00000000000000003449430233678840P30DtrueP1MQ2false0001267565--12-3120200001267565us-gaap:RetainedEarningsMember2020-06-300001267565us-gaap:AdditionalPaidInCapitalMember2020-06-300001267565us-gaap:RetainedEarningsMember2020-03-310001267565us-gaap:AdditionalPaidInCapitalMember2020-03-3100012675652020-03-310001267565us-gaap:RetainedEarningsMember2019-12-310001267565us-gaap:AdditionalPaidInCapitalMember2019-12-310001267565us-gaap:RetainedEarningsMember2019-06-300001267565us-gaap:AdditionalPaidInCapitalMember2019-06-300001267565us-gaap:RetainedEarningsMember2019-03-310001267565us-gaap:AdditionalPaidInCapitalMember2019-03-3100012675652019-03-310001267565us-gaap:RetainedEarningsMember2018-12-310001267565us-gaap:AdditionalPaidInCapitalMember2018-12-310001267565us-gaap:CommonStockMember2020-06-300001267565us-gaap:CommonStockMember2020-03-310001267565us-gaap:CommonStockMember2019-12-310001267565us-gaap:CommonStockMember2019-06-300001267565us-gaap:CommonStockMember2019-03-310001267565us-gaap:CommonStockMember2018-12-310001267565us-gaap:EmployeeStockOptionMember2019-01-012019-12-310001267565us-gaap:EmployeeStockOptionMember2019-12-310001267565coll:StockIncentivePlan2014Member2020-06-300001267565coll:StockIncentivePlan2014Member2015-05-310001267565us-gaap:RestrictedStockUnitsRSUMember2019-12-310001267565us-gaap:PerformanceSharesMember2019-12-310001267565us-gaap:RestrictedStockUnitsRSUMember2019-01-012019-06-300001267565srt:MinimumMemberus-gaap:PerformanceSharesMember2020-01-012020-06-300001267565srt:MaximumMemberus-gaap:PerformanceSharesMember2020-01-012020-06-300001267565us-gaap:PerformanceSharesMember2019-04-012019-06-300001267565us-gaap:PerformanceSharesMember2019-01-012019-06-300001267565coll:XtampzaMember2020-04-012020-06-300001267565coll:NucyntaMember2020-04-012020-06-300001267565coll:NucyntaIrMember2020-04-012020-06-300001267565coll:NucyntaErMember2020-04-012020-06-300001267565coll:XtampzaMember2020-01-012020-06-300001267565coll:NucyntaIrMember2020-01-012020-06-300001267565coll:NucyntaErMember2020-01-012020-06-300001267565coll:XtampzaMember2019-04-012019-06-300001267565coll:NucyntaMember2019-04-012019-06-300001267565coll:NucyntaIrMember2019-04-012019-06-300001267565coll:NucyntaErMember2019-04-012019-06-300001267565coll:XtampzaMember2019-01-012019-06-300001267565coll:NucyntaMember2019-01-012019-06-300001267565coll:NucyntaIrMember2019-01-012019-06-300001267565coll:NucyntaErMember2019-01-012019-06-300001267565us-gaap:SecuredDebtMember2020-01-012020-06-300001267565us-gaap:ConvertibleDebtMember2020-01-012020-06-300001267565us-gaap:RetainedEarningsMember2020-04-012020-06-300001267565us-gaap:RetainedEarningsMember2020-01-012020-03-310001267565us-gaap:RetainedEarningsMember2019-04-012019-06-300001267565us-gaap:RetainedEarningsMember2019-01-012019-03-310001267565coll:PurduePharmaLimitedPartnershipPatentInfringementDistrictOfDelawareMember2020-01-012020-06-300001267565coll:TevaLitigationMember2019-05-092019-05-090001267565coll:TevaLitigationMember2018-11-012018-11-300001267565coll:PurduePharmaLimitedPartnershipPatentInfringementDistrictOfDelawareMember2015-03-242015-03-240001267565coll:OpioidLitigationMember2019-10-012019-10-3100012675652018-09-262018-09-2600012675652018-07-112018-07-1200012675652018-05-042018-05-040001267565coll:OpioidLitigationMember2019-11-062019-11-060001267565coll:SiliconValleyBankTermLoanFacilityMember2020-01-310001267565coll:PharmakonTermNotesMember2020-04-012020-06-300001267565coll:PharmakonTermNotesMember2020-01-012020-06-300001267565us-gaap:WarrantMember2020-04-012020-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2020-04-012020-06-300001267565us-gaap:PerformanceSharesMember2020-04-012020-06-300001267565us-gaap:EmployeeStockOptionMember2020-04-012020-06-300001267565coll:EmployeeStockPurchaseProgramMember2020-04-012020-06-300001267565us-gaap:WarrantMember2020-01-012020-06-300001267565coll:EmployeeStockPurchaseProgramMember2020-01-012020-06-300001267565coll:NucyntaMember2018-01-090001267565coll:NucyntaMember2020-06-300001267565coll:AssetPurchaseAgreementMember2020-06-300001267565coll:NucyntaMember2019-12-310001267565coll:NucyntaMember2018-12-310001267565us-gaap:EmployeeStockOptionMember2020-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2020-06-300001267565us-gaap:PerformanceSharesMember2020-06-300001267565us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001267565us-gaap:ConvertibleNotesPayableMember2020-08-150001267565coll:PharmakonTermNotesMember2020-02-060001267565coll:ConversionOfConvertibleDebtAfterCalendarQuarterEndingOnMarch312020Memberus-gaap:ConvertibleNotesPayableMember2020-01-012020-06-300001267565coll:ConversionOfConvertibleDebtAfterCalendarQuarterEndingOnMarch312020Member2020-02-132020-02-130001267565coll:PharmakonTermNotesMember2020-06-300001267565coll:SiliconValleyBankTermLoanFacilityMemberus-gaap:PrimeRateMember2020-01-012020-01-310001267565coll:AssertioMembercoll:NucyntaCommercializationAgreementMember2018-01-092018-01-090001267565srt:RestatementAdjustmentMember2019-04-012019-06-300001267565srt:RestatementAdjustmentMember2019-01-012019-06-300001267565coll:ContractWithCustomerRefundLiabilityMember2020-06-300001267565coll:AllowanceForRebatesAndIncentivesMember2020-06-300001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2020-06-300001267565coll:ContractWithCustomerRefundLiabilityMember2019-12-310001267565coll:AllowanceForRebatesAndIncentivesMember2019-12-310001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2019-12-310001267565coll:ContractWithCustomerRefundLiabilityMember2019-06-300001267565coll:AllowanceForRebatesAndIncentivesMember2019-06-300001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2019-06-300001267565coll:ContractWithCustomerRefundLiabilityMember2018-12-310001267565coll:AllowanceForRebatesAndIncentivesMember2018-12-310001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2018-12-310001267565coll:ThirdAmendmentToCommercializationAgreementMember2018-11-3000012675652018-12-310001267565us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-06-300001267565us-gaap:MoneyMarketFundsMember2020-06-300001267565us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2019-12-310001267565us-gaap:MoneyMarketFundsMember2019-12-3100012675652019-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2020-04-012020-06-300001267565us-gaap:PerformanceSharesMember2020-04-012020-06-300001267565us-gaap:EmployeeStockOptionMember2020-04-012020-06-300001267565us-gaap:ConvertibleNotesPayableMember2020-04-012020-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-06-300001267565us-gaap:PerformanceSharesMember2020-01-012020-06-300001267565us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001267565us-gaap:ConvertibleNotesPayableMember2020-01-012020-06-300001267565us-gaap:WarrantMember2019-04-012019-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2019-04-012019-06-300001267565us-gaap:PerformanceSharesMember2019-04-012019-06-300001267565us-gaap:EmployeeStockOptionMember2019-04-012019-06-300001267565us-gaap:WarrantMember2019-01-012019-06-300001267565us-gaap:RestrictedStockUnitsRSUMember2019-01-012019-06-300001267565us-gaap:PerformanceSharesMember2019-01-012019-06-300001267565