NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
In May 2020, Assertio Therapeutics, Inc. implemented a holding company reorganization through which Assertio Therapeutics, Inc. became a subsidiary of Assertio Holdings, Inc. (Assertio Reorganization) and, subsequently, Assertio Holdings, Inc. merged with Zyla Life Sciences (Zyla) in a transaction we refer to as the “Zyla Merger.” Unless otherwise noted or required by context, use of “Assertio,” “Company,” “we,” “our” and “us” refer to Assertio Holdings, Inc. and/or its applicable subsidiary or subsidiaries.
Assertio is a specialty pharmaceutical company that sells commercial products to wholesale distributors and specialty pharmacies in the United States (“U.S.”). The Company’s primary marketed products include:
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INDOCIN® (indomethacin) Suppositories | A suppository form and oral solution of indomethacin used in the hospital as well as in the out-patient setting. Both products are nonsteroidal anti-inflammatory drug (NSAID), approved for: |
| • Moderate to severe rheumatoid arthritis including acute flares of chronic disease |
| • Moderate to severe ankylosing spondylitis |
INDOCIN® (indomethacin) Oral Suspension | • Moderate to severe osteoarthritis |
| • Acute painful shoulder (bursitis and/or tendinitis) |
| • Acute gouty arthritis |
CAMBIA® (diclofenac potassium for oral solution) | A prescription NSAID indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. CAMBIA can help patients with migraine pain, nausea, photophobia (sensitivity to light), and phonophobia (sensitivity to sound). CAMBIA is not a pill, it is a powder, and combining CAMBIA with water activates the medicine in a unique way. |
Otrexup® (methotrexate) injection for subcutaneous use | A once weekly single-dose auto-injector containing a prescription medicine, methotrexate. Methotrexate is used to: |
• Treat certain adults with severe, active rheumatoid arthritis, and children with active polyarticular juvenile idiopathic arthritis (pJIA), after treatment with other medicines including non-steroidal anti-inflammatory drugs (NSAIDS) have been used and did not work well. |
• Control the symptoms of severe, resistant, disabling psoriasis in adults when other types of treatment have been used and did not work well. |
SPRIX® (ketorolac tromethamine) Nasal Spray | A prescription NSAID indicated in adult patients for the short term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. SPRIX is a non-narcotic nasal spray provides patients with moderate to moderately severe short-term pain a form of ketorolac that is absorbed rapidly but does not require an injection administered by a healthcare provider (HCP). |
Zipsor® (diclofenac potassium) Liquid filled capsules | A prescription NSAID used for relief of mild-to-moderate pain in adults (18 years of age and older). Zipsor uses proprietary ProSorb® delivery technology to deliver a finely dispersed, rapid and consistently absorbed formulation of diclofenac. |
Other commercially available products include OXAYDO® (oxycodone HCI, USP) tablets for oral use only —CII.
On December 15, 2021, the Company, through a newly-formed subsidiary, Otter Pharmaceuticals, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Antares Pharma, Inc. (“Antares”), and concurrently consummated the transaction. Pursuant to the terms of the Purchase Agreement, the Company acquired Antares’ rights, title and interest in and to Otrexup, including certain related assets, intellectual property, contracts, and product inventory for (i) $18.0 million in cash paid at closing, (ii) $16.0 million in cash payable on May 31, 2022 and (iii) and $10.0 million in cash payable on December 15, 2022.
On February 9, 2021, the Company completed a registered direct offering with certain institutional investors and accredited investors to sell 5,650,000 shares of our common stock at a purchase price of $2.48 per share on a post stock split basis. The gross proceeds from the offering were approximately $14.0 million. After placement agent fees and other offering expenses payable by the Company, Assertio received net proceeds of approximately $13.1 million. On February 12, 2021, the
Company completed a registered direct offering with certain institutional investors and accredited investors to sell 8,750,000 shares of our common stock at a purchase price of $3.92 per share on a post stock split basis. The gross proceeds from the offering were approximately $34.3 million. After placement agent fees and other offering expenses payable by the Company, Assertio received net proceeds of approximately $32.2 million. The Company intends to use proceeds from both offerings for general corporate purposes, including general working capital.
In September 2020, the Company terminated its Second Amended and Restated Nano-Reformulated Compound License Agreement as of January 27, 2020 (the “iCeutica License”), with iCeutica Inc. and iCeutica Pty Ltd. (collectively, “iCeutica”). The iCeutica License allowed the Company to utilize certain technology and intellectual property related to iCeutica’s SOLUMATRIX technology and certain other rights of iCeutica. Effective the termination of the iCeutica License, the Company ceased manufacturing products using SOLUMATRIX technology and will sell through its remaining inventory.
On February 13, 2020, the Company completed the sale of its remaining rights, title and interest in and to the NUCYNTA® franchise to Collegium Pharmaceutical, Inc. (Collegium) for $375.0 million, less royalties, in cash at closing.
Collegium assumed certain contracts, liabilities and obligations relating to the NUCYNTA products, including those related to manufacturing and supply, post-market commitments and clinical development costs. Collegium also paid for certain inventories relating to the products.
On January 10, 2020, the Company completed the sale of Gralise® (gabapentin) to Golf Acquiror LLC, an affiliate to Alvogen, Inc. (Alvogen), for cash proceeds of $130.3 million. The total value included $75.0 million in cash at closing, with the balance receivable as 75% of Alvogen’s first $70.0 million of Gralise net sales after the closing (consideration receivable). Alvogen also paid for certain inventories relating to Gralise. On June 3, 2020, the Company entered into an agreement with Alvogen to settle the remaining balance of $39.7 million in consideration receivable, whereby the Company reduced the consideration receivable by $0.9 million and Alvogen paid $38.8 million in cash.
Basis of Presentation
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and U.S. Securities and Exchange Commission (SEC) regulations for annual reporting. Certain amounts in prior periods have been reclassified to conform with current period presentation.
In connection with the preparation of the financial statements for the year ended December 31, 2021, the Company evaluated whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within twelve months after the date of the issuance of these financial statements noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
Stock Split
On May 18, 2021, the Company effected a 1-for-4 reverse stock split of its issued and outstanding common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All common stock share and per-share data included in these financial statements have been retrospectively adjusted to reflect the effect of the reverse stock split for all periods presented.
Revenue Reclassification
During the third quarter of 2021, the Company made certain reclassifications within Total Revenues related to product sales adjustments for previously divested products. Product sales adjustments for previously divested products were reclassified from Product sales, net to Other revenue on the Consolidated Statements of Comprehensive Income, which impacted previously reported amounts for the year ended December 31, 2020. The reclassifications were made so the line item Product sales, net would reflect net sales of the Company’s current commercialized products. Prior period results were recast to conform with these changes and resulted in an increase to Other revenue and an equal and offsetting decrease to Product sales, net of $1.4 million for the year ended December 31, 2020, respectively. Total net revenue as previously reported remains unchanged.
Impact of COVID-19 on our Business
Following the outbreak of COVID-19 during early 2020, the Company’s priority was and remains the health and safety of its employees, their families, and the patients it serves. Because COVID-19 impacted the Company’s ability to see in-person providers who prescribe our products, the Company transformed its commercial approach during 2020 and increased virtual visits, ultimately eliminating its in-person sales force in favor of a digital sales strategy. Additionally, due to the
limitations on elective surgeries and changes in patient behavior since the outbreak of COVID-19, the Company has experienced a decline and subsequent volatility in prescriptions associated with those elective procedures. The extent to which the Company’s operations may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including actions by government authorities to contain the outbreak, the emergence of new COVID-19 variants and the related potential for new surges in infections and the impacts of increases in virtual physician visits on prescriber behavior. For example, although many public health restrictions have eased, future surges could result in additional restrictions or other factors that may contribute to decreases in elective procedures. The impact of the pandemic on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact its liquidity. The Company does not yet know the full extent of potential delays or impacts on its business, financing or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which it relies, including suppliers and distributors.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities as well as subsequent fair value measurements. Additionally, estimates are used in determining items such as product returns, rebates, evaluation of impairment of intangible assets, fair value of contingent consideration obligation and taxes on income. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company, actual results could differ materially from these estimates.
Segment Information
The Company manages its business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. To date, substantially all of the Company’s revenues from product sales are related to sales in the U.S.
Cash, Cash Equivalents
Cash and cash equivalents include cash in readily available checking and money market funds. We consider all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment. To date the Company has not recorded a bad debt allowance since the majority of its product revenue comes from sales to a limited number of financially sound companies who have historically paid their balances timely. The need for a bad debt allowance is evaluated each reporting period based on the Company’s assessment of the credit worthiness of its customers or any other potential circumstances that could result in bad debt.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost determined by specific manufactured lot. Inventories consist of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs. Additionally, the Company writes off the value of inventory for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and projected demand.
Cost of sales includes the cost of inventory sold or reserved, which includes manufacturing and supply chain costs, product shipping and handling costs, and product royalties.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, as follows:
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| Furniture and office equipment | 3 - 5 years |
| Machinery and equipment | 5 - 7 years |
| Laboratory equipment | 3 - 5 years |
| Leasehold improvements | Shorter of estimated useful life or lease term |
Intangible Assets (other than goodwill)
Intangible assets, other than goodwill, consist of product rights that are accounted for as definite-lived intangible assets subject to amortization. The Company determines the fair value of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. The fair value recorded is amortized on a straight-line basis over the estimated useful life of the asset. The Company estimated the useful life of the assets by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition for the same or similar indication and other related factors.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including property and equipment and product rights, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Pursuant to ASC 360, Impairment Testing: Long Lived Assets Classified as Held and Used, the Company groups its long-lived assets, including purchased developed technology and trademarks, at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. The Company estimates the future net undiscounted cash flows expected to be generated from the use of the long-lived asset group and its eventual disposition. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss is calculated as the excess of the carrying amount over the fair value.
Acquisitions
The Company accounts for acquired businesses using the acquisition method of accounting under ASC 805, Business Combinations (ASC 805), which requires that assets acquired and liabilities assumed be recorded at date of acquisition at their respective fair values. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the resulting timing and amounts charged to, or recognized in current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.
Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs is recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled.
If the acquired net assets do not constitute a business under the acquisition method of accounting, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired in-process research and development with no alternative future use is charged to expense at the acquisition date.
Goodwill
Under the purchase method of accounting pursuant to ASC 805, Goodwill is calculated as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Goodwill, which is not tax-deductible, is recognized within other long-term assets, and is not amortized but subject to an annual review for impairment. Goodwill is tested for impairment at the reporting unit level at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts. A reporting unit is the same as, or one level below, an operating segment. Our operations are currently comprised of a single reporting unit.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers (ASC 606), the Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 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 Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that Company 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 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation, when (or as) the performance obligation is satisfied. The Company assesses the term of the contract based upon the contractual period in which the Company has enforceable rights and obligations.
Variable consideration arising from sales or usage-based royalties, promised in exchange for a license of the Company’s Intellectual Property, is recognized at the later of (i) when the subsequent product sales occur or (ii) the performance obligation, to which some or all of the sales-based royalty has been allocated, has been satisfied.
The Company recognizes a contract asset relating to its conditional right to consideration for completed performance obligations. Accounts receivable are recorded when the right to consideration becomes unconditional. A contract liability is recorded for payments received in advance of the related performance obligation being satisfied under the contract.
Product Sales
The Company sells commercial products to wholesale distributors and specialty pharmacies. Product sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer. The Company’s performance obligation is to deliver product to the customer, and the performance obligation is completed upon delivery. The transaction price consists of a fixed invoice price and variable product sales allowances, which include rebates, discounts and returns. Product sales revenues are recorded net of applicable sales tax and reserves for these product sales allowances. Receivables related to product sales are typically collected one to two months after delivery.
