynta

$

16,795

$

16,795

Belbuca

1,937

    

Symproic

182

Elyxyb

9

Total amortization expense

$

18,923

$

16,795

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As of March 31, 2022, the remaining amortization expense expected to be recognized is as follows:

Years ended December 31,

Nucynta

Belbuca

Symproic

Elyxyb

Total

2022

$

50,385

$

58,115

$

5,464

$

264

$

114,228

2023

67,181

77,487

7,285

352

152,305

2024

67,181

77,487

7,285

352

152,305

2025

67,180

77,487

7,285

352

152,304

2026

77,487

7,285

352

85,124

Thereafter

35,214

3,319

38,533

Remaining amortization expense

$

251,927

$

368,063

$

69,818

$

4,991

$

694,799

10. Accrued Expenses

Accrued expenses as of March 31, 2022 and December 31, 2021 consisted of the following:

March 31,

December 31,

2022

 

2021

Acquired product right

$

9,000

$

Accrued royalties

7,912

9,930

Accrued audit and legal

 

4,153

3,623

Accrued payroll and related benefits

3,730

807

Accrued product taxes and fees

3,102

2,570

Accrued incentive compensation

2,346

851

Accrued income taxes

2,043

622

Accrued sales and marketing

1,649

697

Accrued bonuses

1,364

 

2,634

Accrued interest

 

471

 

1,415

Accrued restructuring expenses

3,222

Accrued other operating costs

5,298

2,843

Total accrued expenses

$

41,068

$

29,214

11. Term Notes Payable

Prior 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 “2020 Loan Agreement”) with BioPharma Credit PLC, as collateral agent and lender, and BioPharma Credit Investments V (Master) LP, as lender (collectively “Pharmakon”). The 2020 Loan Agreement provided for a $200,000 secured term loan (the “2020 Term 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 “2020 Term Loan Closing Date”), the Company received the $200,000 proceeds from the 2020 Term Notes.

On March 22, 2022 the outstanding balance under the 2020 Loan Agreement was fully paid in connection with the closing of the BDSI Acquisition and establishment of the 2022 Term Loan, as defined below (the “2022 Loan Amendment”).

2022 Term Loan

On March 22, 2022, in connection with the closing of the BDSI Acquisition, the Company entered into an Amended and Restated Loan Agreement by and among the Company, the Purchaser, and Pharmakon (the “2022 Loan Agreement”). The 2022 Loan Agreement provides for a $650,000 secured term loan (the “2022 Term Loan”), the proceeds of which were used to repay the Company’s existing term notes and fund a portion of the consideration to be paid to complete the BDSI Acquisition. The 2022 Loan Amendment was accounted for as a debt modification and transaction fees of $173

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were expensed. In connection with the 2022 Loan Amendment, the Company paid loan commitment and other fees to the lender of $19,818, which together with preexisting debt issuance costs and note discounts of $2,049 will be amortized over the term of the loan using the effective interest rate.

The 2022 Term Loan will mature on the 48-month anniversary of the closing of the BDSI Acquisition and is guaranteed by the Company’s material domestic subsidiaries. The 2022 Term Loan is also secured by substantially all of the assets of the Company and its material domestic subsidiaries. The 2022 Term Loan will bear interest at a rate based upon LIBOR (subject to a LIBOR floor of 1.20%), plus a margin of 7.5% per annum. As of March 31, 2022, the interest rate was 8.7%. The Company is required to repay the 2022 Term Loan by paying $100,000 in amortization payments during the first year and the remaining $550,000 balance will amortize in equal quarterly installments over the remaining three years.

The 2022 Loan Agreement permits voluntary prepayment at any time, subject to a prepayment premium. The prepayment premium is equal to 2.00% of the principal amount being prepaid prior to the second-year anniversary of the closing date, or 1.00% of the principal amount being prepaid on or after the second-year anniversary of the closing date. The 2022 Loan Agreement also includes a make-whole premium in the event of a voluntary prepayment, a prepayment due to a change in control or acceleration following an Event of Default (as defined in the 2022 Loan Agreement) on or prior to the second-year anniversary of the closing date, in each case in an amount equal to foregone interest from the date of prepayment through the second-year anniversary of the closing date. A change of control also triggers a mandatory prepayment of the 2022 Term Loan.

The 2022 Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that limit the Company’s ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary course of business. Failure to comply with these covenants would constitute an event of default under the 2022 Loan Agreement, notwithstanding the Company’s ability to meet its debt service obligations. The 2022 Loan Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the 2022 Loan Agreement and execution upon the collateral securing obligations under the 2022 Loan Agreement.

During the three months ended March 31, 2022, the Company recognized interest expense of $1,823 related to the 2022 Term Loan.

As of March 31, 2022, principal repayments under the 2022 Term Loan are as follows:

Years ended December 31,

Principal Payments

2022

$

75,000

2023

162,500

2024

183,333

2025

183,333

2026

45,834

Total before unamortized discount and issuance costs

$

650,000

Less: unamortized discount and issuance costs

(21,610)

Total term notes

$

628,390

12. 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.

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.

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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 March 31, 2022, none of the above circumstances had occurred and as such, the convertible notes could not have been converted.

The Company may not redeem the convertible notes prior to February 15, 2023. On or after February 15, 2023, the Company may redeem the convertible notes, in whole and not in part, at a cash redemption price equal to the principal amount of the 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.

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As of March 31, 2022, the convertible notes outstanding consisted of the following:

Principal

$

143,750

Less: unamortized issuance costs

(3,561)

Net carrying amount

$

140,189

The Company determined the expected life of the convertible notes was equal to its six-year term. The effective interest rate on the convertible notes is 3.26%. As of March 31, 2022, 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 months ended March 31, 2022, and 2021:

Three Months Ended March 31,

2022

2021

Contractual interest expense

$

943

$

943

Amortization of debt issuance costs

223

222

Total interest expense

$

1,166

$

1,165

As of March 31, 2022, the future minimum payments on the convertible notes were as follows:

Years ended December 31,

Future Minimum Payments

2022

$

1,886

2023

3,773

2024

3,773

2025

3,773

2026

145,638

Total minimum payments

$

158,843

Less: interest

(15,093)

Less: unamortized issuance costs

(3,561)

Convertible senior notes

$

140,189

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13. Equity

The changes in shareholders’ equity for the three months ended March 31, 2022 were as follows:

    

Additional

    

    

Total

Common Stock

 

Paid- In

Treasury Stock

Accumulated

 

Shareholders’

Shares

    

Amount

 

Capital

Shares

Amount

 

Deficit

 

Equity

Balance, December 31, 2021

35,806,119

$

36

$

502,095

(2,150,717)

$

(42,861)

$

(256,342)

$

202,928

Exercise of common stock options

190,074

3,261

3,261

Issuance for employee stock purchase plan

13,421

203

203

Vesting of RSUs and PSUs

563,050

Shares withheld for employee taxes upon vesting of RSUs and PSUs

(191,667)

(3,382)

(3,382)

Share repurchases from Accelerated Share Repurchase ("ASR") agreement

5,000

(307,132)

(5,000)

Stock-based compensation

6,135

6,135

Net income

(13,069)

(13,069)

Balance, March 31, 2022

36,380,997

$

36

$

513,312

(2,457,849)

$

(47,861)

$

(269,411)

$

196,076

The changes in shareholders’ equity for the three months ended March 31, 2021 were as follows: