Quarterly Report (10-q)

Date : 08/07/2019 @ 8:04PM
Source : Edgar (US Regulatory)
Stock : Collegium Pharmaceutical Inc (COLL)
Quote : 20.71  0.31 (1.52%) @ 11:00PM
After Hours
Last Trade
Last $ 20.71 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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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, 2019

OR

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

For the transition period from              to

Commission file number: 001-37372

Collegium Pharmaceutical, Inc.

(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)

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

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

02072
(Zip Code)

( 781 ) 713-3699

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

COLL

The NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

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

Large accelerated filer

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of July 31, 2019, there were 33,470,530 shares of Common Stock, $0.001 par value per share, outstanding.

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;
our ability to effectively commercialize in-licensed products and manage our relationships with licensors.
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;
our ability to attract collaborators with development, regulatory and commercialization expertise;
our ability to obtain funding for our operations and business development;
regulatory developments in the United States;
our expectations regarding 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

 

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, 

2019

2018

Assets

 

    

 

    

Current assets

Cash and cash equivalents

$

148,713

$

146,633

Accounts receivable

81,279

77,946

Inventory

9,953

7,817

Prepaid expenses and other current assets

 

4,618

 

5,116

Total current assets

 

244,563

 

237,512

Property and equipment, net

 

10,367

 

9,274

Operating lease assets

9,574

Intangible assets, net

36,879

44,255

Other noncurrent assets

198

204

Total assets

$

301,581

$

291,245

Liabilities and shareholders' equity

Current liabilities

Accounts payable

$

10,941

$

12,150

Accrued expenses

 

24,517

 

30,551

Accrued rebates, returns and discounts

158,264

144,783

Current portion of term loan payable

1,917

1,642

Current portion of operating lease liabilities

633

Total current liabilities

 

196,272

 

189,126

Term loan payable, net of current portion

9,583

9,858

Operating lease liabilities, net of current portion

 

9,903

 

Other noncurrent liabilities

676

Total liabilities

 

215,758

 

199,660

Commitments and contingencies (see Note 14)

Shareholders’ equity:

Preferred stock, $0.001 par value; authorized shares - 5,000,000 at June 30, 2019 and December 31, 2018; issued and outstanding shares - none at June 30, 2019 and December 31, 2018

Common stock, $0.001 par value; authorized shares - 100,000,000 at June 30, 2019 and December 31, 2018; issued and outstanding shares - 33,416,553 at June 30, 2019 and 33,265,629 at December 31, 2018

 

33

 

33

Additional paid-in capital

 

437,379

 

428,729

Accumulated deficit

 

(351,589)

 

(337,177)

Total shareholders’ equity

 

85,823

 

91,585

Total liabilities and shareholders’ equity

$

301,581

$

291,245

See accompanying notes to the Condensed Consolidated Financial Statements.

4

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, 

2019

2018

2019

2018

Product revenues, net

$

75,040

$

73,061

$

149,556

$

136,810

Costs and expenses

Cost of product revenues

48,654

46,838

97,818

89,944

Research and development

2,459

2,237

5,451

4,505

Selling, general and administrative

 

28,935

 

31,279

 

61,287

 

62,861

Total costs and expenses

 

80,048

 

80,354

 

164,556

 

157,310

Loss from operations

 

(5,008)

 

(7,293)

 

(15,000)

 

(20,500)

Interest expense

 

(236)

 

(6,158)

 

(470)

 

(11,858)

Interest income

532

391

1,058

646

Net loss

$

(4,712)

$

(13,060)

$

(14,412)

$

(31,712)

Loss per share - basic and diluted

$

(0.14)

$

(0.40)

$

(0.43)

$

(0.96)

Weighted-average shares - basic and diluted

33,397,709

32,967,718

33,338,243

32,935,873

See accompanying notes to the Condensed Consolidated Financial Statements.

5

Collegium Pharmaceutical, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six months ended June 30, 

2019

    

2018

Operating activities

Net loss

$

(14,412)

$

(31,712)

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

Amortization expense for Nucynta asset acquisition

7,376

61,933

Depreciation and amortization, excluding Nucynta asset acquisition

355

578

Stock-based compensation expense

 

8,425

 

6,254

Non-cash lease expense

229

Non-cash interest expense for Nucynta asset acquisition

 

 

11,471

Changes in operating assets and liabilities:

Accounts receivable

(3,333)

(58,411)

Inventory

(2,136)

(508)

Prepaid expenses and other assets

 

509

 

(608)

Accounts payable

 

(1,209)

 

13,008

Accrued expenses

 

(3,285)

 

13,917

Accrued rebates, returns and discounts

13,481

69,346

Operating lease assets and liabilities

734

Other long-term liabilities

(676)

Net cash provided by operating activities

 

6,058

 

85,268

Investing activities

Upfront cash paid for Nucynta asset acquisition

(18,877)

Purchases of property and equipment

(4,198)

 

(987)

Net cash used in investing activities

 

(4,198)

 

(19,864)

Financing activities

Cash paid for common stock offerings costs

(30)

Proceeds from issuances of common stock from employee stock purchase plans

444

510

Proceeds from term loan amendment, net of repayment of amended term loan

10,020

Repayment of asset acquisition obligations

(64,500)

Proceeds from the exercise of stock options

 

299

 

3,905

Payments made for employee restricted stock tax withholdings

(523)

(356)

Net cash provided by (used in) financing activities

 

220

 

(50,451)

Net increase in cash, cash equivalents and restricted cash

 

2,080

 

14,953

Cash, cash equivalents and restricted cash at beginning of period

 

146,633

 

118,794

Cash, cash equivalents and restricted cash at end of period

$

148,713

$

133,747

Supplemental disclosure of cash flow information

Cash paid for offering costs

$

$

30

Cash paid for interest

$

362

$

242

Supplemental disclosure of non-cash activities

Offering costs in accrued expenses

$

$

25

Receivable from stock option exercises in other current assets

$

5

$

Acquisition of property and equipment in accounts payable and accrued expenses

$

512

$

1,184

Operating lease assets assumed

$

9,957

$

Operating lease liabilities assumed

$

10,691

$

Liabilities assumed from Nucynta asset acquisition included in accrued rebates, returns and discounts

$

$

22,406

Liabilities assumed from Nucynta asset acquisition included as a reduction to accounts receivable

$

$

254

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® (“Xtampza ER”) is an abuse-deterrent, extended-release, oral formulation of oxycodone. In April 2016, the U.S. Food and Drug Administration (“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.

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.

The Company believes that its cash and cash equivalents at June 30, 2019, 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, 2019, the results of operations for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The results of operations for the six months ended June 30,  2019 are not necessarily indicative of the results to be expected for the full year.

7

When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of its 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, 2018 (the “Annual Report”).

Significant Accounting Policies

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

Recently Adopted Accounting Pronouncements

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”) 2016-02, Leases (ASC Topic 842 ), as amended, on January 1, 2019, using the modified retrospective approach by initially applying the new standard at the adoption date and recognizing a cumulative-effect adjustment. This adoption method did not impact prior period financial statements and related disclosures. In addition, t he Company utilized the package of practical expedients permitted within the transition guidance, which, among other things, allowed the Company to carryforward the historical lease classification. Upon adoption, the new standard resulted in the Company recording material operating lease assets and corresponding operating lease liabilities on its balance sheet. As of June 30, 2019, the Company had operating lease assets of $9,574 and operating lease liabilities of $10,536 primarily related to operating lease agreements for its corporate headquarters. In addition, the Company implemented new accounting policies, processes and controls to identify and account for leases going forward. For additional information related to lease arrangements and accounting policies, please see Note 11.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (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. The new standard is effective for annual and interim periods beginning after December 15, 2019, 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 only source of revenue to date has been generated by 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.

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

8

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 60 days after satisfaction of the Company’s performance obligations and generally does not have an effect on contract asset and contract liability balances. Under the practical expedients permitted by the rules of the adoption, 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 chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns. The Company estimates the amount of variable consideration that should be included in the transaction price under the expected value method. These estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. These provisions reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract.  The amount of variable consideration that is included in the transaction price may be constrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  In general, performance obligations do not include any estimated amounts of variable consideration that are constrained. Actual amounts of consideration ultimately received may differ from the Company’s estimates.   If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

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

    

    

Trade

Rebates and

Product

Allowances and

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)

Rebates and incentives includes managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances. Provisions for rebates and discounts 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.

9

(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)

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, 2019, 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

Product revenues, net consisted of the following:

Three months ended June 30, 

Six months ended June 30, 

2019

2018

2019

2018

Xtampza ER

$

26,018

    

$

18,116

$

51,152

$

33,911

Nucynta Products

 

49,022

 

54,945

 

98,404

 

102,899

Total product revenues, net

$

75,040

$

73,061

$

149,556

$

136,810

4. License Agreements

The Company periodically enters into license and development agreements to develop and commercialize its products. The Company’s license and development agreements as of June 30, 2019 are as follows:

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 are eliminated, and the Company is no longer required to secure its royalty payment obligations with a standby letter of credit. Beginning on January 1, 2019 and thereafter, the Company will be conditionally 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

10

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

The Amendment does not modify the royalties payable on sales of the Nucynta Products on and after January 1, 2022, which will remain as contemplated by the Nucynta Commercialization Agreement as in effect on January 9, 2018, based on the following royalty structure:

(i) 58% of annual net sales of the Nucynta Products up to $233,000, plus

(ii) 25% of annual net sales of the Nucynta Products between $233,000 and $258,000, plus

(iii) 17.5% of annual net sales of the Nucynta Products in excess of $258,000.

In addition, prior to January 1, 2022, if the annual net sales of the Nucynta Products are in the range of $180,000 to $243,000, the Company will be required to pay a supplemental royalty to Assertio, for ultimate payment to Grünenthal GmbH, not to exceed a maximum of 4.9% of net sales of the Nucynta Products. If annual net sales of Products are 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, then Assertio will have the right to terminate the Nucynta Commercialization Agreement without penalty. The Amendment further provides that the Company does not have a right to terminate the Nucynta Commercialization Agreement prior to December 31, 2021. The Company will be required to pay a $5,000 termination fee to Assertio in connection with any termination by the Company with an effective date between December 31, 2021 and December 31, 2022. In connection with execution of the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company (the “Warrant”) at an exercise price of $19.20 per share. The Warrant will expire in November 2022 and includes customary adjustments for changes in the Company’s capitalization.

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

5. Loss per Common Share

The following table presents the computations of basic and dilutive net loss per share:

Three months ended June 30, 

Six months ended June 30, 

2019

 

2018

2019

 

2018

Loss attributable to common shareholders — basic and diluted

$

(4,712)

$

(13,060)

$

(14,412)

$

(31,712)

Weighted-average number of common shares used in net loss per share - basic and diluted

33,397,709

32,967,718

33,338,243

32,935,873

Loss per share - basic and diluted

$

(0.14)

$

(0.40)

$

(0.43)

$

(0.96)

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

Three months ended June 30, 

 

Six months ended June 30, 

2019

 

2018

 

2019

 

2018

Outstanding stock options

4,190,116

3,665,459

4,190,116

3,665,459

Warrants

1,041,667

1,041,667

Unvested restricted stock (1)

12,072

12,072

Restricted stock units

892,237

522,190

892,237

522,190

Performance share units

99,400

99,400

(1) - Includes shares of unvested restricted stock remaining from the early exercise of stock options.

11

6. Fair Value of Financial Instruments

Disclosures of fair value information about financial instruments are required, whether or not recognized in the balance sheet, for financial instruments with respect to which it is practicable to estimate that value. Fair value measurements and 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, 2019 and 2018.

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, 2019 and December 31, 2018:

Significant

Quoted Prices

other

Significant

in active

observable

unobservable

markets

inputs

inputs

June 30, 2019

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

Money market funds, included in cash equivalents

$

93,968

$

93,968

$

$

December 31, 2018

Money market funds, included in cash equivalents

$

92,914

$

92,914

$

$

As of June 30, 2019, the carrying amounts of the Company’s other assets and liabilities approximated their estimated fair values.

7. Inventory

Inventory consisted of the following:

As of June 30, 

As of December 31, 

2019

2018

Raw materials

$

1,664

$

496

Work in process

848

671

Finished goods

7,441

6,650

Total inventory

$

9,953

$

7,817

The aggregate charges related to excess inventory for the three and six months ended June 30, 2019 and 2018 were immaterial. These expenses were recorded as a component of cost of product revenues.

8. Intangible Assets

As of June 30, 2019 and December 31, 2018, the Company’s only intangible asset is related to the Nucynta Intangible Asset.

 

12

Nucynta Intangible Asset  

The Company determined the Nucynta Commercialization Agreement 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 is 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.

The table below represents the costs accumulated to acquire the sublicense of the Nucynta Products based on the terms of the Nucynta Commercialization Agreement, as amended:

Acquisition consideration:

Upfront cash paid

$

18,877

Minimum royalty payment obligation (1)

112,719

Rebates, incentives, trade allowances and chargebacks assumed

22,660

Warrant issued

8,043

Total acquisition consideration:

$

162,299

(1) Represents $132,000 of minimum royalty payments owed under the Nucynta Commercialization Agreement discounted for present value adjustments of $19,281 .

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

$

154,089

Inventory

6,223

Prepaid expenses

1,987

Total consideration allocated to assets acquired:

$

162,299

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 fair value of the future minimum royalty payments was recorded as a component of the intangible asset. 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 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.

13

The gross carrying amount and accumulated amortization of the Nucynta Intangible Asset were as follows:

As of June 30, 

As of December 31, 

2019

 

2018

Gross carrying amount

$

154,089

$

154,089

Accumulated amortization

(117,210)

 

(109,834)

Intangible assets, net

$

36,879

$

44,255

Warrant

In November 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 terms of the warrant are fixed, with the exception of customary adjustments for changes in the Company’s capitalization. The warrant may only be settled with the issuance of shares of common stock upon exercise and will expire in November 2022. The Company has recorded the relative fair value of the warrant as a component of equity interest issued by the Company as consideration transferred in the cost accumulation model for the asset acquisition. 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. The Company concluded that the warrant met the definition of an equity instrument and was recorded as a component of additional paid-in capital in the Company’s Condensed Consolidated Balance Sheet as of the issuance date.

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 determined that the useful life for the intangible asset was approximately 4.0 years from the Nucynta Commercialization Closing Date. The Company recognizes amortization expense as a component of cost of product revenues in the 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 Third Amendment to the Nucynta Commercialization Agreement, the Company had recognized $107,662 of amortization expense. As the accumulated cost basis of the intangible asset was reduced with the Third Amendment to the Nucynta Commercialization Agreement, the Company will continue to prospectively amortize the residual net intangible asset on a straight-line basis over the remaining useful life.

For the three months ended June 30, 2019 and 2018, the Company recognized amortization expenses of $3,688 and $32,407 respectively. For the six months ended ended June 30, 2019 and 2018, the Company recognized amortization expenses of $7,376 and $61,933 respectively. As of June 30, 2019, the remaining amortization period is approximately 2.5 years and the remaining estimated amortization for 2019, 2020 and 2021 is expected to be $7,376 , $14,752 , and $14,751 , respectively.

14

9. Accrued Expenses

Accrued expenses consisted of the following:

As of June 30, 

As of December 31, 

2019

 

2018

Accrued royalties

$

15,463

$

15,138

Accrued bonuses

2,008

 

4,286

Accrued incentive compensation

1,566

1,806

Accrued payroll and related benefits

1,230

1,544

Accrued inventory

1,175

3,745

Accrued audit and legal

 

674

480

Accrued sales and marketing

690

2,193

Accrued interest

 

382

 

274

Accrued other operating costs

1,329

1,085

Total accrued expenses

$

24,517

$

30,551

10. Term Loan Payable

On August 28, 2012, the Company entered into a loan agreement with Silicon Valley Bank (“SVB”) to borrow up to a maximum amount of $1,000. The loan agreement was subsequently amended in 2014 and 2015 to provide for additional borrowings (as amended, the “Existing Term Loan”).