Product Sales Allowances - The Company considers products sales allowances to be variable consideration and estimates and recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on actual or estimated amounts owed on the related sales. These estimates take into consideration the terms of the Company’s agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. The Company uses the most likely method in estimating product sales allowances. If actual future results vary from the Company’s estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company’s sales allowances include:
Product Returns - The Company allows customers to return product for credit with respect to that product within six months before and up to twelve months after its product expiration date. The Company estimates product returns and associated credit on Zipsor, CAMBIA, NUCYNTA, Gralise, Lazanda and products acquired from Zyla, INDOCIN Products, ZORVOLEX, VIVLODEX and OXAYDO. Estimates for returns are based on historical return trends by product or by return trends of similar products, taking into consideration the shelf life of the product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive
products. The Company did not assume financial responsibility for returns of NUCYNTA previously sold by Janssen Pharma or Lazanda product previously sold by Archimedes Pharma US Inc. Under the Commercialization Agreement with Collegium for NUCYNTA, the divestiture of Lazanda to Slán and the divestiture of Gralise to Alvogen, the Company is only financially responsible for product returns for product that were sold by the Company, which are identified by specific lot numbers.
Shelf lives, from the respective manufacture dates, for the Company’s products range from 24 months to 48 months. Because of the shelf life of the Company’s products and its return policy of issuing credits with respect to product that is returned within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.
Managed Care Rebates - The Company offers discounts under contracts with certain managed care providers. The Company generally pays managed care rebates one to three months after prescriptions subject to the rebate are filled.
Government Rebates - The Company participates in both Medicaid and Medicare rebate programs. Medicaid provides assistance to certain low income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled. The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the “donut hole” coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.
Wholesaler and Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and specialty pharmacies that purchase directly from it. These discounts are either taken off invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.
Prompt Pay Discounts - The Company offers cash discounts to its customers (generally 2% of the sales price) as an incentive for prompt payment.
Based on the Company’s experience, the Company expects its customers to comply with the payment terms to earn the cash discount.
Patient Discount Programs - The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail and specialty pharmacies. The discounts are reimbursed by the Company to program administrators approximately one month after the prescriptions subject to the discount are filled.
Chargebacks - The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs and 340B eligible entities. These federal and 340B entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.
Royalties and Milestone Revenue
For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). The Company currently has the right to receive royalties based on sales of CAMBIA in Canada, which are recognized as revenue when the related sales occur as there are no continuing performance obligations by the Company under those agreements.
For arrangements that include milestones, the Company recognizes such revenue using the most likely method. At the end of each reporting period, the Company re-evaluates the probability or achievement of any potential milestone and any related constraints, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment.
Contingent Consideration Obligation
Pursuant to the May 2020 Zyla Merger, the Company assumed a contingent consideration obligation which is measured at fair value. The Company has an obligations to make contingent consideration payments for future royalties to Iroko based upon annual INDOCIN Product net sales over $20.0 million at a 20% royalty through January 2029.
At each reporting date, the Company re-measures the contingent consideration obligation to estimated fair value and any resulting change is recognized in Selling, general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Income. The fair value of the contingent consideration is determined using an option pricing model under the income approach based on estimated INDOCIN product revenues through January 2029 and discounted to present value. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting.
Leases
In accordance with ASC 842, Leases, the Company assesses contracts for lease arrangements at inception. Operating right-of-use (ROU) assets and liabilities are recognized at the lease commencement date equal to the present value of future lease payments using the implicit, if readily available, or incremental borrowing rate based on the information readily available at the commencement date. ROU assets include any lease payments as of commencement and initial direct costs but exclude any lease incentives. Lease and non-lease components are generally accounted for separately and the Company recognizes operating lease expense straight-line over the term of the lease. Operating leases are included in Other long-term assets, Other current liabilities, and Other long-term liabilities in the Consolidated Balance Sheet.
The Company accounts for operating leases with an initial term of twelve months or less on a straight-line basis over the lease term in the Consolidated Statements of Comprehensive Income.
Stock Based Compensation
The Company’s stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs), and purchases under the Company’s employee stock purchase plan (ESPP), which was terminated in June 2021. The Company accounts for forfeitures as they occur for each type of award. Stock-based compensation expense related to restricted stock unit awards (RSUs) is based on the market value of the underlying stock on the date of grant and the related expense is recognized ratably over the requisite service period.
The stock-based compensation expense related to performance share units (PSUs) is estimated at grant date based on the fair value of the award. The PSU awards are measured exclusively to the relative total shareholder return (TSR) performance, which is measured against the three-year TSR of a custom index of companies. The actual number of shares awarded is adjusted to between zero and 200% of the target award amount based upon achievement in each of the three independent successive one-year tranches. TSR relative to peers is considered a market condition under applicable authoritative guidance. For PSUs granted with vesting subject to market conditions, the fair value of the award is determined at grant date using the Monte Carlo model, and expense is recognized ratably over the requisite service period regardless of whether or not the market condition is satisfied. The Monte Carlo valuation model considers a variety of potential future share prices for Assertio and our peer companies in a selected market index.
The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock-based payment awards on the date of grant using an option valuation model is affected by our stock price as well as assumptions, which include the expected term of the award, the expected stock price volatility, risk-free interest rate and expected dividends over the expected term of the award. The Company uses historical option exercise data to estimate the expected term of the options. The Company estimates the volatility of our common stock price by using the historical volatility over the expected term of the options. The Company bases the risk-free interest rate on U.S. Treasury zero coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore, uses an expected dividend yield of zero in the option valuation model. Stock-based compensation expense related to the ESPP and options is recognized on a straight-line basis over its respective term.
Research and Development Expense
Research and development (R&D) expenses include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs, allocations of corporate costs, as well as post-marketing clinical studies. All such costs are charged to R&D expense as incurred. These expenses result from the Company’s independent R&D efforts as well as efforts associated with collaborations. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and
other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.
Advertising Costs
Costs associated with advertising are expensed as incurred. Advertising expense for the years ended December 31, 2021 and 2020 were $1.8 million and $0.4 million, respectively.
Restructuring
Restructuring costs are included in Restructuring charges within the Consolidated Statements of Comprehensive Income. The Company has accounted for these costs in accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420) and ASC 712, Compensation - Nonretirement Postemployment Benefits (ASC 712). One-time termination benefits are recorded at the time restructuring is communicated to the affected employees. Ongoing benefits are recognized when they are estimable and probable.
Income Taxes
The Company records the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in its Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheets and provide any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. When it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future, the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount determined is more likely than not to be realized. At this time, the Company has recorded a valuation allowance against its net deferred tax assets.
The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more‑likely‑than‑not threshold to the recognition and de‑recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in its judgment, is more than 50 percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.
The Company recognizes tax liabilities in accordance with ASC Topic 740, Income Taxes, and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Concentration of Risk
The Company is subject to credit risk from its accounts receivable related to product sales. The three large, national wholesale distributors represent the vast majority of the Company’s business and represented the following percentage of consolidated revenue by customer and the percentage accounts receivable by customer related to product shipments for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated revenue | | | Accounts receivable related to product sales |
| 2021 | | 2020 | | | | 2021 | | 2020 |
| Cardinal Health | 34 | % | | 42 | % | | | | 44 | % | | 53 | % |
| McKesson Corporation | 24 | % | | 14 | % | | | | 23 | % | | 20 | % |
| AmerisourceBergen Corporation | 26 | % | | 13 | % | | | | 29 | % | | 18 | % |
| Collegium | — | % | | 11 | % | | | | — | % | | — | % |
| All others | 16 | % | | 20 | % | | | | 4 | % | | 9 | % |
| Total | 100 | % | | 100 | % | | | | 100 | % | | 100 | % |
Accounts receivable balances related to product sales were $43.8 million and $40.8 million for the years ended December 31, 2021 and 2020, respectively. To date, the Company has not experienced any significant bad debt losses with respect to the collection of its accounts receivable and believes that its accounts receivable balances are collectible.
The Company is dependent upon third-party manufacturers to supply product for commercial use. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for all commercialized products. Such production arrangements could be adversely affected by a significant interruption which would negatively impact the supply of final drug product. The Company’s sole commercial suppliers for each of its marketed products, as follows:
•INDOCIN Products - Patheon Pharmaceuticals, Inc. (Patheon) and Cosette Pharmaceuticals, Inc;
•CAMBIA - MiPharm, S.p.A. and Pharma Packaging Solutions
•Otrexup - Antares Pharma, Inc. and Pharmascience Inc.
•SPRIX - Jubilant HollisterStier LLC and Sharp Packaging Solutions
•Zipsor - Catalent Ontario Limited (Catalent) and Mikart Inc.
•OXAYDO - UPM Pharmaceuticals, Inc.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (ASU 2016-13 or Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The Company adopted this standard on January 1, 2020 and updated its internal controls to include certain forward-looking considerations in the current process of developing and recognizing credit losses for in scope financial assets. Refer to “Note 8. Other Long Term Assets for further discussion on impact of adopting ASU 2016-13.
In June 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (ASU 2018-18), which clarifies the interaction between ASC 808, Collaborative Arrangements (ASC 808) and ASC 606, Revenue from Contracts with Customers (ASC 606). The update clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. The Company adopted the standard as of January 1, 2020 and have applied modified retrospective transition method to the date of initial application of ASC 606. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Accounting for Cloud Computing Arrangements (Subtopic 350-40), which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. Effective January 1, 2020, the Company adopted the standard using the prospective approach to eligible costs incurred on or after the date of adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement Disclosure Framework (ASU 2018-03), which is part of a broader disclosure framework project by the FASB to improve the effectiveness of disclosures by more clearly communicating the information to the user. The Company adopted the standard as of January 1, 2020 and included these
disclosures in the consolidated financial statements. The additional elements of this release did not impact the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASU 2019-12): Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and by clarifying and amending existing guidance in order to improve consistent application of and simplify GAAP for other areas of Topic 740. ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company early adopted the standard effective January 1, 2020. The new standard was applied to the presentation of the Company’s reacquisition of $19.5 million in equity component of the Company’s Convertible Notes, as a result of the private purchase in February 2020 and tender offer in April 2020.
Recently Issued Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in ASU 2021-04 provide guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance is effective for fiscal years beginning after December 15, 2021, including interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08, it does not expect ASU 2021-08 to have a material effect on its consolidated financial statements.
NOTE 2. ACQUISITIONS
Otrexup Acquisition
On December 15, 2021, the Company, through a newly-formed subsidiary, Otter Pharmaceuticals, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Antares Pharma, Inc. (“Antares”), and concurrently consummated the transaction. Pursuant to the terms of the Purchase Agreement, the Company acquired Antares’ rights, title and interest in and to Otrexup, including certain related assets, intellectual property, contracts, and product inventory for (i) $18.0 million in cash paid at closing, (ii) $16.0 million in cash payable on May 31, 2022 and (iii) and $10.0 million in cash payable on December 15, 2022.
The following table summarizes the aggregate amount paid for the assets acquired by the Company in connection with the acquisition of Otrexup (in thousands):
| | | | | | | | |
| Cash paid to Antares at closing | | $ | 18,000 | |
| Deferred cash payment due in May and December 2022 | | 26,021 | |
| Transaction costs | | 1,478 | |
| Total purchase price of assets acquired | | $ | 45,499 | |
The acquisition of Otrexup has been accounted for as an asset acquisition in accordance with FASB ASC 805-50. The Company accounted for the acquisition of Otrexup as an asset acquisition because substantially all of the fair value of the assets acquired is concentrated in a single asset, the Otrexup product rights. The Otrexup products rights consist of certain patents and trademarks, at-market contracts and regulatory approvals, customer lists, marketing assets, and other records, and are considered a single asset as they are inextricably linked. ASC 805-10-55-5A includes a screen test, which provides that if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets acquired are not considered to be a business. As an asset acquisition, the cost to acquire the group of assets, including transaction costs, is allocated to the individual assets acquired or liabilities assumed based on their relative
fair values. The relative fair values of identifiable assets from the acquisition of Otrexup are based on estimates of fair value using assumptions that the Company believes is reasonable.
The following table summarizes the fair value of assets acquired in the acquisition of Otrexup (in thousands):
| | | | | | | | |
| Inventories | | $ | 1,413 | |
Intangible assets (Otrexup product rights) | | 44,086 | |
| Total assets acquired | | $ | 45,499 | |
The Otrexup product rights will be amortized over an 8 year period. As of December 31, 2021, cash payable to Antares in 2022 of $26.0 million is recorded in Other current liabilities in the Company’s Condensed Consolidated Balance Sheet.