us-gaap:EmployeeStockOptionMember2019-01-012019-06-300001267565coll:AssetPurchaseAgreementMember2020-01-012020-02-060001267565coll:AssetPurchaseAgreementMember2020-01-012020-02-0500012675652019-01-012019-12-310001267565coll:NucyntaMember2018-01-012018-12-310001267565coll:NucyntaMember2018-01-012018-11-070001267565us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-04-012020-06-300001267565us-gaap:ResearchAndDevelopmentExpenseMember2020-04-012020-06-300001267565us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-01-012020-06-300001267565us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-06-300001267565us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-04-012019-06-300001267565us-gaap:ResearchAndDevelopmentExpenseMember2019-04-012019-06-300001267565us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-01-012019-06-300001267565us-gaap:ResearchAndDevelopmentExpenseMember2019-01-012019-06-300001267565us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001267565coll:NucyntaMember2020-01-012020-06-300001267565coll:NucyntaMember2018-01-092018-01-0900012675652020-07-310001267565us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001267565us-gaap:AdditionalPaidInCapitalMember2020-01-012020-06-300001267565us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-300001267565us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-3100012675652019-01-012019-03-310001267565us-gaap:CommonStockMember2020-04-012020-06-300001267565us-gaap:CommonStockMember2020-01-012020-06-300001267565us-gaap:CommonStockMember2019-04-012019-06-300001267565us-gaap:CommonStockMember2019-01-012019-03-310001267565srt:MinimumMembercoll:StockIncentivePlan2014Member2020-01-012020-06-300001267565srt:MaximumMembercoll:StockIncentivePlan2014Member2020-01-012020-06-300001267565coll:StockIncentivePlan2014Member2020-01-012020-06-300001267565coll:ThirdAmendmentToCommercializationAgreementMember2018-12-310001267565coll:NucyntaCommercializationAgreementMember2020-06-3000012675652018-02-222018-02-220001267565srt:MinimumMember2020-01-012020-06-300001267565srt:MaximumMember2020-01-012020-06-300001267565coll:TevaLitigationMember2019-09-112019-09-110001267565coll:PurduePharmaLimitedPartnershipPatentInfringementDistrictOfMassachusettsMember2020-01-012020-06-300001267565coll:PayorGroupsAndWarminsterTownshipMember2019-03-012019-03-310001267565coll:TevaLitigationMember2020-01-012020-06-300001267565coll:PayorGroupsAndWarminsterTownshipMember2020-06-300001267565coll:OpioidLitigationMember2020-06-300001267565coll:OpioidLitigationMember2019-10-182019-10-180001267565coll:NucyntaMembersrt:MaximumMembercoll:CommencementScenario2Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:NucyntaMembersrt:MaximumMembercoll:CommencementScenario1Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:NucyntaCommercializationAgreementMember2018-01-090001267565coll:TevaLitigationMember2018-02-222018-02-220001267565us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-06-300001267565coll:PurduePharmaLimitedPartnershipPatentInfringementMembersrt:MaximumMember2020-01-012020-06-300001267565us-gaap:PerformanceSharesMember2020-01-012020-06-3000012675652020-04-012020-06-3000012675652019-04-012019-06-3000012675652019-01-012019-06-300001267565coll:PurduePharmaLimitedPartnershipPatentInfringementMember2020-01-012020-06-300001267565coll:DebtSingleVoluntaryPrepaymentOfThresholdAmountPriorToSecondYearAnniversaryOfClosingDateMembercoll:PharmakonTermNotesMember2020-02-062020-02-060001267565coll:DebtPrepaidPriorToSecondYearAnniversaryOfClosingDateMembercoll:PharmakonTermNotesMember2020-02-062020-02-060001267565coll:DebtPrepaidBetweenSecondAndThirdYearAnniversaryOfClosingDateMembercoll:PharmakonTermNotesMember2020-02-062020-02-060001267565coll:DebtPrepaidBetweenOnOrAfterThirdYearAnniversaryOfClosingDateMembercoll:PharmakonTermNotesMember2020-02-062020-02-060001267565coll:PharmakonTermNotesMemberus-gaap:LondonInterbankOfferedRateLIBORMember2020-02-062020-02-060001267565coll:PharmakonTermNotesMember2020-02-062020-02-060001267565us-gaap:ConvertibleNotesPayableMember2020-02-130001267565us-gaap:ConvertibleNotesPayableMember2020-02-132020-02-130001267565us-gaap:ConvertibleNotesPayableMember2020-06-300001267565coll:ContractWithCustomerRefundLiabilityMember2020-01-012020-06-300001267565coll:ContractWithCustomerRefundLiabilityMember2019-01-012019-06-300001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2019-01-012019-06-300001267565coll:AllowanceForRebatesAndIncentivesMember2020-01-012020-06-300001267565coll:AllowanceAndChargebacksForTradeReceivablesMember2020-01-012020-06-300001267565coll:AllowanceForRebatesAndIncentivesMember2019-01-012019-06-300001267565us-gaap:ConvertibleNotesPayableMember2020-04-012020-06-300001267565us-gaap:ConvertibleNotesPayableMember2020-01-012020-06-300001267565coll:AssertioMembercoll:NucyntaMembercoll:NucyntaCommercializationAgreementMember2018-01-092018-01-090001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:AssetPurchaseAgreementMember2020-02-062020-02-060001267565coll:AssertioMembercoll:NucyntaMembersrt:MaximumMembercoll:AssetPurchaseAgreementMember2020-02-062020-02-060001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:SalesRoyaltyStructure5Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:SalesRoyaltyStructure4Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:SalesRoyaltyStructure3Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:SalesRoyaltyStructure2Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MinimumMembercoll:PriorScenario1Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MaximumMembercoll:SalesRoyaltyStructure4Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MaximumMembercoll:SalesRoyaltyStructure3Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MaximumMembercoll:SalesRoyaltyStructure2Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembersrt:MaximumMembercoll:PriorScenario1Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:SalesRoyaltyStructure5Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:SalesRoyaltyStructure4Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:SalesRoyaltyStructure3Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:SalesRoyaltyStructure2Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:SalesRoyaltyStructure1Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:PriorScenario1Membercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:NucyntaMembercoll:ThirdAmendmentToCommercializationAgreementMember2018-11-012018-11-300001267565coll:AssertioMembercoll:NucyntaMembercoll:AssetPurchaseAgreementMember2020-02-060001267565coll:AssertioMembercoll:NucyntaMembercoll:AssetPurchaseAgreementMember2020-02-062020-02-060001267565coll:NucyntaMember2020-06-300001267565coll:NucyntaMember2020-01-012020-06-300001267565coll:NucyntaCommercializationAgreementMember2020-01-012020-06-3000012675652020-02-132020-02-1300012675652020-01-012020-06-3000012675652020-01-012020-03-310001267565coll:AssetPurchaseAgreementMember2020-02-060001267565coll:NucyntaMember2018-11-0800012675652019-12-3100012675652020-06-30iso4217:USDxbrli:purecoll:Diso4217:USDxbrli:sharescoll:lawsuitcoll:patentcoll:itemxbrli:shares