In January 2018, in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement with Assertio, the Company entered into a Consent and Amendment to Loan and Security Agreement (the “Consent and Amendment”) with SVB to amend the Existing Term Loan. The Consent and Amendment provided the Company with a new term loan facility in an original principal amount of $11,500, which replaced the Existing Term Loan and the proceeds of which were used by the Company to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the Existing Term Loan. The Existing Term Loan also provided SVB’s consent with respect to the Nucynta Commercialization Agreement.

The Consent and Amendment bears interest at a rate per annum of 0.75% above the prime rate (as defined in the Consent and Amendment). The Company will repay the Consent and Amendment in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing in July 2019, provided that, if the Company achieves EBITDA (as defined in the Consent and Amendment) in excess of $2,500 for two (2) consecutive calendar quarters prior to June 2019, such payments will commence in January 2020. All outstanding principal and accrued and unpaid interest under the Consent and Amendment, and all other outstanding obligations with respect to the Consent and Amendment, are due and payable in full in December 2022. The Company may prepay the Consent and Amendment, in full but not in part, with a prepayment fee of (i) 3.0% of the outstanding principal balance prior to the first anniversary of the Consent and Amendment, (ii) 2.0% of the outstanding principal balance following the first anniversary of the Consent and Amendment and prior to the second anniversary of the Consent and Amendment and (iii) 1.0% of the outstanding principal balance following the second anniversary of the Consent and Amendment, plus, in each case, a final payment fee of $719 .

In November 2018, the Company entered into an amended and restated Loan and Security Agreement (“New Term Loan”) with SVB, that supersedes the Company’s original loan agreement and subsequent amendments with SVB. The New Term Loan amended and restated the loan documentation between the Company and SVB and modified the minimum liquidity ratio to be at least 1.5 to 1.0 (as defined in the New Term Loan), along with other non-material changes. The New Term Loan did not modify the Company’s borrowings, interest rates, or repayment terms. Any amounts outstanding during the continuance of any event of default under the Consent and Amendment will bear additional interest at the per annum rate of 5.0%.

The Company achieved EBITDA in excess of $2,500 for two (2) consecutive calendar quarters prior to June 2019. Therefore, in accordance with the Loan and Security Agreement, the monthly installments of principal payments plus

15

monthly payments of accrued interest will commence in January 2020. As of June 30, 2019, scheduled principle repayments under the Company’s term loan are as follows:

2020

3,833

2021

3,833

2022

3,834

Balance

$

11,500

11. Leases

In accordance with ASC Topic 842, Lease Accounting, the Company records lease assets and liabilities for lease arrangements exceeding a 12-month initial term. For operating leases, the Company records a beginning lease liability equal to the present value of minimum lease payments to be made over the lease term discounted using the Company’s incremental borrowing rate and a corresponding lease asset adjusted for incentives received and indirect costs. After lease commencement, the Company remeasures the operating liability at the present value of the remaining lease payments discounted using the original incremental borrowing rate and corresponding lease asset adjusted for incentives received, indirect costs and uneven lease payments. T he Company records operating lease rent expense in the Statements of Operations on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, or short-term leases, are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term. The Company does not have any financing lease arrangements.

As of June 30, 2019, the Company had operating lease assets of $9,574 and operating lease liabilities of $10,536 primarily related to operating lease agreements for its corporate headquarters.

Adoption of ASC Topic 842, Lease Accounting

The Company adopted ASC Topic 842, as amended, on January 1, 2019, which supersedes the lease accounting requirements in ASC Topic 840, Leases  (“legacy GAAP”) and most industry-specific guidance. The Company adopted ASC Topic 842 using the modified retrospective method. Under this method, the Company applied the new standard at the adoption date and recognized a cumulative-effect adjustment. Therefore, prior period financials were not retrospectively adjusted, and comparative period disclosures will continue to be presented in accordance with legacy GAAP. In addition, the Company utilized the package of practical expedients permitted within the transition guidance, which, among other things, allowed the Company to carryforward the historical lease classification.

Adoption of the new standard resulted in the Company initially recording operating lease assets of $9,957 and corresponding operating lease liabilities of $10,690 on its Condensed Consolidated Balance Sheet, primarily related to the operating lease agreement for its corporate headquarters. In addition, the Company identified an embedded operating lease arrangement that was accounted as a service contract in prior years, as accounting for operating leases and service contracts was similar under legacy GAAP and the accounting for the embedded lease did not result in a material impact to the financial statements. The Company has also implemented new accounting policies, processes and controls to identify and account for leases, including embedded leases, going forward.

Operating Lease Arrangements

In March 2018, the Company entered into an operating lease for its new corporate headquarters (the “Stoughton Lease”) pursuant to which the Company leases approximately 50,678 of rentable square feet of space, in Stoughton, Massachusetts. The Stoughton Lease commenced in August 2018 when the Company took possession of the space. After the initial four-month free rent period following possession of the space, the operating lease will continue for a term of 10 years. The Company has the right to extend the term of the Stoughton Lease for two additional five-year terms, provided that written notice is provided to the landlord no later than 12 months prior to the expiration of the then current Stoughton Lease term. The Company does not believe the exercise of the extension to be reasonably certain as of the balance sheet date and therefore did not include the extension as part of its recognized lease asset and lease liability. The annual base rent is $1,214, or $23.95 per rentable square foot, and will increase annually by 2.5% to 3.1% over the subsequent years.

16

The Company continues to lease 9,660 square feet of office and research space at its former corporate headquarters located in Canton, Massachusetts (the “Canton Lease”). The Canton Lease terminates in August 2020 and may be extended for an additional five years at the Company’s election. The Company does not believe the exercise of the extension to be reasonably certain as of the balance sheet date and therefore did not include the extension as part of its recognized lease asset and lease liability.

In January 2016, the Company entered a non-cancellable contract with the contract manufacturing organization (“CMO”) of Xtampza ER. The initial contract term continues through December 2020 and automatically renews for successive two-year terms unless either party gives written notice of termination two-years in advance. Xtampza ER production is currently conducted in an area of the manufacturing plant that is shared with other clients. Pursuant to the terms of the agreement, since 2016 the CMO has reserved 3,267 square feet of existing manufacturing space for a dedicated production suite for Xtampza ER, which is currently under construction. Upon adoption of ASC Topic 842, the Company determined that this arrangement has an embedded operating lease arrangement as the Company can direct the use of the dedicated space and obtain substantially all the economic benefits. The Company expects the lease term to continue at least through December 2026 and separated the agreement’s lease and non-lease components in determining the operating lease assets and liabilities. The Company determined its best estimate of stand-alone prices for each of the lease and nonlease components by considering observable information including gross margins expected to be recovered from the Company’s service provider and terms of similar lease contracts.

Short-Term Lease Arrangements

In December 2018, the Company began entering into 12-month, non-cancelable vehicle leases for its field-based employees. Each vehicle lease is executed separately and will expire at varying times with automatic renewal options that are cancelable at any time. The rent expense for these leases will therefore be recognized on a straight-line basis over the lease term.

Variable lease payments associated with non-lease components of these arrangements were immaterial and expensed as incurred.