Zyla Life Sciences Merger
On May 20, 2020, Assertio completed the Zyla Merger pursuant to the Agreement and Plan of Merger dated March 16, 2020. Upon consummation of the Zyla Merger, each issued and outstanding share of Zyla common stock converted into 2.5 shares of Assertio Holding’s common stock (the Exchange Ratio) on a pre-stock split basis, and each outstanding option or warrant to purchase Zyla common stock converted into the right to purchase shares of Assertio’s common stock. The company accounted for the Zyla Merger using the acquisition method of accounting under ASC 805.
The following table reflects the acquisition date fair value of the consideration transferred with respect to the Zyla Merger:
| | | | | |
| Total number of Company ordinary shares issued | 6,369,635 |
| |
| |
| Assertio share price as of May 20, 2020 | $ | 3.60 | |
| Fair value of common shares issued (in thousands) | $ | 22,931 | |
Fair value of warrants and stock options issued (in thousands) (1) | $ | 11,626 | |
| Taxes paid by the Company on behalf of Zyla (in thousands) | 529 | |
| Total purchase consideration (in thousands) | $ | 35,086 | |
(1) Represents 1,243,091 of Zyla warrants outstanding as of May 20, 2020 at the Exchange Ratio or 3,107,728 Company warrants. The Company’s warrants were valued using the Company’s share price of $3.60 as of May 20,2020. As these shares are exercisable at any time at an exercise price of $0.0016 per share and Assertio issued replacement awards for these shares, these shares represent consideration transferred.
Costs incurred that were directly attributable to facilitating the close of the Zyla Merger were $6.6 million and were recognized during the first six months of 2020. These costs were recorded to the Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.
Pursuant to ASC 805, one of the companies in the transactions shall be designated as the acquirer for accounting purposes based on the evidence available. For accounting purposes, Assertio was treated as the acquiring entity. The Zyla Merger transaction was accounted for as a business combination under the acquisition method of accounting in accordance with ASC 805. Under this method, the acquisition was recorded by allocating the purchase price consideration to the tangible and intangible assets acquired and liabilities assumed from Zyla, based on the estimated fair values at the acquisition date. The excess of purchase price over the fair value of the acquired net assets was recorded as goodwill. The results of operations of this transaction have been included in the Company’s consolidated financial statements from the date of acquisition.
As of the merger date in 2020, valuations were performed to assess the fair value of certain assets acquired and liabilities assumed. Accounting guidance provides that the allocation of the purchase price may be modified up to one year from the date of the merger as more information is obtained about the fair value of assets acquired and liabilities assumed. The Company finalized the Zyla Merger purchase price allocation effective December 31, 2020.
The following table reflects the initial preliminary and final fair values of the assets acquired and liabilities assumed, and measurement period adjustments during the year ended December 31, 2020, as of the acquisition date (in thousands):
| | | | | | | | | | | | | | | | | |
| Initial Preliminary Purchase Price Allocation (PPA) to Fair Value | | Measurement period adjustments | | Final PPA to Fair Value |
| Cash | $ | 7,585 | | | $ | — | | | $ | 7,585 | |
| Accounts receivable | 23,133 | | | — | | | 23,133 | |
| Inventories | 26,742 | | | (12,481) | | | 14,261 | |
| Property and equipment | 4,512 | | | (3,016) | | | 1,496 | |
| Intangible assets | 160,900 | | | 32,500 | | | 193,400 | |
| Other assets | 9,629 | | | (1,964) | | | 7,665 | |
| Total identifiable assets acquired | $ | 232,501 | | | $ | 15,039 | | | $ | 247,540 | |
| Accounts payable | 21,574 | | | — | | | 21,574 | |
| Accrued rebates, returns and discounts | 33,254 | | | — | | | 33,254 | |
| Other accrued liabilities | 15,434 | | | 8,424 | | | 23,858 | |
| Contingent consideration (a) | 29,400 | | | 10,500 | | | 39,900 | |
| Debt (b) | 111,900 | | | (600) | | | 111,300 | |
| Total liabilities assumed | $ | 211,562 | | | $ | 18,324 | | | $ | 229,886 | |
| Net identifiable assets acquired | 20,939 | | | (3,285) | | | 17,654 | |
| Goodwill (c) | 14,147 | | | 3,285 | | | 17,432 | |
| Net assets acquired | $ | 35,086 | | | $ | — | | | $ | 35,086 | |
(a) Contingent consideration obligation was recognized and measured at an estimated fair value as of the acquisition date. The contingent consideration liability assumed is the result of Zyla’s previous acquisition of INDOCIN Products. The liability assumed included contingent consideration related to royalties payable in the form of an earnout provision based on INDOCIN Product revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will subsequently re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.
(b) The fair value of acquired debt is comprised of the following (in thousands):
| | | | | | | | |
13% Senior Secured Note due 2024 | | $ | 95,000 | |
| Royalty rights obligation | | 3,300 | |
| Promissory note | | 3,000 | |
| Credit agreement | | 10,000 | |
| Total debt | | $ | 111,300 | |
Upon the Zyla Merger, the Company assumed and immediately paid off a $3.0 million promissory note. The promissory note was scheduled to mature on July 31, 2020. Additionally upon the Zyla Merger, the Company assumed and immediately paid off a $10.0 million credit agreement. The credit agreement was recognized by Zyla as a related party transaction as the lenders were also holders of a portion of the Zyla’s 13% Notes that were issued on January 31, 2019. The Credit Agreement was scheduled to mature on March 20, 2022. See Note 10, Debt, for further information regarding assumed Debt.
(c) The Company recognized $17.4 million of goodwill which represents the fair value of assets net of the fair value of liabilities assumed in excess of consideration paid. Goodwill arising from the Zyla Merger is not expected to be deductible for tax purposes and is subject to material revision as the purchase price allocation is completed. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Zyla. Refer “Note 7. Intangible Assets” for discussions around related goodwill impairment.
Stock-based Compensation Plan
On June 4, 2020, the Company filed a Registration Statement with the SEC to register the Zyla Life Sciences Amended and Restated 2019 Stock-Based Incentive Compensation Plan (the 2019 Zyla Plan). The 2019 Zyla Plan was assumed in connection with the Zyla Merger. Pursuant to the Zyla Merger Agreement, each outstanding Zyla stock option was cancelled and converted into a stock option to purchase the Company’s Common Stock on the same terms and conditions with (1) the number of shares of Company Common Stock subject to each such option equal to (i) the number of shares of the common stock subject to the option multiplied by (ii) the Merger Exchange Ratio, which was 2.5, rounded on pre-stock split basis, if necessary, to the nearest whole share and (2) an exercise price per share (rounded to the nearest whole cent) equal to the original exercise price of the Zyla stock option divided by (B) the Exchange Ratio. This resulted in the issuance of 1.3 million options with an average fair market value of $2.48 per share value on a post stock split basis, of which $0.4 million was recognized as merger consideration. The term of Zyla options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over three years at the rate of at least 33%, by the end of the first year and then ratably in monthly installments over the remaining vesting period of the stock option.
Warrant Agreements
Upon the Zyla Merger, the Company assumed Zyla’s warrant agreements (the “Warrant Agreements”) with Iroko Pharmaceuticals, Inc. (“Iroko”) certain of Iroko’s affiliates and certain other parties entitled to receive shares of the Company’s common stock as consideration pursuant to Zyla’s prior agreements or in satisfaction of certain claims pursuant to the Zyla’s prior reorganization plan. The warrants are exercisable at any time at an exercise price of $0.0016 per share, subject to certain ownership limitations including, with respect to Iroko and its affiliates, that no such exercise may increase the aggregate ownership of the Company’s outstanding common stock of such parties above 49% of the number of shares of its common stock then outstanding for a period of 18 months. All of the Company’s outstanding warrants have similar terms whereas under no circumstance may the warrants be net-cash settled. As such, all warrants are equity-classified.
Pro Forma Information
Supplemental unaudited proforma information is based upon accounting estimates and judgments that the Company believes are reasonable. This supplemental unaudited pro forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual results would have occurred, or of results that may occur in the future. The following table reflects the pro forma consolidated total revenues and net loss for the periods presented, as if the acquisition of Zyla had occurred on January 1, 2020.
| | | | | | | | | | |
| | | | Unaudited |
| | | | Twelve Months Ended December 31, |
| | | | 2020 |
| Total revenues | | | | $ | 131,969 | |
| | | | |
| Net loss | | | | $ | (60,105) | |
The unaudited proforma financial results for the year ended December 31, 2020 reflect adjustments directly attributed to the business combination and the Company’s divestiture of NUCYNTA and Gralise. See Note 3, Revenue, for revenue for the period since the acquisition date to December 31, 2020 related to Zyla acquired products. As the Company operates as one operating entity, earnings of Zyla since the acquisition date are impractical to calculate separate from the consolidated company.
NOTE 3. REVENUE
Disaggregated Revenue
The following table reflects summary revenue, net for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2021 | | 2020 |
| Product sales, net: | | | | |
INDOCIN products (1) | | $ | 60,557 | | | $ | 31,684 | |
| CAMBIA | | 24,972 | | 28,350 |
| Zipsor | | 10,185 | | | 13,286 | |
SPRIX (1) | | 8,676 | | 11,077 | |
| Other products | | 5,030 | | | 7,693 | |
| Total product sales, net | | 109,420 | | | 92,090 | |
| Commercialization agreement revenue, net | | — | | | 11,258 | |
| Royalties and milestone revenue | | 2,579 | | | 1,519 | |
| Other revenue | | (985) | | | 1,408 | |
| Total revenues | | $ | 111,014 | | | $ | 106,275 | |
(1)Products acquired in connection with the May 20, 2020 Zyla Merger
Product Sales, net
For the year ended December 31, 2021, product sales primarily consisted of sales from INDOCIN Products, CAMBIA, Zipsor and SPRIX. The Company began shipping and recognizing product sales for INDOCIN Products and SPRIX upon the Zyla Merger on May 20, 2020.
Other product net sales primarily includes product sales for non-promoted products (OXAYDO and SOLUMATRIX) which were acquired from Zyla in May 2020.
The Company records contract liabilities in the form of deferred revenue resulting from prepayments from customers. As of December 31, 2021, contract liabilities were $0.3 million and included in Other Current Liabilities on the Consolidated Balance Sheet.
Commercialization Agreement Revenue, net
The Company ceased recognizing commercialization revenue and related costs for NUCYNTA effective the closing of the transaction to sell its rights, title and interest in and to the NUCYNTA franchise to Collegium on February 13, 2020. In connection with the sale, the Commercialization Agreement terminated at closing with certain specified provisions of the Commercialization Agreement surviving in accordance with the terms of the purchase agreement. During the year ended December 31, 2020, the Company recognized net revenue from the Commercialization Agreement of $11.3 million. This included variable royalty revenue of $13.1 million offset by the amortization of the $1.8 million net contract asset in connection with the termination of the Commercialization Agreement.
Royalties and Milestone Revenue
In November 2010, the Company entered into a license agreement with Tribute Pharmaceuticals Canada Ltd. (now known as Miravo Pharmaceuticals) granting them the rights to commercially market CAMBIA in Canada. Miravo independently contracts with manufacturers to produce a specific CAMBIA formulation in Canada. The Company receives royalties on net sales on a quarterly basis as well as certain one-time contingent milestone payments upon the occurrence of certain events. The Company recognized revenue related to CAMBIA in Canada of $2.5 million and $1.5 million, respectively, for the years ended December 31, 2021, and 2020.
Other Revenue
Other revenue consists of sales adjustments for previously divested products, which includes adjustments to reserves for product sales allowances (gross to-net sales allowances) and can result in reductions to total revenue during the period. Sales adjustments for previously divested products primarily include Gralise, which was divested in January 2020, Nucynta and Lazanda and were $(1.0) million and $1.4 million for the years ended December 31, 2021, and 2020, respectively.