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, 2020

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

Graphic

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
(Do not check if
smaller reporting company)

  

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, 2020, there were 34,525,650 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

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

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

79

Item 3.

Defaults Upon Senior Securities

80

Item 4.

Mine Safety Disclosures

80

Item 5.

Other Information

80

Item 6.

Exhibits

81

Signature

82

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 product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product;
the size of the markets for our products and any product candidates, 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 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. and Teva Pharmaceuticals USA, Inc.;
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 may in-license from third parties;
our ability to attract collaborators with development, regulatory and commercialization expertise;
our ability to obtain funding for our operations and business development;
our ability to comply with the terms of our outstanding indebtedness;
regulatory developments in the United States;
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;
the loss of key commercial, scientific or management personnel;
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, 

2020

2019

Assets

 

    

 

    

Current assets

Cash and cash equivalents

$

145,678

$

170,019

Accounts receivable

81,195

72,953

Inventory

18,815

9,643

Prepaid expenses and other current assets

 

5,125

 

3,105

Total current assets

 

250,813

 

255,720

Property and equipment, net

 

15,156

 

11,854

Operating lease assets

8,697

9,047

Intangible asset, net

369,494

29,503

Restricted cash

2,547

Other noncurrent assets

163

178

Total assets

$

646,870

$

306,302

Liabilities and shareholders' equity

Current liabilities

Accounts payable

$

8,182

$

6,247

Accrued expenses

 

25,111

 

33,480

Accrued rebates, returns and discounts

171,053

157,549

Current portion of term notes payable

47,069

3,833

Current portion of operating lease liabilities

696

656

Total current liabilities

 

252,111

 

201,765

Term notes payable, net of current portion

133,862

7,667

Convertible senior notes

96,046

Operating lease liabilities, net of current portion

 

9,084

 

9,438

Total liabilities

 

491,103

 

218,870

Commitments and contingencies (see Note 14)

Shareholders’ equity:

Preferred stock, $0.001 par value; authorized shares - 5,000,000 at June 30, 2020 and December 31, 2019; issued and outstanding shares - none at June 30, 2020 and December 31, 2019