Three months ended June 30, 

Six months ended June 30, 

2019

2019

Lease Cost

Operating lease cost

$

353

$

705

Short-term lease cost

144

312

Total lease cost

$

497

$

1,017

As of June 30, 

Lease Term and Discount Rate:

2019

Weighted-average remaining lease term — operating leases (years)

10.1

Weighted-average discount rate — operating leases

6.1%

Six months ended June 30, 

Other Information:

2019

Cash paid for amounts included in the measurement of operating leases liabilities

$

476

Leased assets obtained in exchange for new operating lease liabilities

17

Under ASC Topic 842, the Company’s aggregate future minimum lease payments for its operating leases, including embedded operating lease arrangements, as of June 30, 2019, are as follows:

2019

$

578

2020

 

1,328

2021

1,284

2022

1,322

2023

1,360

After 2023

8,490

Total minimum lease payments

$

14,362

Less: Present value discount

3,826

Present value of lease liabilities

$

10,536

Under legacy GAAP, the Company’s aggregate future minimum lease payments for its operating leases as of December 31, 2018 were as follows:

2019

$

1,032

2020

1,305

2021

1,261

2022

1,299

2023

1,337

After 2023

8,423

Total minimum lease payments

$

14,657

12. Equity

The changes in shareholder’s equity for the three and six months ended June 30, 2019 are as follows:

    

Additional

    

    

Total

Common Stock

 

Paid- In

 

Accumulated

 

Shareholders’

Shares

    

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

Balance, December 31, 2018

33,265,629

$

33

$

428,729

$

(337,177)

$

91,585

Exercise of common stock options

18,693

246

246

Issuance for employee stock purchase plan

32,826

444

444

Vesting of restricted stock units ("RSUs")

101,483

Shares withheld for employee taxes upon vesting of RSUs

(33,503)

(488)

(488)

Stock-based compensation

4,263

4,263

Net loss

(9,700)

(9,700)

Balance, March 31, 2019

33,385,128

$

33

$

433,194

$

(346,877)

$

86,350

Exercise of common stock options

8,218

58

58

Vesting of RSUs

26,304

Shares withheld for employee taxes upon vesting of RSUs

(3,097)

(35)

(35)

Stock-based compensation

4,162

4,162

Net loss

(4,712)

(4,712)

Balance, June 30, 2019

33,416,553

$

33

$

437,379

$

(351,589)

$

85,823

18

The changes in shareholder’s equity for the three and six months ended June 30, 2018 ended were as follows:

    

Additional

    

    

Total

Common Stock

 

Paid- In

 

Accumulated

 

Shareholders’

Shares

    

Amount

 

Capital

Deficit

 

Equity (Deficit)

Balance, December 31, 2017

32,770,678

$

33

$

402,096

$

(298,049)

$

104,080

Exercise of common stock options

183,987

2,373

2,373

Issuance for employee stock purchase plan

50,151

510

510

Vesting of RSUs

32,573

Shares withheld for employee taxes upon vesting of RSUs

(9,810)

(216)

(216)

Stock-based compensation

2,728

2,728

Net loss

(18,652)

(18,652)

Balance, March 31, 2018

33,027,579

$

33

$

407,491

$

(316,701)

$

90,823

Exercise of common stock options

137,419

1,532

1,532

Vesting of RSUs

20,887

Shares withheld for employee taxes upon vesting of RSUs

(6,205)

(140)

(140)

Stock-based compensation

3,526

3,526

Net loss

(13,060)

(13,060)

Balance, June 30, 2018

33,179,680

$

33

$

412,409

$

(329,761)

$

82,681

Controlled Equity Offering Sales Agreement

In March 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “ATM Sales Agreement”), with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which the Company may issue and sell, from time to time, through Cantor Fitzgerald, shares of the Company’s common stock, up to an aggregate offering price of $60,000 (the “ATM Shares”). Under the ATM Sales Agreement, Cantor Fitzgerald may sell the ATM Shares by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on The NASDAQ Global Select Market, on any other existing trading market for the ATM Shares or to or through a market maker. In addition, under the ATM Sales Agreement, Cantor Fitzgerald may sell the ATM Shares by any other method permitted by law, including in privately negotiated transactions. The Company is not obligated to make any sales of the ATM Shares under the ATM Sales Agreement. The Company or Cantor Fitzgerald may suspend or terminate the offering of ATM Shares upon notice to the other party and subject to other conditions. The Company will pay Cantor Fitzgerald a commission of up to 3.0% of the gross proceeds from the sale of the ATM Shares pursuant to the ATM Sales Agreement and has agreed to provide Cantor Fitzgerald with customary indemnification and contribution rights.

No shares were sold pursuant to the ATM Sales during the six months ended June 30, 2019 or the year ended December 31, 2018.

Warrants

As of June 30, 2019, the warrant issued to Assertio in November 2018 was the Company’s only outstanding warrant, which is described in greater detail in Note 8.

19

13. Stock-based Compensation

A summary of the Company’s stock-based compensation expense included in the Condensed Consolidated Statements of Operations are as follows:

Three months ended June 30, 

Six months ended June 30, 

2019

2018

2019

2018

Research and development expenses

$

514

    

$

380

$

1,081

    

$

703

Selling, general and administrative expenses

 

3,648

 

3,146

 

7,344

 

5,551

Total stock-based compensation expense

$

4,162

$

3,526

$

8,425

$

6,254

At June 30, 2019, there was approximately $34,447 of unrecognized compensation expense related to unvested options, restricted stock units and performance stock units, which is expected to be recognized as expense over a weighted average period of approximately 2.7 years.

Restricted Stock Units, Performance Share Units, and Stock Options

In May 2015, the Company adopted the Amended and Restated 2014 Stock Incentive Plan (the “Plan”), under which an aggregate of 2,700,000 shares of common stock were authorized for issuance to employees, officers, directors, consultants and advisors of the Company, plus an annual increase on the first day of each fiscal year until the expiration of the Plan equal to 4% of the total number of outstanding shares of common stock on December 31 st of the immediately preceding calendar year (or a lower amount as otherwise determined by the board of directors prior to January 1st). As of June 30, 2019, there were 1,261,162 shares of common stock available for issuance pursuant to the Plan. The Plan provides for granting of both Internal Revenue Service qualified incentive stock options and non-qualified options, restricted stock awards, restricted stock units and performance stock units. The Company’s qualified incentive stock options and non-qualified options, restricted stock awards, restricted stock units generally vest ratably over a four-year period of service. The stock options generally have a ten-year contractual life and, upon termination, vested options are generally exercisable between one and three months following the termination date, while unvested options are forfeited immediately upon termination.

In January 2019, the Company granted performance share units (“PSUs”) to certain members of the Company's senior management team. The PSUs will vest following a three-year performance period, subject to the satisfaction of annual and cumulative performance criteria and the executive’s continued employment through the performance period. No shares will be issued if the minimum applicable performance metric is not achieved. The Company recognizes compensation expense ratably over the required service period based on its estimate of the number of shares that will vest based upon the probability of achieving performance metrics. If there is a change in the estimate of the number of shares that are likely to vest, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made. Achievement of the annual and cumulative performance criteria for PSU grants will be determined by the compensation committee. For PSUs granted in 2019, the performance criteria relate to Xtampza ER 2019, 2020, 2021 and three-year cumulative revenue goals. The expense for the three and six months ended June 30, 2019 was $27 and $42, respectively.

A summary of the Company’s performance share units activity for the six months ended June 30, 2019 and related information is as follows:

Weighted-Average

Shares

Grant Date Fair Value

Outstanding at December 31, 2018

$

Granted

99,400

15.90

Outstanding at June 30, 2019

99,400

$

15.90

20

A summary of the Company’s restricted stock units activity for the six months ended June 30, 2019 and related information is as follows:

Weighted-Average

Shares

Grant Date Fair Value

Outstanding at December 31, 2018

514,603

$

20.67

Granted

590,205

15.78

Vested

(127,787)

21.54

Forfeited

(84,784)

18.26

Outstanding at June 30, 2019

892,237

$

17.54

A summary of the Company’s stock option activity for the six months ended June 30, 2019 and related information is as follows:

 

 

 

Weighted-

 

 

Weighted-

 

Average

 

Average

 

Remaining

Aggregate

Exercise Price

 

Contractual

Intrinsic

    

Shares

    

per Share

    

Term (in years)

    

Value

Outstanding at December 31, 2018

 

3,585,856

$

16.20

 

8.0

$

11,170

Granted

 

897,312

 

15.67

Exercised

 

(26,911)

11.30

Cancelled

 

(266,141)

 

17.61

Outstanding at June 30, 2019

 

4,190,116

$

16.03

 

7.7

$

5,248

Exercisable at June 30, 2019

 

2,113,346

$

14.45

 

6.6

$

4,285

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

Six months ended June 30, 

2019

2018

Risk-free interest rate

2.6

%  

2.6

%  

Volatility

63.3

%  

65.0

%  

Expected term (years)

6.06

6.11

Expected dividend yield

%  

%  

Employee Stock Purchase Plan

The Company’s 2015 Employee Stock Purchase Plan allows employees to purchase shares of the Company’s common stock. The purchase price is equal to 85% of the lower of the closing price of the Company’s common stock on (1) the first day of the purchase period or (2) the last day of the purchase period. During the three and six months ended June 30, 2019, 32,826 shares of common stock were purchased for total proceeds of $444. The expense for the three months ended June 30, 2019 and 2018 was $73 and $120, respectively. The expense for the six months ended June 30, 2019 and 2018 was $173 and $242, respectively.