NOTE 4. ACCOUNTS RECEIVABLES, NET
The following table reflects accounts receivables, net, as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| Receivables related to product sales, net | $ | 43,753 | | | $ | 40,784 | |
| Receivables from Collegium | 608 | | | 3,566 | |
| Total accounts receivable, net | $ | 44,361 | | | $ | 44,350 | |
As of December 31, 2021 and 2020, allowances for cash discounts for prompt payment were $0.9 million and $1.3 million, respectively.
NOTE 5. INVENTORIES, NET
The following table reflects the components of inventory, net as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Raw materials | $ | 1,242 | | | $ | 1,136 | |
| Work-in-process | 823 | | | 1,340 | |
| Finished goods | 5,424 | | | 9,236 | |
| Total Inventories, net | $ | 7,489 | | | $ | 11,712 | |
As of December 31, 2021 and 2020 inventory reserves were $3.7 million and $2.3 million, respectively.
NOTE 6. PROPERTY AND EQUIPMENT, NET
The following table reflects property and equipment, net as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Furniture and office equipment | $ | 2,733 | | | $ | 2,680 | |
| Laboratory equipment | 20 | | | 20 | |
| Leasehold improvements | 10,523 | | | 10,523 | |
| | 13,276 | | | 13,223 | |
| Less: Accumulated depreciation and amortization | (11,749) | | | (10,786) | |
| Property and equipment, net | $ | 1,527 | | | $ | 2,437 | |
Depreciation expense was $1.0 million, and $1.6 million for the years ended December 31, 2021 and 2020, respectively. Depreciation expense is recognized in Selling, general and administrative expense in the Company’s Consolidated Statements of Comprehensive Income.
NOTE 7. INTANGIBLE ASSETS
Intangible Assets
The following table reflects the gross carrying amounts and net book values of intangible assets as of December 31, 2021 and 2020 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| Product rights | | Remaining
Useful Life
(In years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Book
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Book
Value |
| INDOCIN | | 10.4 | | $ | 154,100 | | | $ | (20,654) | | | $ | 133,446 | | | $ | 154,100 | | | $ | (7,812) | | | $ | 146,288 | |
| Otrexup | | 8.0 | | 44,086 | | | — | | | 44,086 | | | — | | | — | | | — | |
| SPRIX | | 5.4 | | 39,000 | | | (8,960) | | | 30,040 | | | 39,000 | | | (3,389) | | | 35,611 | |
| CAMBIA | | 1.0 | | 51,360 | | | (43,410) | | | 7,950 | | | 51,360 | | | (36,163) | | | 15,197 | |
| Zipsor | | 0.2 | | 27,250 | | | (26,718) | | | 532 | | | 27,250 | | | (24,381) | | | 2,869 | |
| Oxaydo | | 0.0 | | 300 | | | (300) | | | — | | | 300 | | | (183) | | | 117 | |
| Total Intangible Assets | | | | $ | 316,096 | | | $ | (100,042) | | | $ | 216,054 | | | $ | 272,010 | | | $ | (71,928) | | | $ | 200,082 | |
Amortization expense was $28.1 million and $24.8 million for the years ended December 31, 2021 and 2020, respectively.
The following table reflects future amortization expense the Company expects for its intangible assets (in thousands):
| | | | | | | | |
| Year Ending December 31, | | Estimated
Amortization
Expense |
| 2022 | | $ | 32,406 | |
| 2023 | | 23,924 | |
| 2024 | | 23,924 | |
| 2025 | | 23,924 | |
| Thereafter | | 111,876 | |
| Total | | $ | 216,054 | |
Goodwill
During the year ended December 31, 2020, the Company recognized $17.4 million of goodwill related to the fair value of the underlying net tangible and identifiable intangible assets net of liabilities resulting from the Zyla Merger (see Note 2, Acquisitions).
As of December 31, 2020, the Company determined, due to declining revenues and a decrease in its market capitalization, that it was more likely than not that the fair value of net assets are below their carrying amounts and, therefore, the Company performed the required goodwill impairment test under ASC 350, Intangibles - Goodwill and Other. First, the Company estimated the fair value of the reporting unit to which goodwill is assigned using a combination of the income and market approach. The Company then compared the carrying amount of the reporting unit, including goodwill, to its fair value. Since the fair value was less than the reporting unit’s carrying amount, the Company calculated the goodwill impairment as the difference between the reporting unit’s fair value and the carrying amount, not to exceed the carrying amount of goodwill. Accordingly, the Company recorded an impairment charge of $17.4 million, recognized within total costs and expenses in the Consolidated Statement of Comprehensive Income, to impair the carrying amount of goodwill as of December 31, 2020.
NOTE 8. OTHER LONG TERM ASSETS
The following table reflects other long-term assets as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Investment, net | $ | 1,579 | | | $ | 1,579 | |
| Operating lease right-of-use assets | 735 | | | 1,955 | |
| Prepaid asset and deposits | 2,456 | | | 1,936 | |
| Other | 698 | | | 1,031 | |
| Total other long-term assets | $ | 5,468 | | | $ | 6,501 | |
Investment, net as of December 31, 2021 and 2020 consists of the Company’s investment in NES Therapeutic, Inc. (NES). In August 2018, the Company entered into a Convertible Secured Note Purchase Agreement (Note Agreement) with NES. Pursuant the terms of the Note Agreement, the Company purchased a $3.0 million Convertible Secured Promissory Note (NES Note) for $3.0 million which accrues interest annually at a rate of 10% on $3.0 million principal, with both the principal and accrued interest due at maturity on August 2, 2024. Pursuant to the Note Agreement, the NES Note is convertible into equity based on (i) FDA acceptance of the NDA, (ii) initiation of any required clinical trials by NES, or (iii) a qualified financing event by NES.
As a result of the Company’s adoption of ASU 2016-13 Financial Instruments-Credit Losses (ASU 2016-13 or Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020, the Company estimated an expected credit loss of approximately $1.9 million on the NES Note including accrued interest, which was recognized in Other (expense) income in the Company’s Consolidated Statement of Comprehensive Income in the first quarter of 2020. To calculate the expected credit loss allowance, the Company utilized a probability-of-default method (PDM). This process estimates the probability of the loan being successfully paid back or converted into equity based on certain qualified events. The Company’s expected credit losses can vary from period to period based on several factors, such as progress of the medical research and FDA submission, and overall economic environment and the ability of the investee to fund its operations. As of December 31, 2021, the Company continues to assess an estimated $1.9 million expected credit loss on the NES Note based on evaluation of probability of default that exist.
NOTE 9. ACCRUED LIABILITIES
The following table reflects accrued liabilities as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Accrued compensation | $ | 4,122 | | | $ | 5,498 | |
| Accrued restructuring | 828 | | | 8,744 | |
| Other accrued liabilities | 8,062 | | | 12,829 | |
| Interest payable | 1,687 | | | 1,793 | |
| Total accrued liabilities | $ | 14,699 | | | $ | 28,864 | |
NOTE 10. DEBT
The following table reflects the Company’s debt as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
13% Senior Secured Note due 2024 | $ | 70,750 | | | $ | 80,250 | |
| Royalty rights obligation | 2,743 | | | 3,533 | |
2.50% Convertible Notes due 2021 | — | | | 335 | |
| | | |
| | | |
| | | |
| | | |
| Total principal amount | 73,493 | | | 84,118 | |
| | | |
| Unamortized debt discounts | — | | | (16) | |
| | | |
| Carrying value | 73,493 | | | 84,102 | |
| Less: current portion of long-term debt | (12,174) | | | (11,942) | |
| Net, long-term debt | $ | 61,319 | | | $ | 72,160 | |
13% Senior Secured Notes due 2024
In accordance with the Zyla Merger, Assertio assumed $95.0 million aggregate principal amount of 13% senior secured notes due 2024 (the Secured Notes) issued pursuant to an indenture (the Existing Indenture) entered into on January 31, 2019, by and among Zyla Life Sciences, the guarantors party thereto (the Guarantors) and Wilmington Savings Fund Society, FSB (as successor to U.S. Bank National Association), as trustee and collateral agent (the Trustee). The Secured Notes were issued in two series: $50.0 million of Series A-1 Notes and $45.0 million of Series A-2 Notes.
As of May 20, 2020, the Existing Indenture was modified by a Supplemental Indenture (the Supplemental Indenture and the Existing Indenture, as so modified, the Indenture), pursuant to which Assertio (the Issuer) assumed the obligations as issuer of the Secured Notes and the subsidiaries of Assertio became guarantors of the Secured Notes. The Supplemental Indenture, among other things, provides for certain amendments to the restrictive covenants in the Indenture.
Interest on the Secured Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on May 1 and November 1 of each year (each, a Payment Date). The Existing Indenture also requires payments of outstanding principal on the Secured Notes equal to 10% per annum of the issued principal amount, payable semi-annually on each Payment Date.
The Secured Notes are senior secured obligations of the Issuer and are secured by a lien on substantially all assets of the Issuer and the guarantors. The stated maturity date of the Secured Notes is January 31, 2024. Upon the occurrence of a Change of Control, subject to certain conditions (as defined in the Existing Indenture), holders of the Secured Notes may require the Issuer to repurchase for cash all or part of their Secured Notes at a repurchase price equal to 100% of the principal amount of the Secured Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.
The Company may redeem the Secured Notes at its option, in whole or in part from time to time, at a redemption price equal to 100% of the principal amount of the Secured Notes being redeemed, plus accrued and unpaid interest, if any, through the redemption date. No sinking fund is provided for the Secured Notes.
Pursuant to the Supplemental Indenture, Assertio and its restricted subsidiaries must also comply with certain covenants, including limitations on the issuance of debt; the issuance of preferred and/or disqualified stock; the payment of dividends and other restricted payments; the prepayment, redemption or repurchase of subordinated debt; mergers, amalgamations or consolidations; engaging in certain transactions with affiliates; and the making of investments. In addition, the Issuer must maintain a minimum level of consolidated liquidity, based on unrestricted cash on hand and availability under any revolving credit facility, equal to the greater of (1) the quotient of the outstanding principal amount of the Secured Notes divided by 9.5 and (2) $7.5 million. The Company was in compliance with its covenants with respect to the Secured Notes as of December 31, 2021.
The Company had Senior Secured Notes obligations of $70.8 million as of December 31, 2021, with $9.5 million classified as current and $61.3 million classified as non-current debt in the Company’s Consolidated Balance Sheets.
Royalty Rights Obligation
In accordance with the Zyla Merger, the Company assumed a royalty rights agreement (the Royalty Rights) with each of the holders of its Secured Notes pursuant to which the Company will pay the holders of the Secured Notes an aggregate 1.5% royalty on Net Sales (as defined in the Existing Indenture) through December 31, 2022. The Royalty Rights were determined to be a freestanding element with respect to the Secured Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument.
The Company has Royalty Rights obligations of $2.7 million as of December 31, 2021, with $2.6 million classified as current and $0.1 million classified as non-current debt in the Company’s Consolidated Balance Sheets.
The accounting for the Royalty Rights requires the Company to make certain estimates and assumptions about the future net sales. The estimates of the magnitude and timing of net sales are subject to significant variability due to the extended time period associated with the financing transaction and are thus subject to significant uncertainty.
Convertible Notes
2.50% Convertible Senior Notes Due 2021
On September 9, 2014, the Company issued $345 million aggregate principal amount of 2.50% Convertible Senior Notes Due 2021 (the 2021 Notes). The 2021 Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture dated September 9, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee), and mature on September 1, 2021, unless earlier converted, redeemed, or repurchased. The 2021 Notes bear interest at the rate of 2.50% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning March 1, 2015.
On February 19, 2020, the Company entered into purchase agreements with a limited number of holders of the Company’s outstanding 2021 Notes to repurchase $102.5 million aggregate principal amount of 2021 Notes. On April 8, 2020, the Company completed its public tender offers to purchase the $42.1 million in aggregate principal amount outstanding 2021 Notes. As of December 31, 2020, only $0.3 million in aggregate principal amount of the 2021 Notes were outstanding and were classified as part of current portion of long-term debt on the Company’s Consolidated Balance Sheets. On September 1, 2021, the remaining $0.3 million in aggregate principal amount of the 2021 Notes matured and were paid. As of December 31, 2021, there were no outstanding aggregate principal amounts of the 2021 Notes.