Common stock, $0.001 par value; authorized shares - 100,000,000 at June 30, 2020 and December 31, 2019; issued and outstanding shares - 34,494,302 at June 30, 2020 and 33,678,840 at December 31, 2019

 

34

 

34

Additional paid-in capital

 

507,124

 

447,297

Accumulated deficit

 

(351,391)

 

(359,899)

Total shareholders’ equity

 

155,767

 

87,432

Total liabilities and shareholders’ equity

$

646,870

$

306,302

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, 

2020

2019

2020

2019

Product revenues, net

$

78,058

$

75,040

$

154,569

$

149,556

Cost of product revenues

Cost of product revenues (excluding intangible asset amortization)

12,899

44,966

40,128

90,442

Intangible asset amortization

16,795

3,688

27,090

7,376

Total cost of products revenues

 

29,694

48,654

 

67,218

 

97,818

Gross profit

48,364

26,386

87,351

51,738

Operating expenses

Research and development

2,493

2,459

5,159

5,451

Selling, general and administrative

 

29,322

 

28,935

 

60,582

 

61,287

Total operating expenses

 

31,815

 

31,394

 

65,741

 

66,738

Income (loss) from operations

 

16,549

 

(5,008)

 

21,610

 

(15,000)

Interest expense

 

(8,259)

 

(236)

 

(13,082)

 

(470)

Interest income

14

532

226

1,058

Income (loss) before income taxes

8,304

(4,712)

8,754

(14,412)

Provision for income taxes

246

246

Net income (loss)

$

8,058

$

(4,712)

$

8,508

$

(14,412)

Earnings (loss) per share — basic

$

0.23

$

(0.14)

$

0.25

$

(0.43)

Weighted-average shares — basic

34,395,266

33,397,709

34,247,977

33,338,243

Earnings (loss) per share — diluted

$

0.23

$

(0.14)

$

0.24

$

(0.43)

Weighted-average shares — diluted

35,091,906

33,397,709

35,089,740

33,338,243

See accompanying notes to the Condensed Consolidated Financial Statements.

5

Table of Contents

Collegium Pharmaceutical, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six months ended June 30, 

2020

    

2019

Operating activities

Net income (loss)

$

8,508

$

(14,412)

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

Amortization expense

27,090

7,376

Depreciation expense

394

355

Stock-based compensation expense

 

10,535

 

8,425

Non-cash lease expense

36

229

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

 

3,860

 

Changes in operating assets and liabilities:

Accounts receivable

(8,242)

(3,333)

Inventory

(9,785)

(2,136)

Prepaid expenses and other assets

 

(2,005)

 

509

Accounts payable

 

1,935

 

(1,209)

Accrued expenses

 

(8,645)

 

(3,285)

Accrued rebates, returns and discounts

13,504

13,481

Operating lease assets and liabilities

734

Other long-term liabilities

(676)

Net cash provided by operating activities

 

37,185

 

6,058

Investing activities

Purchase of intangible asset

(368,226)

Purchases of property and equipment

(1,662)

 

(4,198)

Net cash used in investing activities

 

(369,888)

 

(4,198)

Financing activities

Proceeds from issuances of common stock from employee stock purchase plans

357

444

Proceeds from the exercise of stock options

 

6,080

 

299

Payments made for employee restricted stock tax withholdings

(1,922)

(523)

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

(12,500)

Repayment of term loan

(11,500)

Net cash provided by financing activities

 

310,909

 

220

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

 

(21,794)

 

2,080

Cash, cash equivalents and restricted cash at beginning of period

 

170,019

 

146,633

Cash, cash equivalents and restricted cash at end of period

$

148,225

$

148,713

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

Cash and cash equivalents

$

145,678

$

148,713

Restricted cash

2,547

Total cash, cash equivalents and restricted cash

$

148,225

$

148,713

Supplemental disclosure of cash flow information

Cash paid for interest

$

8,259

$

362

Supplemental disclosure of non-cash activities

Acquisition of property and equipment in accounts payable and accrued expenses

$

1,555

$

512

Accrued royalties discharged upon closing of asset acquisition

$

1,145

$

Inventory used in the construction and installation of property and equipment

$

613

$

Receivable from stock option exercises in other current assets

$

$

5

Operating lease assets assumed

$

$

9,957

Operating lease liabilities assumed

$

$

10,691

See accompanying notes to the Condensed Consolidated Financial Statements.

6

Table of Contents

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”). In December 2017, the Company entered into a Commercialization Agreement (the “Nucynta Commercialization Agreement”) with Assertio Therapeutics, Inc. (formerly known as Depomed) (“Assertio”), pursuant to which the Company acquired the right to commercialize the Nucynta Products in the United States. The Company began shipping and recognizing product sales on the Nucynta Products on January 9, 2018 and began marketing the Nucynta Products in February 2018. Nucynta ER is an extended-release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate-release formulation of tapentadol that is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults.

On February 6, 2020, the Company entered into an Asset Purchase Agreement with Assertio (the “Nucynta Purchase Agreement”), pursuant to which the Company agreed to acquire from Assertio certain assets related to the Nucynta Products (the “Nucynta Acquisition”), including the license from Grünenthal GmbH (“Grünenthal”), for an aggregate purchase price of $375,000, subject to certain closing and post-closing adjustments as described in the Nucynta Purchase Agreement. On February 13, 2020, the Company closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement. Upon closing, the Nucynta Commercialization Agreement was effectively terminated and the Company’s royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company will pay royalties directly to Grünenthal at a rate of 14% of net sales of the Nucynta Products and no longer pay royalties to Assertio.