14. Commitments and Contingencies

Legal Proceedings

From time to time, the Company may face legal claims or actions in the normal course of business. Except as disclosed below, the Company is not currently a party to any litigation and, accordingly, does not have any amounts recorded for any litigation related matters.

21

Xtampza ER Litigation

 

The Company filed the NDA for Xtampza ER as a 505(b)(2) application, which allows the Company to reference data from an approved drug listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), in this case OxyContin OP. The 505(b)(2) process requires that the Company certifies to the FDA and notify Purdue Pharma, L.P (“Purdue”), as the holder of the NDA and any other Orange Book-listed patent owners, that the Company does not infringe any of the patents listed for OxyContin OP in the Orange Book, or that the patents are invalid. The Company made such certification and provided such notice on February 11, 2015 and such certification documented why Xtampza ER does not infringe any of the 11 Orange Book listed patents for OxyContin OP, five of which have been invalidated in court proceedings. Under the Hatch-Waxman Act of 1984, Purdue had the option to sue the Company for infringement and receive a stay of up to 30 months before the FDA could issue a final approval for Xtampza ER, unless the stay was earlier terminated.

Purdue exercised its option and elected to sue the Company for infringement in the District of Delaware on March 24, 2015 asserting infringement of three of Purdue’s Orange Book-listed patents (Patent Nos. 7,674,799, 7,674,800, and 7,683,072) and a non-Orange Book-listed patent (Patent No. 8,652,497), and accordingly, received a 30-month stay of FDA approval.

 

The Delaware court transferred the case to the District of Massachusetts. After the Company filed a partial motion for judgment on the pleadings relating to the Orange Book-listed patents, the District Court of Massachusetts ordered judgment in the Company’s favor on those three patents, and dismissed the claims asserting infringement of those patents with prejudice. Upon dismissal of those claims, the 30-month stay of FDA approval was lifted. As a result, the Company was able to obtain final approval for Xtampza ER and launch the product commercially.

 

In November 2015, Purdue filed a follow-on suit asserting infringement of another patent, Patent No. 9,073,933, which was late-listed in the Orange Book and therefore could not trigger any stay of FDA approval. In June 2016, Purdue filed another follow-on suit asserting infringement of another non-Orange Book listed patent, Patent No. 9,155,717. In April 2017, Purdue filed another follow-on suit asserting infringement of another patent, Patent No. 9,522,919, which was late-listed in the Orange Book and therefore could not trigger any stay of FDA approval. Then, in September 2017, Purdue filed another follow-on suit asserting infringement of another non-Orange Book listed patent, Patent No. 9,693,961.

On March 13, 2018, the Company filed a Petition for Post-Grant Review (“PGR”) of the ʼ961 patent with the Patent Trial and Appeal Board (“PTAB”). The PGR argues that the ʼ961 patent is invalid for lack of a written description, for lack of enablement, for indefiniteness, and as being anticipated by prior art. Purdue filed its Patent Owner Preliminary Response on July 10, 2018. The PTAB entered an order to institute post-grant review of all claims of the ’961 patent on October 4, 2018, upon a finding that it is more likely than not that the claims of the ʼ961 patent are unpatentable. Purdue filed its Patent Owner Response on January 30, 2019. The Company filed its reply on April 12, 2019, and Purdue filed a sur-reply on May 10, 2019. The PTAB held oral argument on the proceedings on July 10, 2019 and, absent special circumstances, will issue a decision on the patentability of the ʼ961 patent by no later than October 4, 2019.

In October 2017, and in response to the filing of the Company’s Supplemental NDA (“sNDA”) seeking to update the drug abuse and dependence section of the Xtampza ER label, Purdue filed another suit asserting infringement of the ʼ933 and ʼ919 patent. The Company filed a motion to dismiss that action, and the Court granted its motion on January 16, 2018.

 

The current suits have been consolidated by the District of Massachusetts, where Purdue asserted infringement of five patents: the ʼ497 patent, the ʼ933 patent, the ʼ717 patent, the ʼ919 patent, and the ʼ961 patent. The Court issued an order on September 28, 2018 in which it granted in part a motion for summary judgment filed by the Company, and in which the Court ruled that the ʼ497 and ʼ717 patents are not infringed by the Company. As a result, only the ʼ933, the ʼ919, and the ʼ961 patents remain in dispute. On October 16, 2018, the Company filed a motion to stay proceedings in the district court on the ‘961 patent pending the PGR. None of these suits are associated with any stay of FDA approval for Xtampza ER. Purdue has made a demand for monetary relief but has not quantified its alleged damages. Purdue has also requested a judgment of infringement, an adjustment of the effective date of FDA approval, and an injunction on the sale of the Company’s products accused of infringement. The Company has denied all claims and seeks a judgment that the patents are invalid and/or not infringed by the Company; the Company is also seeking a judgment that the case is exceptional, with an award to the Company of its fees for defending the case.

 

22

The parties are in the early stages of fact discovery. Written discovery has commenced with depositions expected to commence during 2019. A claim construction hearing was held on June 1, 2017. On November 21, 2017, the Court issued its claim construction ruling, construing certain claims of the ʼ933, ʼ497, and ʼ717 patents. No trial date has been scheduled.

 

The Company is, and plans to continue, defending this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

Nucynta Litigation

 

On February 7, 2018, Purdue filed a patent infringement suit against the Company in the District of Delaware. Specifically, Purdue argues that the Company’s sale of immediate-release and extended-release Nucynta infringes U.S. Patent Nos. 9,861,583, 9,867,784, and 9,872,836. Purdue has made a demand for monetary relief in its complaint but has not quantified its alleged damages.

On December 6, 2018, the Company filed an Amended Answer asserting an affirmative defense for patent exhaustion. On December 10, 2018, the Court granted the parties’ stipulation for resolution of the Company’s defense of patent exhaustion and stayed the action, with the exception of briefing on and resolution of the Company’s Motion for Judgment on the Pleadings and any discovery related to that Motion. On December 12, 2018, the Company filed a Rule 12(c) Motion for Judgment on the Pleadings, arguing that the Purdue’s claims were barred by the doctrine of patent exhaustion. Purdue filed its response on January 11, 2019 and the Company filed a reply on January 25, 2019. On June 18, 2019, the court heard oral argument on the Company’s Rule 12(c) Motion for Judgment on the Pleadings. On June 19, 2019, the court issued an order stating that “judgment in Collegium’s favor is warranted under the doctrine of patent exhaustion to the extent Collegium’s alleged infringing activities resulted from sales that fall within the scope of that covenant.” The court explained, however, that based on the current record, it was not possible “to determine whether title of the Nucynta Products was transferred to Collegium” from sales authorized by Purdue’s covenant not to sue. The court ordered discovery on this issue and the case remains “stayed with the exception of discovery and briefing on and resolution of the Company’s anticipated motion for summary judgment based on patent exhaustion.”

The Company plans to defend this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

 

Teva Litigation

 

The Company has fifteen patents listed in the FDA Orange Book as covering the Company’s abuse-deterrent product and methods of using it to treat patients: Patents Nos. 7,399,488; 7,771,707; 8,449,909; 8,557,291; 8,758,813; 8,840,928; 9,044,398; 9,248,195; 9,592,200; 9,682,075; 9,737,530, 9,763,883; 9,968,598; 10,004,729; and 10,188,644 (the “Orange Book Patents”).