5.00% Convertible Senior Notes Due 2024
On August 13, 2019, the Company issued $120.0 million aggregate principal of Convertible Senior Notes Due 2024 (the 2024 Notes). On February 19, 2020, the Company entered into purchase agreements with a limited number of holders of the Company’s outstanding 2024 Notes to repurchase $85.5 million aggregate principal amount of 2024 Notes.
On April 8, 2020, the Company completed its public tender offers to purchase the remaining $34.5 million in aggregate principal amount outstanding 2024 Notes. As of December 31, 2021 and 2020, there were no outstanding aggregate principal amount of the 2024 Notes.
Senior Secured Notes
On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement). On February 13, 2020, the Company repaid in full all outstanding indebtedness, and terminated all commitments and obligations, under its Note Purchase Agreement.
Interest Expense
Debt discount and royalty rights are amortized as interest expense using the effective interest method. The following table reflects debt related interest included in the Interest expense in the Company’s Consolidated Statements of Comprehensive Income as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
| Interest payable on Convertible Notes | $ | 6 | | | $ | 1,727 | |
Interest payable on 13% Senior Secured Notes due 2024 | 10,020 | | | 6,870 | |
| Interest payable on Senior Notes | — | | | 1,648 | |
| Amortization of debt discounts, and royalty rights | 194 | | | 5,680 | |
| Total interest expense | $ | 10,220 | | | $ | 15,925 | |
NOTE 11. RESTRUCTURING CHARGES
The Company continually evaluates its operations to identify opportunities to streamline operations and optimize operating efficiencies as an anticipation to changes in the business environment.
On December 15, 2020, the Company announced the December 2020 Plan which was designed to substantially reduce the Company’s operating footprint through the reduction of its workforce. The reorganization plan included a reduction of staff at our headquarters office and remote sales force. As a result, $9.6 million of severance and benefits costs and $1.6 million of other exit costs, including $0.9 million related to the write off of fixed assets no longer in use and $0.7 million related to the early termination of fleet leases, were recognized as restructuring charges, related to the December 2020 Plan, during the year ended December 31, 2020. The Company completed the workforce reduction in 2021 and recognized $0.9 million of severance and benefits costs and $0.2 million of other exit costs during the year ended December 31, 2021
In May 2020, the Company began implementing reorganization plans of its workforce and other restructuring activities to realize the synergies of the Zyla Merger and to re-align resources to strategic areas and drive growth (Zyla Merger Reorganization). The Company completed the restructuring activities in 2020 and incurred $5.6 million of severance and benefits costs, which includes $1.0 million of stock-based compensation expense associated with equity modifications for certain executives, and $0.2 million of other exit costs were incurred during the year ended December 31, 2020. The Company did not incur significant costs related to the Zyla Merger Reorganization in 2021.
In April 2020, the Company executed a limited reduction to its sales force due to the impact of COVID-19 on its ability to see in-person providers who prescribe our products. As a result, $0.3 million of severance and benefits costs and $0.3 million of other costs were recognized as restructuring charges during the year ended December 31, 2020. This initiative was completed during 2020.
In November 2019, the Company announced an acceleration of cost-saving initiatives that included a decision to discontinue its relationship with its contract sales organization, a reduction in the use of certain outside vendors and consultants, and the reorganization of certain functions resulting in a reduction of staff at its headquarters office and remote positions during the fourth quarter of 2019 (the 2019 Plan). As a result, $0.2 million of severance and benefits costs for the reduction of staff were recognized as restructuring charges, related to the 2019 Plan, during the year ended December 31, 2020. The 2019 cost-saving initiative was completed in 2020.
The following table reflects total expenses related to restructuring activities recognized within the Consolidated Statement of Comprehensive Income as restructuring costs (in thousands): | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| Employee compensation costs | $ | 876 | | | $ | 15,705 | |
| | | |
| | | |
| Other exit costs | 213 | | | 2,101 | |
| Total restructuring charges | $ | 1,089 | | | $ | 17,806 | |
The following table reflects cash activity relating to the Company’s accrued restructuring cost as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Employee compensation costs | | Other exit costs | | Total |
| Balance as of December 31, 2019 | $ | 3,763 | | | $ | — | | | $ | 3,763 | |
| Accruals | 15,705 | | | 2,101 | | | 17,806 | |
| Adjustment to previous accrual estimate | (594) | | | — | | | (594) | |
| Write off of fixed assets, leases and other adjustments | — | | | (1,888) | | | (1,888) | |
| Cash paid | (10,130) | | | (213) | | | (10,343) | |
| Balance as of December 31, 2020 | $ | 8,744 | | | $ | — | | | $ | 8,744 | |
| Restructuring charges | 876 | | | 213 | | | 1,089 | |
| Cash paid | (8,792) | | | (213) | | | (9,005) | |
| Balance as of December 31, 2021 | $ | 828 | | | $ | — | | | $ | 828 | |
As of December 31, 2021, the accrued restructuring balance of $0.8 million was related to the December 2020 Plan. As of December 31, 2020, the accrued restructuring balance of $8.7 million was comprised of $7.2 million related to the December 2020 Plan, $0.8 million related to the 2019 Plan, and $0.7 million related to Zyla Merger restructuring activities and was classified as accrued liabilities in the Consolidated Balance Sheet. Non-cash charges during the year ended December 31, 2020 primarily related to the write off of fixed assets no longer in use and the early termination of fleet leases in connection with the December 2020 plan.
NOTE 12. LEASES
As of December 31, 2021, the Company has non-cancelable operating leases for its offices and certain office equipment. The Company has the right to renew the term of the Lake Forest lease for one period of five years, provided that written notice is made to the Landlord no later than twelve months prior to the expiration of the initial term of the lease which is on December 31, 2023. In connection with the Zyla Merger, the company assumed an operating lease for offices in Wayne, Pennsylvania, which terminated in February 2022.
Prior to the Company’s corporate headquarters relocation in 2018, it had leased its previous corporate office in Newark, California (the Newark lease) which terminates at the end of November 2022 and will not be renewed. The Newark lease is currently partially subleased through the lease term. Operating lease costs and sublease income related to the Newark facility are accounted for in Other gain (loss) in the Consolidated Statements of Comprehensive Income.
The following table reflects lease expense for the years ended December 31, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | |
| | | Year ended
December 31, 2021 | | Year ended
December 31, 2020 |
| Financial Statement Classification | | |
| Operating lease cost | Selling, general and administrative expenses | | $ | 307 | | | $ | 1,760 | |
| Operating lease cost | Other gain (loss) | | 591 | | | 1,391 | |
| Total lease cost | | | $ | 898 | | | $ | 3,151 | |
| | | | | |
| Sublease Income | Other gain (loss) | | $ | 1,148 | | | $ | 2,236 | |
The following table reflects supplemental cash flow information related to leases for the years ended December 31, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | |
| | Year ended
December 31, 2021 | | Year ended
December 31, 2020 |
| | |
| Cash paid for amounts included in measurement of liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 2,799 | | | $ | 3,004 | |
The following table reflects supplemental balance sheet information related to leases as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Financial Statement Classification | | December 31, 2021 | | December 31, 2020 |
| | | | | |
| | | | | |
| Liabilities | | | | | |
| Current operating lease liabilities | Other current liabilities | | $ | 1,978 | | | $ | 2,683 | |
| Noncurrent operating lease liabilities | Other long term liabilities | | 397 | | | 2,815 | |
| Total lease liabilities | | | $ | 2,375 | | | $ | 5,498 | |
Future undiscounted cash flows to be received from subleases is expected to be approximately $0.8 million for the year ended December 31, 2022.
The following table reflects other lease information as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Weighted-average remaining lease term (years): | | | | |
| Operating leases | | 1.2 | | 2.2 |
| Weighted-average discount rate: | | | | |
| Operating leases | | 7.8 | % | | 6.3 | % |
The following table reflects future minimum lease payments under the Company’s non-cancelable operating leases as of December 31, 2021 (in thousands):
| | | | | | | | |
| | Lease Payments |
| 2022 | | $ | 1,983 | |
| 2023 | | 421 | |
| Thereafter | | — | |
| Total lease payments | | $ | 2,404 | |
| Less: Interest | | 29 | |
| Present value of lease liabilities | | $ | 2,375 | |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Jubilant HollisterStier Manufacturing and Supply Agreement
Pursuant to the Zyla Merger, the Company assumed a Manufacturing and Supply Agreement (the “Agreement”) with Jubilant HollisterStier LLC (“JHS”) pursuant to which the Company engaged JHS to provide certain services related to the manufacture and supply of SPRIX for the Company’s commercial use. Under the Agreement, JHS will be responsible for supplying a minimum of 75% of the Company’s annual requirements of SPRIX through July 30, 2022. The Company has agreed to purchase a minimum number of batches of SPRIX per calendar year from JHS over the term of the Agreement. Total commitments to JHS are approximately $0.7 million through the period ending July 30, 2022 and are expected to be met.
Cosette Pharmaceuticals Supply Agreement
Pursuant to the Zyla Merger, the Company assumed a Collaborative License, Exclusive Manufacture and Global Supply Agreement with Cosette Pharmaceuticals, Inc. (formerly G&W Laboratories, Inc.) (the “Supply Agreement”) for the manufacture and supply of INDOCIN Suppositories to Zyla for commercial distribution in the United States. On July 9, 2021, the Company and Cosette entered into Amendment No. 3 to the Supply Agreement, to among other things, extend the expiration date of the Supply Agreement from July 31, 2023 to July 9, 2028. The Company is obligated to purchase all of its requirements for INDOCIN Suppositories from Cosette Pharmaceuticals, Inc., and is required to meet minimum purchase requirements each calendar year during the extended term of the agreement. Total commitments to Cosette are approximately $6.3 million annually through the end of the contract term.
Antares Supply Agreement
In connection with the Otrexup acquisition, the Company entered into a Supply Agreement with Antares pursuant to which Antares will manufacture and supply the finished Otrexup products. Under the Supply Agreement, the Company has agreed to annual minimum purchase obligations from Antares, which approximate $2.0 million annually. The Supply Agreement has an initial term through December 2031 with renewal terms beyond.
Legal Matters
General
The Company is currently involved in various lawsuits, claims, investigations and other legal proceedings that arise in the ordinary course of business. The Company recognizes a loss contingency provision in its financial statements when it concludes that a contingent liability is probable, and the amount thereof is estimable. Costs associated with our involvement in legal proceedings are expensed as incurred. Amounts accrued for legal contingencies are based on management’s best estimate of a loss based upon the status of the cases described below, assessments of the likelihood of damages, and the advice of counsel and often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments. As of December 31, 2021 and December 31, 2020 the Company had a legal contingency accrual of approximately $3.4 million and zero, respectively. The Company recognized a loss on contingency provision of $10.6 million during the year ended December 31, 2021. The Company will continue to monitor each matter and adjust accruals as warranted based on new information and further developments in accordance with ASC 450-20- 25. For matters discussed below for which a loss is not probable, or a probable loss cannot be reasonably estimated, no liability has been recorded. Legal expenses are recorded in Selling, general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Income and the related accruals are recorded in Accrued liabilities in the Company’s Condensed Consolidated Balance Sheets.
Other than matters that we have disclosed below, the Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of its business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. The Company may also become party to further litigation in federal and state courts relating to opioid drugs. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth below, the Company is not currently involved in any matters that the Company believes may have a material adverse effect on its business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.
Glumetza Antitrust Litigation
Antitrust class actions and related direct antitrust actions were filed in the Northern District of California against the Company and several other defendants relating to our former drug Glumetza®. The plaintiffs sought to represent a putative class of direct purchasers of Glumetza. In addition, several retailers, including CVS Pharmacy, Inc., Rite Aid Corporation, Walgreen Co., the Kroger Co., the Albertsons Companies, Inc., H-E-B, L.P., and Hy-Vee, Inc. (the “Retailer Plaintiffs”), filed substantially similar direct purchaser antitrust claims.