In March 2020, the World Health Organization declared the continued spread of a novel coronavirus (“COVID-19”) a pandemic. The pandemic has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. The travel restrictions and “social distancing” recommendations resulting from the spread of COVID-19 have impacted the Company’s sales professionals’ ability to travel to and meet with healthcare providers in person. 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, the COVID-19 pandemic and actions taken to contain it have impacted revenue (due to fewer new patients beginning therapy with the Company’s products and adverse impact on the Company’s ability to promote products due to closure or limited operations of many physicians’ offices) and decreased certain operating expenses, including travel, marketing and expenses associated with participation in congresses that have been postponed. The Company believes that the disruptions caused by COVID-19 will continue through 2020 and there remains substantial uncertainty as to when such disruptions will cease (or ease).

The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to successfully commercialize products, changing market conditions for products and development of competing products, changing regulatory environment and reimbursement landscape, litigation related to opioid marketing and distribution practices, manufacture of adequate commercial inventory, inability to secure adequate supplies of active pharmaceutical ingredients, key personnel retention, protection of intellectual property, patent infringement litigation and the availability of additional capital financing on terms acceptable to the Company.

7

Table of Contents

The Company believes that its cash and cash equivalents at June 30, 2020, 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 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, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. The results of operations for the six months ended June 30, 2020 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 reserves. 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, 2019 (the “Annual Report”).

8

Table of Contents

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. During the interim period covered by this Quarterly Report on Form 10-Q, the Company assumed certain material assets and liabilities in connection with consummating the Nucynta Acquisition, in addition to the issuance of convertible notes and term notes that required a review for embedded derivatives. As a result, the Company adopted the following accounting policy:

Embedded Derivatives

The Company accounts for derivative financial instruments as either equity or liabilities in accordance with Accounting Standards Codification Topic 815, Derivatives and Hedging, based on the characteristics and provisions of each instrument. Embedded derivatives are required to be bifurcated from the host instruments and recorded at fair value if the derivatives are not clearly and closely related to the host instruments on the date of issuance. The Company’s term notes (see Note 10) and convertible notes (see Note 11) contain certain features that, in accordance with ASC 815, are not clearly and closely related to the host instrument and represent derivatives that are required to be re-measured at fair value each reporting period. The Company determined that the estimated fair value of the derivatives at issuance and as of June 30, 2020 were not material based on a scenario-based cash flow model that uses unobservable inputs that reflect the Company’s own assumptions. Should the Company’s assessment of the probabilities around these scenarios change, including for changes in market conditions, there could be a change to the fair value.

Other than the aforementioned changes, 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.

Reclassifications

The Company has reclassified certain amounts in its Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 to conform to the 2020 presentation. Specifically, the Company disaggregated previously reported cost of product revenues of $48,654 for the three months ended June 30, 2019 into the captions Cost of product revenues (excluding intangible asset amortization) $44,966 and Intangible asset amortization $3,688. In addition, the Company disaggregated previously reported cost of product revenues of $97,818 for the six months ended June 30, 2019 into the captions Cost of product revenues (excluding intangible asset amortization) $90,442 and Intangible asset amortization $7,376. The reclassifications relate to the presentation of the Company’s gross profit and amortization expense and were made to provide the readers of the Company’s consolidated financial statements with additional insight into how the Company and its management view and evaluate its performance and profitability. This reclassification within the consolidated statements of operations for the three and six months ended June 30, 2019 had no impact on previously reported total consolidated revenues or consolidated results of operations.

Recently Adopted Accounting Pronouncements

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

The Company adopted Accounting Standard Updated (“ASU”) 2016-13, Financial Instruments – Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to issuance, the FASB issued ASUs 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03 to provide additional guidance on the adoption of ASU 2016-13. The Company adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

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

9

Table of Contents

December 31, 2022. 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 amendments of ASU 2020-04 and disclose the effect on its consolidated financial statements

Recently Issued Accounting Pronouncements Not Yet Adopted

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 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the standard’s effect on the Company’s consolidated financial statements.

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, which represents the Company’s only contract asset. Payment is typically received 30 to 90 days after satisfaction of the Company’s performance obligations and generally does not have an effect on contract asset and contract liability balances. 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 the 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.

10

Table of Contents

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 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 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 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.

11

Table of Contents

The following tables summarize activity in each of the Company’s product revenue provision and allowance categories for the six months ended June 30, 2020 and 2019:

    

    

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

    

Trade

Rebates and

Product

Allowances and

Six months ended June 30, 2019

Incentives (1)

Returns (2)

Chargebacks (3)

Balance at December 31, 2018

$

129,318

$

15,465

$

14,841

Provision related to current period sales

128,509

9,150

31,988

Changes in estimate related to prior period sales

(3,017)

Credits/payments made

(119,659)

(1,502)

(32,673)

Balance at June 30, 2019

$

135,151

$

23,113

$

14,156

(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 Condensed 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, 2020, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

Disaggregation of Revenue

The Company disaggregates its product revenue, net from contracts with customers, into the categories included in the table below. These categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors:

Three months ended June 30, 

Six months ended June 30, 

2020

2019

2020

2019

Xtampza ER

$

33,557

    

$

26,018

$

65,064

$

51,152

Nucynta Products(1)

44,501

49,022

89,505

98,404

Total product revenues, net

$

78,058

$

75,040

$

154,569

$

149,556

(1)

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 three months ended June 30, 2019, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $29,461 and $19,561, 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. For the six months ended June 30, 2019, the Company recognized Nucynta IR and Nucynta ER product revenues, net of $59,322 and $39,082, respectively.

12

Table of Contents

4. License Agreements

The Company periodically enters into license agreements to develop and commercialize products. During the three and six months ended June 30, 2020 and 2019, the only products sold by the Company under a license agreement were the Nucynta Products. Prior to February 13, 2020, the Company sold the Nucynta Products pursuant to the rights licensed and acquired under the Nucynta Commercialization Agreement. Effective February 13, 2020, the Company sold the Nucynta Products pursuant to the rights licensed and acquired under the Nucynta Purchase Agreement, including certain intellectual property and manufacturing rights that it did not previously own under the Commercialization Agreement (see Note 8).