 

Teva Pharmaceuticals USA, Inc. (“Teva”) filed Notice Letters of Patent Certification against all of the fifteen listed Orange Book Patents alleging that they were invalid and/or not infringed by the proposed oxycodone products that are the subject of Teva’s Abbreviated New Drug Application (“ANDA”). On February 22, 2018—within the 45-day period that gives the Company a 30-month stay on FDA approval of Teva’s ANDA while the parties have an opportunity to litigate—the Company sued Teva in the District of Delaware on eleven of the Orange Book Patents. Teva responded to the Company’s complaint on May 14, 2018, alleging that the Orange Book Patents are invalid and are not infringed by Teva’s proposed ANDA products and asserting counterclaims of non-infringement and invalidity of the Orange Book Patents. The Company answered Teva’s counterclaims on June 4, 2018. The parties briefed claim construction and the court heard argument on April 12, 2019. Fact discovery is scheduled to close on September 20, 2019 and expert discovery will close on January 24, 2020.

The Company filed a second lawsuit in the District of Delaware, asserting two additional Orange Book Patents, on November 30, 2018. Teva responded to the Company’s complaint on January 11, 2019, alleging that the asserted patents are invalid and are not infringed by Teva’s proposed ANDA products, and asserting counterclaims of non-infringement and invalidity of the asserted patents. The Company answered Teva’s counterclaims on February 1, 2019. The court consolidated the second suit with the first suit, and thus both suits are proceeding on the same schedule.

23

The Company filed a third lawsuit in the District of Delaware, asserting one additional Orange Book Patent, on May 9, 2019. Teva responded to the Company’s complaint on June 6, 2019, alleging that the asserted patent is invalid and is not infringed by Teva’s proposed ANDA products, and asserting counterclaims of non-infringement and invalidity of the asserted patent. The Company answered Teva’s counterclaims on June 27, 2019. No schedule has been entered in the third lawsuit.

Opioid Litigation

On March 19, 2018, a lawsuit was filed by multiple local governments in the Circuit Court of Crittenden County, Arkansas, against the Company and other pharmaceutical manufacturers and distributors alleging a variety of claims related to opioid marketing and distribution practices. On January 29, 2019, the Company was dismissed from this litigation without prejudice.

On March 21, 2018, the Company, along with other pharmaceutical manufacturers and distributors, were named in a class-action lawsuit filed in the Eastern District of Kentucky by a family practice clinic, on behalf of other similarly-situated healthcare providers. The action alleges violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) relating to opioid marketing and distribution practices. On April 14, 2018, the lawsuit was conditionally transferred by the Judicial Panel on Multi-District Litigation to the federal Prescription Opiate Multi District Litigation (the “MDL”) in the Southern District of Ohio. On April 10, 2018, the conditional transfer was finalized and the lawsuit was docketed in the MDL on April 11, 2018. On May 4, 2018, the Company, along with other pharmaceutical manufacturers and distributors, were named in two lawsuits filed in the MDL by the Fiscal Court of Bourbon County, Kentucky and the Fiscal Court of Owen County, Kentucky, relating to opioid marketing and distribution practices. On June 11 and 12, 2018, the Company was named in four lawsuits filed in the MDL by a health system and various member hospitals. On September 26, 2018, the Company was named in two lawsuits filed in the MDL by the Fiscal Court of Lee County, Kentucky and the Fiscal Court of Wolfe County, Kentucky. On March 15, 2019, the Company was named in an additional lawsuit in the MDL by the City of Paterson, New Jersey. The lawsuits all seek, generally, penalties and/or injunctive relief. On March 15, 2019, the plaintiffs in all of the MDL cases in which the Company was named, except for the City of Paterson case, filed amended complaints which no longer name the Company as a defendant, effectively terminating these lawsuits as to the Company. The City of Paterson lawsuit is not designated as a representative case in the MDL and, therefore, is effectively currently stayed. In April 2019, the City of Norwich, Connecticut and the Town of Enfield, Connecticut filed lawsuits in Connecticut Superior Court. The lawsuits allege violations of fraud, public nuisance, negligent misrepresentation, and violations of state consumer protection laws. On June 28, 2019, both cases were transferred to the MDL, where they are effectively stayed.

On May 29, 2018, a lawsuit was filed by Bucks County, Pennsylvania against the Company and other pharmaceutical manufacturers and on June 12, 2018, a lawsuit was filed by Clinton County, Pennsylvania, against the Company and other pharmaceutical manufacturers and distributors. On June 6, 2018, a lawsuit was filed by Mercer County, Pennsylvania, against the Company and other pharmaceutical manufacturers and distributors. These lawsuits allege claims related to opioid marketing and distribution, including negligence, fraud, unjust enrichment, public nuisance, and violations of state consumer protections laws. These cases have been consolidated for discovery purposes in the Delaware County Court of Common Pleas as part of a consolidated proceeding of similar lawsuits brought by numerous Pennsylvania counties against other pharmaceutical manufacturers and distributors. In March 2019, three additional

cases were filed in Pennsylvania by two payor groups and Warminster Township. In July 2019, the Company learned of additional lawsuits alleging similar claims which were filed by Warrington Township in the Bucks County Court of Common Pleas, and filed by the City of Lock Haven in the Clinton County Court of Common Pleas. The City of Lock Haven case has been coordinated into the consolidated proceeding before the Delaware County Court of Common Pleas; the Warrington Township case is pending transfer. None of these cases have been designated a Track One case in which discovery would commence, and therefore are effectively stayed at present.

On July 30, 2018, a lawsuit was filed by the City of Worcester, Massachusetts against the Company and other pharmaceutical manufacturers and distributors. The action alleges a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, violations of Mass Gen. Laws ch. 93A, Section 11 , unjust enrichment and civil conspiracy. In February 2019, the City of Worcester case was transferred to the Business Litigation Session of the Superior Court. Additional lawsuits brought by the following cities and counties Massachusetts were filed between October 2018 and April 2019: City of Salem, City of Framingham, Town of Lynnfield, City of Springfield, City of Haverhill, City of Gloucester, Town of Canton, Town of Wakefield, City of Chicopee; Town of Natick; City of Cambridge, and Town of Randolph. With the exception of the

24

City of Cambridge and the Town of Randolph, each of these additional lawsuits has been coordinated before the Business Litigation Session; the City of Cambridge and Town of Randolph are pending transfer into the Business Litigation Session. The case brought by the City of Springfield has been selected to advance for the purpose of motions practice. The other cases pending before the Business Litigation Session are effectively stayed at present.

On January 11, 2019, the City of Portsmouth filed a lawsuit in Virginia Circuit Court against the Company and other pharmaceutical manufacturers and distributors. The lawsuit alleges a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, and violations of state consumer protection laws. On June 24, 2019, the case was removed to the Eastern District of Virginia federal court, where it awaits either coordination in the federal MDL or remand to state court. The plaintiff has filed its opposition to coordination and requested remand to Virginia Circuit Court.

On June 14, 2019, the City of Trenton filed a lawsuit in New Jersey Superior Court against the Company and other pharmaceutical manufacturers and distributors. The lawsuit alleges a variety of claims related to opioid marketing and distribution practices including public nuisance, common law fraud, negligent misrepresentation, negligence, and violations of state consumer protection laws and the New Jersey Drug Dealer Liability Act.

The Company disputes the allegations in these lawsuits and intends to vigorously defend these actions. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

Opioid-Related Request and Subpoenas

 

The Company, like a number of other pharmaceutical companies, has received subpoenas or civil investigative demands related to opioid sales and marketing. The Company has received such subpoenas or civil investigative demands from the Offices of the Attorney General of each of Washington, New Hampshire, and Massachusetts. The Company is currently cooperating with each of the foregoing states in their respective investigations.

25

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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Q uarterly R eport on Form 10-Q . The following discussion contains forward-looking statements that involve risks uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors.  We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Q uarterly R eport on Form 10-Q , including those set forth under “Forward-looking Statements” and “Risk Factors”, as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.

OVERVIEW

We are a specialty pharmaceutical company committed to being the leader in responsible pain management. Our first product, Xtampza ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone. In April 2016, the FDA approved our 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, we announced the commercial launch of Xtampza ER.