On July 30, 2020, Humana Inc. also filed a complaint against the Company and several other defendants in federal court in the Northern District of California alleging similar claims related to Glumetza®. The claims asserted by Humana in its federal case were ultimately withdrawn, and analogous claims were instead asserted by Humana in an action it filed in California state court on February 8, 2021, and subsequently amended in September 2021.
These antitrust cases arise out of a Settlement and License Agreement (the Settlement) that the Company, Santarus, Inc. (Santarus) and Lupin Limited (Lupin) entered into in February 2012 that resolved patent infringement litigation filed by the Company against Lupin regarding Lupin’s Abbreviated New Drug Application for generic 500 mg and 1000 mg tablets of Glumetza. The antitrust plaintiffs allege, among other things, that the Settlement violated the antitrust laws because it allegedly included a “reverse payment” that caused Lupin to delay its entry in the market with a generic version of Glumetza. The alleged “reverse payment” is an alleged commitment on the part of the settling parties not to launch an authorized generic version of Glumetza for a certain period. The antitrust plaintiffs allege that the Company and its co-defendants, which include Lupin as well as Bausch Health (the alleged successor in interest to Santarus) are liable for damages under the antitrust laws for overcharges that the antitrust plaintiffs allege they paid when they purchased the branded version of Glumetza® due to delayed generic entry. Plaintiffs seek treble damages for alleged past harm, attorneys’ fees and costs.
On September 14, 2021, the Retailer Plaintiffs voluntarily dismissed all claims against the Company pursuant to a settlement agreement with the Company in return for $3.15 million. On February 3, 2022, the Court issued its final order approving a settlement of the direct purchaser class plaintiffs’ claims against the Company in return for $3.85 million.
With respect to the Humana lawsuit that is continuing in California state court, on November 24, 2021, the state court granted in part and denied in part a demurrer by the defendants. That case is now moving to discovery.
The Company intends to defend itself vigorously in the Humana California state court lawsuit. A liability for this matter has been recorded in the financial statements.
Securities Class Action Lawsuit and Related Matters
On August 23, 2017, the Company, two individuals who formerly served as its chief executive officer and president, and its former chief financial officer were named as defendants in a purported federal securities law class action filed in the U.S. District Court for the Northern District of California (the District Court). The action (Huang v. Depomed et al., No. 4:17-cv-4830-JST, N.D. Cal.) alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 relating to certain prior disclosures of the Company about its business, compliance, and operational policies and practices concerning the sales and marketing of its opioid products and contends that the conduct supporting the alleged violations affected the value of Company common stock and is seeking damages and other relief. In an amended complaint filed on February 6, 2018, the lead plaintiff (referred to in its pleadings as the Depomed Investor Group), which seeks to represent a class consisting of all purchasers of Company common stock between July 29, 2015 and August 7, 2017, asserted the same claims arising out of the same and similar disclosures against the Company and the same individuals as were involved in the original complaint. The Company and the individuals filed a motion to dismiss the amended complaint on April 9, 2018. On March 18, 2019, the District Court granted the motion to dismiss without prejudice, and the plaintiffs filed a second amended complaint on May 2, 2019. The second amended complaint asserted the same claims arising out of the same and similar disclosures against the Company and the same individuals as were involved in the original complaint. The Company and the individuals filed a motion to dismiss the second amended complaint on June 17, 2019, and the District Court granted that motion with prejudice on March 11, 2020. On April 9, 2020, the plaintiffs filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit. The parties completed their briefing of the appeal on December 14, 2020. On March 1, 2021, the court granted the parties’ joint motion to stay the appeal pending settlement discussions. On July 30, 2021, the Company reached an agreement to settle the matter subject to District Court approval. On August 13, 2021, the plaintiffs filed an unopposed motion for preliminary approval of the settlement with the District Court. A liability for this matter has been recorded in the financial statements.
In addition, five shareholder derivative actions were filed on behalf of the Company against its officers and directors for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of the federal securities laws. The claims arise out of the same factual allegations as the purported federal securities class action described above. The first derivative action was filed in the Superior Court of California, Alameda County on September 29, 2017 (Singh v. Higgins et al., RG17877280). The second and third actions were filed in the Northern District of California on November 10, 2017 (Solak v. Higgins et al., No. 3:17-cv-6546-JST) and November 15, 2017 (Ross v. Fogarty et al., No. 3:17-cv-6592-JST). The fourth action was filed in the District of Delaware on December 21, 2018 (Lutz v. Higgins et al, No. 18-2044-CFC). The fifth derivative action was filed in the Superior Court of California, Alameda County on January 28, 2019 (Youse v. Higgins et al, No. HG19004409). On December 7, 2017, the plaintiffs in Solak v. Higgins, et al. voluntarily dismissed the action. On July 12, 2019, the Singh and Youse actions were consolidated. All of the derivative actions were stayed pending the resolution of the class action, and the stays have been extended pending the resolution of the appeal. On July 30, 2021, the Company reached an agreement to settle these matters subject to court approval. On August 6, 2021, plaintiffs in the consolidated Singh/Youse derivative action filed an unopposed motion for preliminary approval of the settlement with the Superior Court of California, Alameda County. On October 19, 2021, the Superior Court held a hearing regarding the preliminary approval motion and, on October 28, 2021 and December 14, 2021, respectively, the Superior Court issued its preliminary and final orders approving the settlement.
Opioid-Related Request and Subpoenas
As a result of the greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers generally by federal, state, and local regulatory and governmental agencies. In March 2017, the Company’s subsidiary Assertio Therapeutics, Inc. (Assertio Therapeutics) received a letter from then-Sen. Claire McCaskill (D-MO), the then-Ranking Member on the U.S. Senate Committee on Homeland Security and Governmental Affairs, requesting certain information regarding Assertio Therapeutics’ historical commercialization of opioid products. Assertio Therapeutics voluntarily furnished information responsive to Sen. McCaskill’s
request. Since 2017, Assertio Therapeutics has received and responded to subpoenas from the U.S. Department of Justice (DOJ) seeking documents and information regarding its historical sales and marketing of opioid products. Assertio Therapeutics has also received and responded to subpoenas or civil investigative demands focused on its historical promotion and sales of Lazanda, NUCYNTA, and NUCYNTA ER from various state attorneys general seeking documents and information regarding Assertio Therapeutics’ historical sales and marketing of opioid products. In addition, Assertio Therapeutics received and responded to a subpoena from the State of California Department of Insurance (CDI) seeking information relating to its historical sales and marketing of Lazanda. The CDI subpoena also seeks information on Gralise, a non-opioid product formerly in Assertio Therapeutics’ portfolio. In addition, Assertio Therapeutics received and responded to a subpoena from the New York Department of Financial Services seeking information relating to its historical sales and marketing of opioid products. Assertio Therapeutics also from time to time receives and complies with subpoenas from governmental authorities related to investigations primarily focused on third parties, including healthcare practitioners. Assertio Therapeutics is cooperating with the foregoing governmental investigations and inquiries.
Multidistrict Opioid Litigation
A number of pharmaceutical manufacturers, distributors and other industry participants have been named in numerous lawsuits around the country brought by various groups of plaintiffs, including city and county governments, hospitals, individuals and others. In general, the lawsuits assert claims arising from defendants’ manufacturing, distributing, marketing and promoting of FDA-approved opioid drugs. The specific legal theories asserted vary from case to case, but the lawsuits generally include federal and/or state statutory claims, as well as claims arising under state common law. Plaintiffs seek various forms of damages, injunctive and other relief and attorneys’ fees and costs.
For such cases filed in or removed to federal court, the Judicial Panel on Multi-District Litigation issued an order in December 2017, establishing a Multi-District Litigation court (MDL Court) in the Northern District of Ohio (In re National Prescription Opiate Litigation, Case No. 1:17-MD-2804). Since that time, more than 2,000 such cases that were originally filed in U.S. District Courts, or removed to federal court from state court, have been filed in or transferred to the MDL Court. Assertio Therapeutics is currently involved in a subset of the lawsuits that have been filed in or transferred to the MDL Court. Plaintiffs may file additional lawsuits in which Assertio Therapeutics may be named. Plaintiffs in the pending federal cases involving Assertio Therapeutics include individuals; county, municipal and other governmental entities; employee benefit plans, health insurance providers and other payors; hospitals, health clinics and other health care providers; Native American tribes; and non-profit organizations who assert, for themselves and in some cases for a putative class, federal and state statutory claims and state common law claims, such as conspiracy, nuisance, fraud, negligence, gross negligence, negligent and intentional infliction of emotional distress, deceptive trade practices, and products liability claims (defective design/failure to warn). In these cases, plaintiffs seek a variety of forms of relief, including actual damages to compensate for alleged personal injuries and for alleged past and future costs such as to provide care and services to persons with opioid-related addiction or related conditions, injunctive relief, including to prohibit alleged deceptive marketing practices and abate an alleged nuisance, establishment of a compensation fund, establishment of medical monitoring programs, disgorgement of profits, punitive and statutory treble damages, and attorneys’ fees and costs. No trial date has been set in any of these lawsuits, which are at an early stage of proceedings. Assertio Therapeutics intends to defend itself vigorously in these matters.
State Opioid Litigation
Related to the cases in the MDL Court noted above, there have been hundreds of similar lawsuits filed in state courts around the country, in which various groups of plaintiffs assert opioid-drug related claims against similar groups of defendants. Assertio Therapeutics is currently named in a subset of those cases, including cases in Missouri, Nevada, Pennsylvania, Texas and Utah. Plaintiffs may file additional lawsuits in which Assertio Therapeutics may be named. In the pending cases involving Assertio Therapeutics, plaintiffs are asserting state common law and statutory claims against the defendants similar in nature to the claims asserted in the MDL cases. Plaintiffs are seeking actual damages, disgorgement of profits, injunctive relief, punitive and statutory treble damages, and attorneys’ fees and costs. The state lawsuits in which Assertio Therapeutics has been served are generally each at an early stage of proceedings. Assertio Therapeutics intends to defend itself vigorously in these matters.
Insurance Litigation
On January 15, 2019, the Company was named as a defendant in a declaratory judgment action filed by Navigators Specialty Insurance Company (Navigators) in the U.S. District Court for the Northern District of California (Case No. 3:19-cv-255). Navigators is the Company’s primary product liability insurer. Navigators was seeking declaratory judgment that opioid litigation claims noticed by the Company (as further described above under “Multidistrict Opioid Litigation” and “State Opioid Litigation”) are not covered by the Company’s life sciences liability policies with Navigators. On February 3, 2021, the Company entered into a Confidential Settlement Agreement and Mutual Release with Navigators to resolve the declaratory
judgment action and the Company’s counterclaims. Pursuant to the Settlement Agreement, the parties settled and the coverage action was dismissed without prejudice.
During the first quarter of 2021, the Company received $5.0 million in insurance reimbursement for previous opioid-related spend, which was recognized within Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income.
On July 16, 2021, the Company filed a complaint for declaratory relief against one of its excess products liability insurers, Lloyd’s of London Newline Syndicate 1218 and related entities (Newline), in the Superior Court of the State of California for the County of Alameda. Newline removed the case to federal court, and it is currently pending in the U.S. District Court for the Northern District of California (Case No. 3:21-cv-06642). The Company is seeking a declaratory judgment that Newline has a duty to defend the Company or, alternatively, to reimburse the Company’s attorneys’ fees and other defense costs for opioid litigation claims noticed by the Company. The litigation is in the early stages of discovery and trial has been scheduled for May 2023.
NOTE 14. EMPLOYEE BENEFIT PLANS
The Company's 401(k) Employee Savings Plan (the "401(k) Plan") is available to all U.S. employees meeting certain eligibility criteria. The 401(k) Plan was amended at the time of the Zyla Merger in May 2020 to make matching contributions amount equal to 100% of elective deferral contributions that are not over 3% of compensation, plus 50% of elective deferral contributions that are over 3% of compensation but are not over 6% of compensation. The Company may make discretionary matching contributions for employees.
The Company contributed cash of $0.1 million and $0.2 million to the 401(k) Plan during the years ended December 31, 2021 and 2020, respectively. The Company's common stock is not an investment option available to participants in the 401(k) Plan.