Nucynta Commercialization Agreement

On January 9, 2018 (the “Nucynta Commercialization Closing Date”), the Company consummated the transactions contemplated by the Nucynta Commercialization Agreement, pursuant to which Assertio agreed to grant a sublicense of certain of its intellectual property related to the Nucynta Products for commercialization in the United States. The Company began recording revenues from sales of the Nucynta Products on the Nucynta Commercialization Closing Date and began commercial promotion of the Nucynta Products in February 2018. Pursuant to the Nucynta Commercialization Agreement, the Company paid a one-time, non-refundable license fee of $10,000 to Assertio on the Nucynta Commercialization Closing Date, $6,223 for transferred inventory and $1,987 as reimbursement for prepaid expenses. The Company also assumed the existing liabilities of the Nucynta Products, including $22,660 related to sales of Nucynta Products that occurred prior to the Nucynta Commercialization Closing Date. The Nucynta Commercialization Agreement initially required the Company to pay a guaranteed minimum royalty of $135,000 per year through December 2021, payable in quarterly payments of $33,750, prorated in 2018 for the Nucynta Commercialization Closing Date, as well as a variable royalty based on annual net sales over $233,000. Beginning January 2022 and for each year of the Nucynta Commercialization Agreement term thereafter, the Company was required to pay a variable royalty on annual net sales of the Nucynta Products, but without a guaranteed minimum.

Effective August 2018, the Company entered into a Second Amendment to the Nucynta Commercialization Agreement to clarify the mechanism for transferring title of products to be sold by the Company pursuant to the agreement and various related matters. The Second Amendment did not have an impact on the Company’s financial statements.

Effective November 2018, the Company entered into the Third Amendment to the Nucynta Commercialization Agreement to adjust the royalty structure and termination clauses. Pursuant to the amended Nucynta Commercialization Agreement, the $135,000 guaranteed minimum annual royalties were eliminated, and the Company was no longer required to secure its royalty payment obligations with a standby letter of credit. Beginning on January 1, 2019 and thereafter, the Company was obligated to make royalty payments to Assertio conditional upon net sales and based on the following royalty structure for the period between January 1, 2019 and December 31, 2021:

(i)65% of annual net sales of the Nucynta Products up to $180,000, plus

(ii)14% of annual net sales of the Nucynta Products between $180,000 and $210,000, plus

(iii)58% of annual net sales of the Nucynta Products between $210,000 and $233,000, plus

(iv)20% of annual net sales of the Nucynta Products between $233,000 and $258,000, plus

(v)15% of annual net sales of the Nucynta Products in excess of $258,000.

The Amendment did not modify the royalties payable on sales of the Nucynta Products on and after January 1, 2022, which remained as contemplated by the Nucynta Commercialization Agreement as in effect on January 9, 2018. In addition, prior to January 1, 2022, the Company was obligated to make royalty payments to Assertio, for ultimate payment to Grünenthal, at a rate of 14% of net sales of the Nucynta Products, subject to a guaranteed royalty of $34,000 when net sales were between $180,000 and $243,000. The Amendment further provided that if annual net sales of the Nucynta Products were less than $180,000 in any 12-month period through January 1, 2022, or if they are less than $170,000 in any 12-month period commencing on January 1, 2022, Assertio had the right to terminate the Nucynta Commercialization Agreement without penalty. The Amendment further provides that the Company did not have a right to terminate the Nucynta Commercialization Agreement prior to December 31, 2021.

In connection with execution of the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company (the “Warrant”) at an

13

Table of Contents

exercise price of $19.20 per share. The Warrant will expire in November 2022 and includes customary adjustments for changes in the Company’s capitalization.

Nucynta Purchase Agreement

On February 6, 2020, the Company entered into the Nucynta Purchase Agreement with Assertio, pursuant to which the Company agreed to acquire from Assertio certain intellectual property and manufacturing rights related to the Nucynta Products for an aggregate purchase price of $375,000, subject to certain closing and post-closing adjustments as described in the Nucynta Purchase Agreement. In connection with the Nucynta Purchase Agreement, the Company also agreed to assume certain regulatory and supply chain contracts and obligations related to Nucynta Products. The Nucynta Purchase Agreement contains customary representations, warranties and covenants, and indemnification provisions subject to specified limitations. After the closing of the Nucynta Purchase Agreement, for the years 2020 and 2021, the Company will pay conditional royalties directly to Grünenthal at a rate of 14% of net sales of the Nucynta Products. This royalty payment obligation will replace the Company’s previous obligation to pay a royalty rate of 14% of net sales of the Nucynta Products to Grünenthal, subject to a guaranteed royalty of $34,000 when net sales are between $180,000 and $243,000.

On February 13, 2020, the Company closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement. Upon the closing, the Nucynta Commercialization Agreement was terminated, with the exception of certain provisions thereof which survived pursuant to the terms of the Nucynta Purchase Agreement, and the Company’s royalty payment obligations to Assertio thereunder ceased.

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

14

Table of Contents

5. Earnings Per Share

Basic net earnings per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock, plus potentially dilutive securities outstanding for the period, as determined in accordance with the treasury stock accounting method. Potentially dilutive securities outstanding include stock options, unvested restricted stock units, performance share units, 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 (loss) per common share:

Three months ended June 30, 

Six months ended June 30, 

2020

 

2019 (1)

2020

 

2019 (1)

Numerator:

Net income (loss)

$

8,058

$

(4,712)

$

8,508

$

(14,412)

Denominator:

Weighted-average shares outstanding - basic

34,395,266

    

33,397,709

34,247,977

    

33,338,243

Effect of dilutive securities:

Stock options

432,688

491,985

Restricted stock units

212,221

262,849

Performance share units

8,796

8,459

Employee Stock Purchase Program

22,822

31,608

Warrants

20,113

46,862

Weighted average shares outstanding - diluted

35,091,906

33,397,709

35,089,740

33,338,243

Earnings (loss) per share — basic

$

0.23

$

(0.14)

$

0.25

$

(0.43)

Earnings (loss) per share — diluted

$

0.23

$

(0.14)

$

0.24

$

(0.43)

(1)The Company incurred a net loss for the three and six months ended June 30, 2019, causing inclusion of any potentially dilutive securities to have an anti-dilutive effect, which resulted in basic loss per share and dilutive loss per share being equivalent.