 

Xtampza ER, OxyContin OP from Purdue, and the authorized generic version of OxyContin OP (which is identical to the branded version) are the only extended-release oxycodone products marketed in the United States as of June 2019. In 2018, the extended-release oxycodone market generated approximately $1.8 billion in U.S. sales and there were approximately 3.4 million prescriptions written. OxyContin OP is the largest selling extended-release oxycodone (and largest-selling branded extended-release opioid) in the United States by dollars and prescription volume, with approximately $1.5 billion in U.S. sales in 2018. We conducted a comprehensive preclinical and clinical program for Xtampza ER consistent with FDA guidance on abuse-deterrence. These studies and clinical trials demonstrated, among other things, that chewing, and crushing Xtampza ER, and then taking it orally, did not meaningfully change its drug release profile or safety characteristics. On the basis of these studies and clinical trials, the FDA concluded that Xtampza ER has properties that are expected to reduce abuse via the oral and intranasal routes and that are expected to make abuse by injection difficult. By contrast, clinical trials performed by us and others — including head-to-head clinical trials comparing Xtampza ER with OxyContin OP — have shown that drug abusers could achieve rapid release and absorption of the active ingredient by manipulating OxyContin OP using common household tools and methods commonly available on the Internet. In November 2017, we announced the approval of a Supplemental New Drug Application by the FDA for Xtampza ER to include comparative oral pharmacokinetic data from the clinical study evaluating the effect of physical manipulation by crushing Xtampza ER compared with OxyContin OP and a control (oxycodone hydrochloride immediate-release), results from an oral human abuse potential study and the addition of an oral abuse deterrent claim.

 

Our product portfolio also includes the Nucynta Products. In December 2017, we entered into the Nucynta Commercialization Agreement with Assertio, pursuant to which we acquired the right to commercialize the Nucynta Products in the United States. 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 moderate to severe acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults.

We began shipping and recognizing product sales on the Nucynta Products on January 9, 2018 and began marketing the Nucynta Products in February 2018. Effective August 2018, we entered into a Second Amendment to the Commercialization Agreement to primarily clarify the mechanism for transferring title to products to be sold by the Company pursuant to the agreement and various related matters. Effective November 2018, we entered into a Third Amendment to the Nucynta Commercialization Agreement, which primarily eliminated the guaranteed minimum royalty payment obligations for years 2019, 2020 and 2021. We began shipping and recognizing product sales on the Nucynta Products in January 2018.

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Outlook

We expect to continue to incur significant commercialization expenses related to marketing, manufacturing, distribution, selling and reimbursement activities. We are promoting Xtampza ER to approximately 11,000 health care professionals who write approximately 65% of the branded extended-release oral opioid prescriptions in the United States with a sales team of approximately 150 sales representatives and managers. We are promoting the Nucynta Products to the same health care professionals to whom we promote Xtampza ER, leveraging our existing sales organization. We pay a royalty to Assertio on all revenues from the sale of Nucynta Products based on certain net sales thresholds.

We have never been profitable and have incurred net losses in each year since inception. We incurred net losses of $14.4 million and $31.7 million for the six months ended June 30,  2019 and 2018 respectively. As of June 30, 2019, we had an accumulated deficit of $351.6 million. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations. We expect to continue to incur net losses in the near future as we continue to commercialize our products. Our net losses may fluctuate significantly from quarter to quarter and year to year.

We believe that our cash and cash equivalents at June 30, 2019, together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

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

The critical accounting policies we identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“Annual Report”), relate to revenue recognition and impairment of intangible assets. Estimates include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of our products, estimates utilized in the valuation of inventory, accounting for stock-based compensation, contingencies, and tax valuation reserves. We also estimate the useful life of our intangible asset and periodically evaluative it for impairment whenever events or circumstances indicate a potential reduction in the fair value. We base our estimates and assumptions on historical experience when available and on various factors that we believe are reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report.

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RESULTS OF OPERATIONS

(in thousands)

Three months ended June 30, 

Six months ended June 30, 

2019

2018

2019

2018

(in thousands)

Product revenues, net

$

75,040

    

$

73,061

$

149,556

    

$

136,810

Costs and expenses

Cost of product revenues

48,654

    

46,838

97,818

    

89,944

Research and development

2,459

2,237

5,451

4,505

Selling, general and administrative

 

28,935

 

31,279

 

61,287

 

62,861

Total costs and expenses

 

80,048

 

80,354

164,556

157,310

Loss from operations

 

(5,008)

 

(7,293)

(15,000)

(20,500)

Interest expense

 

(236)

 

(6,158)

 

(470)

 

(11,858)

Interest income

532

 

391

1,058

 

646

Net loss

$

(4,712)

$

(13,060)

$

(14,412)

$

(31,712)

Comparison of the three months ended June 30, 2019 and June 30, 2018

Product revenues, net were $75.0 million for the three months ended June 30, 2019 (the “2019 Quarter”), compared to $73.1 million for the three months ended June 30, 2018 (the “2018 Quarter”). The $1.9 million increase was related to an increase in revenue for Xtampza ER of $7.9 million, partially offset by a decrease in revenue for the Nucynta Products of $6.0 million. In the 2019 Quarter, Nucynta IR and ER product revenues, net were $29.4 million and $19.6 million, respectively, and Xtampza ER product revenues, net were $26.0 million . The increase in revenue for Xtampza ER was primarily related to an increase in sales volume due to increasing demand. The decrease in revenue for the Nucynta Products was primarily related to lower sales volume, partially offset by an increase in price.

Cost of product revenues was $48.7 million for the 2019 Quarter, compared to $46.8 million for the 2018 Quarter. The $1.9 million increase was primarily related to the recognition of royalty expense for the Nucynta Products, as royalty expense in the 2019 Quarter was recognized as incurred under the terms of the Commercialization Agreement as amended in November 2018, while the expense for the 2018 Quarter was recognized on a straight-line basis through the amortization of the Nucynta Intangible Asset.

Research and development expenses were $2.5 million for the 2019 Quarter, compared to $2.2 million for the 2018 Quarter. The $222,000 increase was primarily related to an increase in salaries, wages and benefits, including stock-based compensation expense.

Selling, general and administrative expenses were $28.9 million for the 2019 Quarter, compared to $31.3 million for the 2018 Quarter. The $2.4 million decrease was primarily related to:

a decrease in sales, marketing and consulting costs of $1.7 million, primarily due to higher one-time costs incurred in the 2018 Quarter to commercialize the Nucynta Products;
a decrease in salaries, wages and benefits of $1.0 million, primarily due to changes in employee headcount and lower incentive compensation expense;
a decrease in fees and permits, including post-marketing requirements and other regulatory costs, of $662,000; offset by
an increase in rent expense of $413,000, primarily related to us taking possession of our new corporate headquarters in mid 2018; and
an increase in professional fees, including audit and legal expenses, of $311,000.

Interest expense was $236,000 for the 2019 Quarter, compared to $6.2 million in the 2018 Quarter. The decrease was primarily due to $5.9 million of interest expense recognized in the 2018 Quarter associated with the minimum royalty

28

payments related to the Nucynta Commercialization Agreement. In November 2018, the minimum royalty payments were eliminated upon the execution of the Third Amendment to the Nucynta Commercialization Agreement.

Interest income was $532,000 for the 2019 Quarter, compared to $391,000 in the 2018 Quarter. The $141,000 increase was primarily due to higher interest rates earned on money market funds.

Comparison of the six months ended months June 30, 2019 and June 30, 2018

   

Product revenues, net were $149.6 million for the six months ended June 30, 2019 (the “2019 Period”), compared to $136.8 million for the six months ended June 30, 2018 (the “2018 Period”). The $12.8 million increase was related to an increase in revenue for Xtampza ER of $17.3 million, partially offset by a decease in revenue for the Nucynta Products of $4.5 million. In the 2019 Period, Nucynta IR and ER product revenues, net were $59.3 million and $39.1 million, respectively, and Xtampza ER product revenues, net were $51.2 million. The increase in revenue for Xtampza ER was primarily related to an increase in sales volume due to increasing demand. The decrease in revenue for the Nucynta Products was primarily related to lower sales volume, partially offset by an increase in price.