NOTE 15. STOCK-BASED COMPENSATION
The Company’s stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs), and purchases under the Company’s former employee stock purchase plan (ESPP). The following table reflects stock‑based compensation expense recognized in the Company’s Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 |
| Cost of sales (excluding amortization of intangible assets) | $ | — | | | $ | 92 | |
| Research and development expenses | — | | | 268 | |
| Selling, general and administrative expenses | 3,545 | | | 9,565 | |
| Restructuring charges | — | | | 999 | |
| Total | $ | 3,545 | | | $ | 10,924 | |
The recognized tax benefits on total stock-based compensation expense was immaterial for the years ended December 31, 2021 and 2020.
As of December 31, 2021, the Company had $4.7 million and $2.3 million of total unrecognized compensation expense related to RSUs and stock option grants, respectively, that will be recognized over a weighted average vesting period of 1.92 years and 2.91 years, respectively.
The following table reflects assumptions used to calculate the fair value of option grants for the year ended December 31, 2021:
| | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| | | | |
| Risk-free interest rate | | 1.25% | | 0.20% - 0.35% |
| Dividend yield | | —% | | —% |
| Expected option term (in years) | | 6.0 | | 3.4 - 5.0 |
| Expected stock price volatility | | 284% | | 80% |
The weighted average grant date fair value of options granted during the years ended December 31, 2021 and 2020 was $1.11 and $1.64 per option share, respectively. There were 72,750 stock options were exercised during the year ended December 31, 2021, and no stock options exercised during 2020. The total intrinsic value of options exercised during the year ended December 31, 2021 was $0.1 million and cash received from stock options exercised during the year ended December 31, 2021 was $0.2 million. Total grant date fair value of options that vested during the years ended December 31, 2021 and 2020 was $0.2 million and $0.7 million, respectively.
Employee Stock Purchase Plan
The Company terminated its ESPP program in June 2021 and did not grant any stock purchase rights under the ESPP program during the year ended December 31, 2021. The weighted average grant date fair value of stock purchase rights granted under the ESPP during the years ended December 31, 2020 was $1.64. The following table reflects assumptions used to calculate the fair value of stock purchase rights granted under the ESPP for the year ended December 31, 2020:
| | | | | | | | |
| | | 2020 |
| Employee Stock Purchase Plan | | |
| Risk-free interest rate | | 0.09% - 0.18% |
| Dividend yield | | —% |
| Expected term (in years) | | 0.5 |
| Expected stock price volatility | | 85.8% - 142.3% |
2004 Equity Incentive Plan
The Company’s 2004 Equity Incentive Plan (2004 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2004. The 2004 Plan provides for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of non-statutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 2004 Plan was 3,612,500 shares and there were no more shares available for future issuance at December 31, 2021.
Generally, the exercise price of all incentive stock options and non-statutory stock options granted under the 2004 Plan must be at least 100% and 80%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and non-statutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.
The following tables reflects activity for the year ended December 31, 2021 under the 2004 Plan (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (years) | | Aggregate
Intrinsic Value
(in thousands) |
| Options outstanding as of December 31, 2020 | 30,875 | | | $ | 25.71 | | | | | |
| Options granted | — | | | — | | | | | |
| Options exercised | — | | | — | | | | | |
| Options forfeited | — | | | — | | | | | |
| Options expired | (10,875) | | | 20.52 | | | | | |
| Options outstanding as of December 31, 2021 | 20,000 | | | $ | 28.54 | | | 1.4 | | $ | — | |
| Options vested and expected as of vest at December 31, 2021 | 20,000 | | | $ | 28.54 | | | 1.4 | | $ | — | |
| Options exercisable as of December 31, 2021 | 20,000 | | | $ | 28.54 | | | 1.4 | | $ | — | |
There were no restricted stock units granted under the 2004 Equity Incentive Plan.
2014 Omnibus Incentive Plan
The Company’s 2014 Omnibus Incentive Plan (2014 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2014, and subsequently amended and restated in June 2020 (2014 Amended Plan). The 2014 Amended Plan provides for the grant of stock options, stock appreciation rights, stock awards, cash awards and performance award to the employees, non-employee directors and consultants of the Company. Shares available for grant under the 2014 Amended Plan were increased during the year ended December 31, 2020 by 3,250,000 shares. The number of shares authorized under the 2014 Amended Plan is 7,195,000 shares, of which 52,317 were available for future issuance at December 31, 2021.
Incentive Stock Options
Generally, the exercise price of all incentive stock options and non-statutory stock options granted under the 2014 Amended Plan must be the fair value of the common stock of the Company on the grant date. The term of incentive and non-statutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over three years at rate of 33% annually or four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.
The following table reflects option activity for the year ended December 31, 2021 under the 2014 Amended Plan (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (years) | | Aggregate
Intrinsic Value
(in thousands) |
| Options outstanding as of December 31, 2020 | 232,956 | | | $ | 36.18 | | | | | |
| Options granted | 2,100,000 | | | 1.31 | | | | | |
| Options exercised | — | | | — | | | | | |
| Options forfeited | (259) | | | 25.73 | | | | | |
| Options expired | (128,856) | | | 44.84 | | | | | |
| Options outstanding as of December 31, 2021 | 2,203,841 | | | $ | 2.45 | | | 9.8 | | $ | 1,827 | |
| Options vested and expected to vest as of December 31, 2021 | 2,203,841 | | | $ | 2.45 | | | 9.8 | | $ | 1,827 | |
| Options exercisable as of December 31, 2021 | 103,841 | | | $ | 25.46 | | | 6.5 | | $ | — | |
Restricted Stock Units
The following table reflects RSU activity for the year ended December 31, 2021 under the 2014 Amended Plan (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted
Average
Grant Date
Fair
Value
Per Share | | Weighted
Average
Remaining
Contractual
Term
(in years) |
| Non-vested performance-based restricted stock units as of December 31, 2020 | 1,374,358 | | | $ | 5.59 | | | |
| Granted | 2,230,065 | | | 2.94 | | | |
| Vested | (707,515) | | | 5.50 | | | |
| Forfeited | (275,305) | | | 5.24 | | | |
| Non-vested restricted stock units as of December 31, 2021 | 2,621,603 | | | $ | 3.40 | | | 1.1 |
RSUs generally vest over three or four years, with 33% or 25% of each award vesting annually, respectively. The total fair value of RSUs that vested during the years ended December 31, 2021 and 2020 was $1.7 million and $1.1 million, respectively.
Performance-based Restricted Stock Units
The PSU awards are measured exclusively to the relative total shareholder return (TSR) performance, which is measured against the three-year TSR of a custom index of companies. The actual number of shares awarded is adjusted to between zero and 200% of the target award amount based upon achievement in each of the three independent successive one-year tranches. TSR relative to peers is considered a market condition under applicable authoritative guidance. For PSUs granted with vesting subject to market conditions, the fair value of the award is determined at grant date using the Monte Carlo model, and expense is recognized ratably over the requisite service period regardless of whether or not the market condition is satisfied. The Monte Carlo valuation model considers a variety of potential future share prices for Assertio and its peer companies in a selected market index. The recipients of the PSU awards will have voting rights and the right to receive a dividend, if applicable, once the underlying shares have been issued. No PSUs were granted during the years ended December 31, 2021 and 2020. The total fair value of PSUs that vested during the year ended December 31, 2021 was $0.1 million and no common shares subject to PSU vesting were issued during the year ended December 31, 2020.
The following table reflects PSU activity for the year ended December 31, 2021 under the 2014 Amended Plan (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted
Average
Grant Date
Fair
Value
Per Share | | Weighted
Average
Remaining
Contractual
Term
(in years) | | Aggregate
Intrinsic Value
(in thousands) |
| Non-vested performance-based restricted stock units as of December 31, 2020 | 226,461 | | | $ | 32.93 | | | | | |
| Granted | — | | | — | | | | |
| Vested | (19,054) | | | 41.37 | | | | | |
| Forfeited | (12,181) | | | 41.37 | | | | |
| Non-vested performance-based restricted stock units as of December 31, 2021 | 195,226 | | | $ | 31.58 | | | 0.1 | | $ | 426 | |
Zyla Life Sciences Amended and Restated 2019 Stock-Based Incentive Compensation Plan
The 2019 Zyla Plan was assumed in connection with the Zyla Merger, and pursuant to the Zyla Merger Agreement, each outstanding Zyla stock option was cancelled and converted into a stock option to purchase the Company’s Common Stock on the same terms and conditions with (1) the number of shares of Company Common Stock subject to each such option equal to (i) the number of shares of the common stock subject to the option multiplied by (ii) the Merger Exchange Ratio, which was 2.5, rounded, if necessary, to the nearest whole share and (2) an exercise price per share (rounded to the nearest whole cent) equal to the original exercise price of the Zyla stock option divided by (B) the Exchange Ratio. This resulted in the issuance of 1.3 million options with an average fair market value of $2.48 per share value, of which $0.4 million was recognized as merger consideration. The term of Zyla options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over three years at the rate of at least 33%, by the end of the first year and then ratably in monthly installments over the
remaining vesting period of the stock option. The number of shares authorized under the 2019 Zyla Plan is 1,246,469 shares and there were no more shares available for future issuance as of December 31, 2021
The following table reflects option activity for the year ended December 31, 2021 under the 2019 Zyla Plan (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (years) | | Aggregate
Intrinsic Value
(in thousands) |
| Options outstanding as of December 31, 2020 | 985,944 | | | $ | 2.93 | | | | | |
| Options granted | — | | | — | | | | | |
| Options exercised | (72,750) | | | 2.40 | | | | | |
| Options forfeited | (402,296) | | | 2.73 | | | | |
| Options expired | (476,340) | | | 2.73 | | | | |
| Options outstanding as of December 31, 2021 | 34,558 | | | 3.23 | | 7.0 | | — | |
| Options vested and expected to vest as of December 31, 2021 | 34,558 | | | 3.23 | | 7.0 | | — | |
| Options exercisable as of December 31, 2021 | 25,029 | | | 3.23 | | 6.6 | | 54 | |
There were no restricted stock units granted under the 2019 Zyla Plan.
NOTE 16. SHAREHOLDERS' EQUITY
Equity Raise
On February 9, 2021, the Company completed a registered direct offering with certain institutional investors and accredited investors to sell 5,650,000 shares of our common stock at a purchase price of $2.48 per share on a post stock split basis. The gross proceeds from the offering were approximately $14.0 million. After placement agent fees and other offering expenses payable by the Company, Assertio received net proceeds of approximately $13.1 million. On February 12, 2021, the Company completed a registered direct offering with certain institutional investors and accredited investors to sell 8,750,000 shares of our common stock at a purchase price of $3.92 per share on a post stock split basis. The gross proceeds from the offering were approximately $34.3 million. After placement agent fees and other offering expenses payable by the Company, Assertio received net proceeds of approximately $32.2 million. The Company intends to use proceeds from both offerings for general corporate purposes, including general working capital.
Zyla Merger
On May 20, 2020, Assertio completed the Zyla Merger pursuant to the Agreement and Plan of Merger dated March 16, 2020. Upon consummation of the Zyla Merger, each issued and outstanding share of Zyla common stock converted into 2.5 shares of Assertio Holding’s common stock (the Exchange Ratio). The Company issued 6.4 million in common shares related to the Zyla Merger, refer to “Note 2. Acquisitions”.
Warrant Agreements
Upon the Zyla Merger, the Company assumed Zyla’s outstanding Warrant Agreements which provides the holder the right to receive shares of the Company’s common stock. The warrants are exercisable at any time at an exercise price of $0.0016 per share, subject to certain ownership limitations including, with respect to Iroko and its affiliates, that no such exercise may increase the aggregate ownership of the Company’s outstanding common stock of such parties above 49% of the number of shares of its common stock then outstanding for a period of 18 months. All of the Company’s outstanding warrants have similar terms whereas under no circumstance may the warrants be net-cash settled. As such, all warrants are equity-classified.