The Company has the option to settle the conversion obligation for its convertible senior notes due in 2026 in cash, shares or any 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 the Company excluded 4,925,134 shares related to the convertible senior notes because their effect is anti-dilutive.

The following table presents dilutive securities excluded from the calculation of diluted earnings per share due to their anti-dilutive effect:

Three months ended June 30, 

 

Six months ended June 30, 

2020

 

2019

 

2020

 

2019

Stock options

2,361,601

4,190,116

2,269,895

4,190,116

Warrants

1,041,667

1,041,667

Restricted stock units

722,388

892,237

648,842

892,237

Performance share units

267,498

99,400

267,498

99,400

Convertible senior notes

4,925,134

4,925,134

15

Table of Contents

6. Fair Value of Financial Instruments

Disclosures of fair value information about financial instruments are required 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 six months ended June 30, 2020 and 2019.

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, 2020 and December 31, 2019:

Significant

Quoted Prices

other

Significant

in active

observable

unobservable

markets

inputs

inputs

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

June 30, 2020

Money market funds, included in cash equivalents

$

45,065

$

45,065

$

$

December 31, 2019

Money market funds, included in cash equivalents

$

94,841

$

94,841

$

$

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. As of June 30, 2020, the convertible senior notes had a fair value of approximately $129,151 and a net carrying value of $96,046.

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, 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 operating lease liabilities approximated their estimated fair values.

16

Table of Contents

7. Inventory

Inventory as of June 30, 2020 and December 31, 2019 consisted of the following:

As of June 30, 

As of December 31, 

2020

2019

Raw materials

$

5,153

$

795

Work in process

2,643

1,427

Finished goods

11,019

7,421

Total inventory

$

18,815

$

9,643

The aggregate charges related to excess inventory for the three and six months ended June 30, 2020 and 2019 were immaterial. These expenses were recorded as a component of cost of product revenues. 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. During the three and six months ended June 30, 2019, inventory used in the construction and installation of property and equipment was immaterial.

8. Intangible Asset

As of June 30, 2020 and December 31, 2019, 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, 

2020

 

2019

Gross carrying amount

$

521,170

$

154,089

Accumulated amortization

(151,676)

 

(124,586)

Intangible asset, net

$

369,494

$

29,503

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 Company determined that the Nucynta Acquisition, closed in February 2020, should be accounted for as an asset acquisition in accordance with ASC Topic 805-50 because substantially all of the fair value of the gross assets acquired are concentrated in the right to commercialize the Nucynta Products in the U.S. The Company concluded that the fair value estimates of the assets surrendered was more clearly evident than the fair value of the assets received, and therefore followed a cost accumulation model to determine the consideration transferred in the asset acquisition.

17

Table of Contents

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.

Nucynta Commercialization Agreement

The Company determined that the Nucynta Commercialization Agreement, which closed in January 2018, should be accounted for as an asset acquisition in accordance with ASC Topic 805-50, as substantially all of the fair value of the gross assets acquired was concentrated in the sublicense of the Nucynta Products, which is a single identifiable asset. The Company concluded that the fair value estimates of the assets surrendered, liabilities incurred, and equity interests issued were more clearly evident than the fair value of the assets received, and therefore followed a cost accumulation model to determine the consideration transferred in the asset acquisition.

Under the original terms of the Nucynta Commercialization Agreement, the Company was obligated to make guaranteed annual minimum royalty payments of $537,000 to Assertio, which consisted of scheduled payments of $132,000 in 2018, $135,000 in 2019, $135,000 in 2020, and $135,000 in 2021. Due to the nature of the guaranteed minimum royalty payment obligation and the fact that it was required to be settled in cash, the Company determined that the future minimum royalty payments represented a liability that should be recorded at its fair value as of the Nucynta Commercialization Closing Date. The Company calculated the fair value of the future minimum royalty payments to be $482,300 using a discount rate of 5.7%. The discount rate was determined based on a review of observable market data relating to similar liabilities. The Company determined the $54,700 discount should be recognized as interest expense in the Statement of Operations using the effective interest method and over the repayment period from January 9, 2018 through December 2021. Prior to the Third Amendment to the Nucynta Commercialization Agreement in November 2018, the Company recognized interest expense of $19,281 relating to the minimum royalty payments and amortization expense of $107,662 related to the intangible asset.

Effective November 8, 2018 (the “Third Amendment Date”), the Company entered into the Third Amendment to the Nucynta Commercialization Agreement, which eliminated the guaranteed minimum royalty payment obligations for

18

Table of Contents

years 2019, 2020 and 2021. As a result, the Company remeasured the remaining contractual obligation as of the Third Amendment Date and recorded a reduction of the acquired intangible asset and obligation. As of December 31, 2018, the Company had paid all of the $132,000 of minimum royalty payment obligation owed under the Nucynta Commercialization Agreement for 2018. In connection with the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company at an exercise price of $19.20 per share. The Company estimated the fair value of the warrant on the date of issuance to be approximately $8,043 using the Black-Scholes option-pricing model. See Note 12 for further detail regarding the warrant issued to Assertio.