   

Cost of product revenues were $97.8 million for the 2019 Period, compared to $89.9 million for the 2018 Period. The $7.9 million increase was primarily related to the recognition of royalty expense for the Nucynta Products, as royalty expense in the 2019 Period was recognized as incurred under the terms of the Commercialization Agreement as amended in November 2018, while the expense for the 2018 Period was recognized on a straight-line basis through the amortization of the Nucynta Intangible Asset.

   

Research and development expenses were $5.5 million for the 2019 Period, compared to $4.5 million for the 2018 Period. The $1.0 million increase was primarily due to related to an increase in salaries, wages and benefits, including stock-based compensation expense.  

 

Selling, general and administrative expenses were $61.3 million for the 2019 Period, compared to $62.9 million for the 2018 Period. The $1.6 million decrease was primarily related to:

a decrease in sales, marketing and consulting costs of $1.5 million, primarily due to higher one-time costs incurred in the 2018 Quarter to commercialize the Nucynta Products;
a decrease in salaries, wages and benefits of $1.4 million, primarily due to changes in employee headcount and lower incentive compensation expense;
a decrease in fees and permits, including post-marketing requirements and other regulatory costs, of $1.4 million; offset by
an increase in professional fees $1.7 million, including audit and legal expenses; and
an increase in rent expense of $873,000, primarily related to us taking possession of our new corporate headquarters in late 2018.

Interest expense was $470,000 for the 2019 Period, compared to $11.9 million in the 2018 Period. The decrease was primarily due to $11.5 million interest expense recognized in the 2018 Period associated with the minimum royalty payments related to the Nucynta Commercialization Agreement. In November 2018, the minimum royalty payments were eliminated upon the execution of the Third Amendment to the Nucynta Commercialization Agreement.

 

Interest income was $1.1 million for the 2019 Period, compared to $646,000 in the 2018 Period.  The increase was primarily due to higher interest rates earned on money market funds.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We have incurred net losses from operations since inception. Since inception, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public offerings of common stock, and commercial bank debt. As of June 30, 2019, we had $148.7 million in cash and cash equivalents.

29

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents at June 30, 2019, together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

Borrowing Arrangements and Equity Offerings

 

There have not been any material changes in borrowing arrangements and equity offerings that were previously disclosed in our most recent Annual Report on Form 10-K.

Cash Flows

Six months ended June 30, 

2019

2018

Net cash provided by operating activities

$

6,058

    

$

85,268

Net cash used in investing activities

 

(4,198)

 

(19,864)

Net cash provided by (used in) financing activities

 

220

 

(50,451)

Net increase in cash, cash equivalents and restricted cash

$

2,080

$

14,953

Operating activities.   Cash provided by operating activities was $6.1 million in the 2019 Period, compared to cash provided by operating activities of $85.3 million in the 2018 Period. The $79.2 million decrease was primarily due to lower non-cash adjustments related to the Nucynta Commercialization Agreement, as in 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019 royalty payments were conditional on net sales and therefore classified as outflows from operating activities. In addition, there was lower amortization from the Nucynta Intangible Asset in 2019 compared to 2018 as a result of the Third Amendment to the Nucynta Commercialization Agreement and non-cash interest was reduced to zero. In addition, cash provided by operating activities decreased due to changes in the working capital accounts, partially offset by a benefit from the change in net loss.

Investing activities.  Cash used in investing activities was $4.2 million in the 2019 Period, compared to cash used in investing activities of $19.9 million in the 2018 Period. The $15.7 million decrease in cash used in investing activities was primarily related to the Nucynta Commercialization Agreement, as in 2018 we made a one-time upfront payment of $18.9 million to Assertio to consummate the Nucynta Commercialization Agreement. This decrease was partially offset by an increase of $3.2 million paid for purchases of property, plant, and equipment primarily for the dedicated production suite at our contract manufacturing organization in the 2019 Period.

Financing activities.   Cash provided by financing activities was $220,000 for the 2019 Period, compared to cash used by financing activities of $50.5 million in the 2018 Period. The $50.7 million increase in cash provided by financing activities was primarily related to the Nucynta Commercialization Agreement, as in 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019 royalty payments were conditional on net sales and therefore classified as outflows from operating activities. The guaranteed minimum royalty payments paid in the 2018 Period were partially offset by proceeds received from our term loan of $10.0 million. The remaining change is primarily related to changes in proceeds from the issuance of shares under our employee stock purchase plan and proceeds from exercises of stock options, offset by payments made for employee restricted stock tax withholdings.

Funding Requirements

We believe that our cash and cash equivalents at June 30, 2019 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future. However, we are subject to all the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.

Certain economic or strategic considerations may cause us to seek additional cash through private or public debt or equity offerings. Such funds may not be available when needed, or, we may not be able to obtain funding on favorable

30

terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

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

the generation of reasonable levels of revenue from products sales;
the cost of growing and maintaining sales, marketing and distribution capabilities for our products;
the timing and costs associated with manufacturing our products, for commercial sale and clinical trials
the cost of patent infringement litigation, including our litigation with each of Purdue and Teva, relating to Xtampza ER and the Nucynta Products, which may be expensive to defend;
the cost of litigation related to opioid marketing and distribution practices;
our need to expand our regulatory and compliance functions; and
the effect of competing technological and market developments .

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

ADDITIONAL INFORMATION

To supplement our financial results presented on a GAAP basis, we have included information about non-GAAP adjusted income/loss. We internally use this non-GAAP financial measure to understand, manage and evaluate the Company as we believe it represents the performance of our core business. Because this non-GAAP financial measure is an important internal measure for the Company, we believe that the presentation of the non-GAAP financial measure provides analysts, investors and lenders insight into management’s view and assessment of the Company’s ongoing operating performance. In addition, we believe that the presentation of this non-GAAP financial measure, when viewed with our results under GAAP and the accompanying reconciliation, provides supplementary information that may be useful to analysts, investors, lenders, and other third parties in assessing the Company’s performance and results from period to period. We report this non-GAAP financial measure in order to portray the results of our major operations – commercializing innovative, differentiated products for people suffering from pain – prior to considering certain income statement elements. This non-GAAP financial measure should be considered in addition to, and not a substitute for, or superior to, net income or other financial measures calculated in accordance with GAAP. The Non-GAAP financial measure is not based on any standardized methodology prescribed by GAAP and represents GAAP net income/loss adjusted to exclude stock-based compensation expense, amortization expense for the Nucynta intangible asset, non-cash interest expense recognized on the Nucynta minimum royalty payments, and minimum royalty payments due and payable in connection with the Nucynta Commercialization Agreement. Any non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, a non-GAAP measure used by other companies.

31

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2019

2018

2019

2018

GAAP net loss

$

(4,712)

$

(13,060)

$

(14,412)

$

(31,712)

Non-GAAP adjustments:

Stock-based compensation expense

4,162

3,526

8,425

6,254

Nucynta related amortization expense (1)

3,688

32,407

7,376

61,933

Nucynta non-cash interest expense (2)

5,943

11,471

Nucynta minimum royalty payment due (3)

(33,750)

(64,500)

          Total non-GAAP adjustments

$

7,850

$

8,126

$

15,801

$

15,158

Non-GAAP adjusted income (loss)

$

3,138

$

(4,934)

$

1,389

$

(16,554)

First Quarter

Second Quarter

2019

2019

GAAP net loss

$

(9,700)

$

(4,712)

Non-GAAP adjustments:

Stock-based compensation expense

4,263

4,162

Nucynta related amortization expense (1)

3,688

3,688

Nucynta non-cash interest expense (2)

Nucynta minimum royalty payment due (3)

          Total non-GAAP adjustments

$

7,951

$

7,850

Non-GAAP adjusted income (loss)

$

(1,749)

$

3,138

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

2018

2018

2018

2018

GAAP net income (loss)

$

(18,652)

$

(13,060)

$

(16,502)

$

9,086

Non-GAAP adjustments:

Stock-based compensation expense

2,728

3,526

3,926

3,598

Nucynta related amortization expense (1)

29,526

32,407

32,407

15,494

Nucynta non-cash interest expense (2)

5,528

5,943

5,641

2,169

Nucynta minimum royalty payment due (3)

(30,750)

(33,750)

(33,750)

(33,750)

          Total non-GAAP adjustments

$

7,032