A summary of the gross carrying amount, accumulated amortization, and net book value of the Nucynta Intangible Asset from the execution of the Nucynta Commercialization Agreement through period end are as follows:

Gross Carrying Value

Accumulated Amortization

Net Book Value

Intangible Asset, net

Cost basis as of acquisition date

$

515,627

$

$

515,627

Amortization expense from acquisition date through Third Amendment Date

(107,662)

(107,662)

Adjustment due to the remeasurement of liability as of Third Amendment Date

(369,581)

(369,581)

Additional costs incurred as of Third Amendment Date(1)

8,043

8,043

Amortization expense from Amendment Date through fiscal year end

(2,172)

(2,172)

Balance as of December 31, 2018

$

154,089

$

(109,834)

$

44,255

Amortization expense

(14,752)

(14,752)

Balance as of December 31, 2019

$

154,089

$

(124,586)

$

29,503

Amortization expense through Nucynta Acquisition

(1,754)

(1,754)

Additional cost incurred from Nucynta Acquisition

367,081

367,081

Amortization expense from Nucynta Acquisition through period end

(25,336)

(25,336)

Balance as of June 30, 2020:

$

521,170

$

(151,676)

$

369,494

(1)Represents fair value of warrant issued in connection with the Amendment to the Nucynta Commercialization Agreement.

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 will be amortized prospectively over its revised useful life. The Company will recognize 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. Prior to the Nucynta Acquisition, the Company had recognized $126,340 of amortization expense related to the Nucynta Intangible Asset. As the accumulated cost basis of the Nucynta Intangible Asset was increased with the Nucynta Acquisition, the Company will continue to prospectively amortize the resulting net intangible asset on a straight-line basis over the remaining useful life.

19

Table of Contents

The following table presents amortization expense recognized for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, 

Six months ended June 30, 

2020

 

2019

2020

2019

Nucynta amortization expense included in cost of product revenues

$

16,795

$

3,688

$

27,090

$

7,376

As of June 30, 2020, the remaining amortization period is approximately 5.5 years and is expected to be recognized in the following periods:

Years ended December 31,

Amortization Expense

2020

$

33,590

2021

67,181

2022

67,181

2023

67,181

2024

67,181

2025

67,180

Remaining amortization expense:

$

369,494

9. Accrued Expenses

Accrued expenses as of June 30, 2020 and December 31, 2019 consisted of the following:

As of June 30, 

As of December 31, 

2020

 

2019

Accrued royalties

$

12,531

$

21,893

Accrued product taxes and fees

3,903

Accrued bonuses

2,331

 

4,047

Accrued incentive compensation

1,586

1,650

Accrued interest

 

1,436

 

473

Accrued payroll and related benefits

1,284

1,154

Accrued audit and legal

 

623

308

Accrued sales and marketing

424

775

Accrued other operating costs

993

3,180

Total accrued expenses

$

25,111

$

33,480

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 net proceeds.

The term notes bear interest at a rate based upon the three-month LIBOR rate, subject to a LIBOR floor of 2.0%, plus a margin of 7.5% per annum, payable quarterly in arrears. The Company is required to repay the term notes by making equal quarterly payments of principal beginning in the first quarter immediately following the third month anniversary of the Closing Date. The term notes will mature on the calendar quarter end immediately following the 48-month anniversary of the Closing Date and is guaranteed by the Company’s material domestic subsidiaries and also secured by substantially all of the Company’s material assets. On the Closing Date, the Company paid to Pharmakon a facility fee

20

Table of Contents

equal to 2.50% of the aggregate principal amount of the term notes, or $5,000, in addition to $427 of other expenses incurred by Pharmakon and reimbursed by the Company (together, the “discount”). Net proceeds of $194,573 were transferred to Assertio by the Company as agent in partial satisfaction of the Nucynta Purchase Agreement. In addition, the Company capitalized $2,456 of term notes issuance costs, related to legal and advisory fees.

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

The Loan Agreement also permits single voluntary prepayments of the Loan Agreement of less than or equal to $50,000 made solely from the proceeds of an equity issuance by the Company. If equity prepayment occurs prior to the second-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 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. As of June 30, 2020, the Company was in compliance with all of its covenants.

During the three and six months ended June 30, 2020, the Company recognized interest expense of $5,664 and $8,650, respectively, related to the term notes.

As of June 30, 2020, scheduled principal repayments under the term notes are as follows:

Years ended December 31,

Principal Payments

2020

$

25,000

2021

50,000

2022

37,500

2023

50,000

2024

25,000

Total before unamortized discount and issuance costs

$

187,500

Less: unamortized discount and issuance costs

(6,569)

Total term notes

$

180,931

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.

21

Table of Contents

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.

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.

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.

22

Table of Contents

As of June 30, 2020, 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.

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 is amortized to interest expense using the effective interest method over six years. The Equity Component, which is included in the additional paid in capital portion of stockholders’ equity on the Company’s consolidated balance sheet, is not remeasured as long as it continues to meet the conditions for equity classification.

As of June 30, 2020, the convertible notes outstanding consisted of the following:

Liability component:

Principal

$

143,750

Less: unamortized debt discount and issuance costs

(47,704)

Net carrying amount

$

96,046

Equity component, net of issuance costs of $1,773

$

44,777

The Company determined the expected life of the convertible notes was equal to its six-year term. The effective interest rate on the Liability Component of the convertible notes was 10.27%. As of June 30, 2020, the “if-converted value” did not exceed the remaining principal amount of the convertible notes. The fair value of the convertible notes was determined based on data points other than quoted prices that are observable, either directly or indirectly, and has been classified as Level 2 within the fair value hierarchy. The fair value of the convertible notes, which differs from their carrying value, is influenced by market interest rates, the Company’s stock price and stock price volatility.

23

Table of Contents

The following table presents the total interest expense recognized related to the convertible notes during the three and six months ended June 30, 2020:

&#