During 2021 and 2020, 1.2 million and 1.5 million warrants were exercised and 1.2 million and 1.5 million common shares were issued by the Company, respectively. The Company has 0.4 million warrant shares that remain outstanding as of December 31, 2021.
Employee Stock Purchase Plan
In May 2004 the Employee Stock Purchase Plan (ESPP) was approved by the shareholders. The ESPP is qualified under Section 423 of the Internal Revenue Code, and allows eligible employees to purchase shares of the Company’s common stock through periodic payroll deductions. The price of the common stock purchased under the ESPP must be equal to at least 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The Company terminated the ESPP program in June 2021 and therefore had no shares authorized for issuance as of December 31, 2021.
In 2021, the Company sold 3,929 shares of its common stock under the ESPP. The shares were purchased at a weighted‑average purchase price of $1.40 and proceeds were immaterial. In 2020, the Company sold 45,682 shares of its common stock under the ESPP. The shares were purchased at a weighted‑average purchase price of $1.91 with proceeds of approximately $0.1 million.
Option Exercises
Employees exercised options to purchase 72,750 shares of the Company’s common stock with net proceeds to the Company of approximately $0.2 million during 2021. No common stock options were exercised during the year ended December 31, 2020.
NOTE 17. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Upon consummation of the Zyla Merger in May 2020, the Company inherited outstanding Zyla warrants to purchase Zyla common stock, which were converted into the right to purchase shares of Assertio’s common stock. As these warrants are exercisable at any time at an exercise price of $0.0016 per share, they represent contingently issuable shares and therefore are included in the number of outstanding shares used for the computation of basic income per share. There were 392,095 unexercised shares of common stock issuable upon the exercise of warrants as of December 31, 2021.
Diluted net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, consisting of stock options, awards, and equivalents and convertible debt. The Company uses the treasury-stock method to compute diluted earnings per share with respect to its stock options and equivalents. The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive.
The following table reflects the calculation of basic and diluted earnings per common share for the years ended December 31, 2021 and 2020 (in thousands, except for per share amounts):
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| Basic net income (loss) per share | | | | |
| Net loss | | $ | (1,281) | | | $ | (28,144) | |
Weighted average common shares and warrants outstanding | | 43,169 | | | 26,209 | |
| Basic net loss per share | | $ | (0.03) | | | $ | (1.07) | |
| | | | |
| Diluted net income (loss) per share | | | | |
| Net loss | | $ | (1,281) | | | $ | (28,144) | |
Weighted average common shares and share equivalents outstanding | | 43,169 | | | 26,209 | |
| Add: effect of dilutive stock options, awards, and equivalents | | — | | | — | |
| Diluted net loss per share | | $ | (0.03) | | | $ | (1.07) | |
The following table reflects outstanding potentially dilutive common shares that are not included in the computation of diluted net income (loss) per share because, to do so would be anti-dilutive for the years ended December 31, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
2.5% Convertible Notes debt 2021 | | 3 | | | 336 | |
5.0% Convertible Notes debt 2024 | | — | | | 1,708 | |
| Stock options, awards and equivalents | | 2,914 | | | 2,655 | |
| Total potentially dilutive common shares | | 2,917 | | | 4,699 | |
NOTE 18. DISPOSITIONS
Sale of Gralise
On December 12, 2019, the Company entered into an Asset Purchase Agreement with Golf Acquiror LLC, an affiliate of Alvogen, Inc. (Alvogen) to divest its rights, title and interest in and to Gralise, including certain related assets, to Alvogen. The transaction subsequently closed on January 10, 2020. At closing, the Company received $78.6 million, including a $75.0 base purchase price and a preliminary positive inventory adjustment equal to $3.6 million. In addition, the Company was entitled to receive 75% of Alvogen’s first $70.0 million of Gralise net sales after closing, as contingent consideration. Alvogen has also assumed, pursuant to the terms of the Asset Purchase Agreement, certain contracts, liabilities and obligations of the Company relating to Gralise, including those related to manufacturing and supply, post-market commitments and clinical development costs.
On June 3, 2020 Alvogen agreed to disburse the contingent consideration due to satisfy its remaining obligations to the Company pursuant to the Asset Purchase Agreement. As consideration for the early disbursement, the Company agreed to reduce the total payments due from Alvogen by $0.9 million, which was recognized as an adjustment to the gain on the sale of Gralise in the Consolidated Statement of Comprehensive Income during the year ended December 31, 2020. During the year ended December 31, 2020, the Company collected a total of $51.6 million from Alvogen in contingent consideration receivable for the sale of Gralise.
Pursuant to ASC 205-20, Presentation of Financial Statements— Discontinued Operations, Gralise did not meet the criteria of a discontinued operation as it was not considered a component of an entity that comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company, nor did it represent a strategic shift of the Company. The Company accounted for the divestiture under ASC 610-20 Other Income - Derecognition of Nonfinancial Assets. During the year ended December 31, 2020, the Company recognized a gain of $126.6 million in Other (expense) income: on the Company’s Consolidated Statements of Comprehensive Income composed of the $78.6 million in upfront consideration received and $51.6 million in contingent consideration settled and $3.6 million in inventory transferred. In addition, the Company recognized co-promotion service income of approximately $1.3 million and co-promotion services were completed as of the first quarter of 2020.
Termination of Slán Agreements
On November 7, 2017, the Company entered into an agreement with Slán Medicinal Holdings Limited (Slán) under which it (i) acquired from Slán certain rights to market the specialty drug, long-acting cosyntropin in the U.S. and (ii) divested to Slán all of its rights to Lazanda® (fentanyl) Nasal Spray CII. As consideration for this acquisition, the Company provided the seller all of the rights and obligations, as defined under the arrangement, associated with Lazanda and together with $5.0 million in cash to Slán.
On February 6, 2020, the Company entered into an amended agreement with Eolas Pharma Teoranta (Eolas), an affiliate of Slán. Pursuant to the amendment the license granted to the Company for the commercialization of long-acting cosyntropin was terminated and the Company received $2.0 million in settlement for the receivable for reimbursable development expenses. Additionally, the Company may receive up to $10.0 million in future payments based upon commercial sales of long-acting cosyntropin if Eolas successfully obtains regulatory approval for and commercializes the product.
Sale of NUCYNTA
On February 6, 2020, the Company entered into a Purchase Agreement with Collegium, to divest its remaining rights, title and interest in and to the NUCYNTA franchise of products from the Company, and assumed certain contracts, liabilities
and obligations of the Company relating to the NUCYNTA products, including those related to manufacturing and supply, post-market commitments and clinical development costs. The transaction subsequently closed on February 13, 2020.
The Company received $367.9 million in net proceeds, which consisted of $375.0 million in base purchase price, plus $6.0 million in preliminary positive inventory value and less $13.1 million for royalties paid to the Company by Collegium between January 1, 2020 and February 11, 2020 pursuant to the Final Commercialization Agreement Payment Value of the Asset Purchase Agreement. In connection with the sale, the Company entered into a third-party consent agreement which requires two lump sum payments of $4.5 million each payable in 2021 and 2022 subject to Collegium achieving certain net sales in 2020 and 2021, respectively.
Since January 9, 2018, Collegium has been responsible for the commercialization of NUCYNTA in the U.S., including sales and marketing, and the Company received royalties based on certain net sales thresholds, in accordance with the Commercialization Agreement. The Commercialization Agreement terminated at closing with certain specified provisions of the Commercialization Agreement surviving in accordance with the terms of the Purchase Agreement.
Pursuant to ASC 205-20, the divestiture of NUCYNTA did not meet the criteria of a discontinued operation as it was not considered a strategic shift. The Company accounted for the divestiture under ASC 610-20 Other Income - Derecognition of Nonfinancial Assets. During the year ended December 31, 2020, the Company recognized a net loss of $15.8 million in Other income which was comprised of the $367.9 million in consideration received less the $369.1 million carrying value of the NUCYNTA intangible derecognized, $9.0 million in net book value of inventory transferred, and $9.0 million in accrued third-party consent fees. During the year ended December 31, 2020, the Company received $1.0 million in net proceeds from Collegium for settlement of expense reimbursement pursuant to the Purchase Agreement which was recognized as a gain in Other (expense) income.
NOTE 19. FAIR VALUE
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
•Level 1: Quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following tables reflect the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Financial Statement Classification | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Short-term contingent consideration | | Contingent consideration liability | | $ | — | | | $ | — | | | $ | 14,500 | | | $ | 14,500 | |
| Long-term contingent consideration | | Contingent consideration liability | | — | | | — | | | 23,159 | | | 23,159 | |
| Total | | | | $ | — | | | $ | — | | | $ | 37,659 | | | $ | 37,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Financial Statement Classification | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | | | |
| Money market funds | | Cash and cash equivalents | | $ | 77 | | | $ | — | | | $ | — | | | $ | 77 | |
| Total | | | | $ | 77 | | | $ | — | | | $ | — | | | $ | 77 | |
| Liabilities: | | | | | | | | | | |
| Short-term contingent consideration | | Contingent consideration liability | | $ | — | | | $ | — | | | $ | 6,776 | | | $ | 6,776 | |
| Long-term contingent consideration | | Contingent consideration liability | | — | | | — | | | 31,776 | | | 31,776 | |
| Total | | | | $ | — | | | $ | — | | | $ | 38,552 | | | $ | 38,552 | |
Cash and Cash Equivalents
Cash equivalents consisted of money market funds with overnight liquidity and no stated maturities. The Company classified cash equivalents as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets.
Contingent Consideration Obligation
Pursuant to the May 2020 Zyla Merger, the Company assumed a contingent consideration obligation which is measured at fair value. The Company has obligations to make contingent consideration payments for future royalties to Iroko based upon annual INDOCIN product net sales over $20.0 million at a 20% royalty through January 2029. The Company classified the acquisition-related contingent consideration liabilities to be settled in cash as Level 3, due to the lack of relevant observable inputs and market activity. As of December 31, 2021 and December 31, 2020, INDOCIN Product contingent consideration was $37.5 million and $38.4 million, respectively with $14.5 million and $6.8 million classified as short-term and $23.0 million and $31.6 million classified as long-term contingent consideration, respectively, in the Consolidated Balance Sheet.
During the years ended December 31, 2021 and 2020, the Company recognized a charge of $3.9 million and $1.5 million, respectively, for the change in fair value of contingent consideration, which was recognized in Selling, general and administrative expense in the Company’s Consolidated Statements of Comprehensive Income. The fair value of the contingent consideration is determined using an option pricing model under the income approach based on estimated INDOCIN Product revenues through January 2029 and discounted to present value. The significant assumptions used in the calculation of the fair value as of December 31, 2021 included revenue volatility of 35%, discount rate of 7.0%, credit spread of 5.2% and updated projections of future INDOCIN Product revenues including the probability assigned to the achievement of those projections.
Contingent consideration obligation related to CAMBIA was $0.2 million as of December 31, 2021 and 2020.
The following table summarizes changes in fair value that are measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021, and 2020 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Fair value, beginning of the period | $ | 38,552 | | | $ | 168 | |
| Contingent consideration acquired with Zyla Merger | — | | | 39,900 | |
| Change in fair value of contingent consideration recorded within costs and expenses | 3,914 | | | 1,500 | |
| Cash payment related to contingent consideration | (4,807) | | | (3,016) | |
| Total | $ | 37,659 | | | $ | 38,552 | |
The carrying value of the Company’s debt for the period ended December 31, 2021 approximates its fair value. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2021 and 2020.
NOTE 20. INCOME TAXES
The following table reflects Net loss before income taxes by source for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
| | | |
| U.S. | $ | (574) | | | $ | (45,327) | |
| Outside the U.S. | 21 | | | (186) | |
| Net loss before income taxes | $ | (553) | | | $ | (45,513) | |
The following table reflects benefit provision for income taxes for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
| Current: | | | |
| | | |
| Federal | $ | 124 | | | $ | (9,100) | |
| State | 387 | | | 155 | |
| Total current taxes | $ | 511 | | | $ | (8,945) | |
| Deferred: | | | |
| Federal | $ | — | | | $ | (7,037) | |
| State | 217 | | | (1,387) | |
| Total deferred taxes | 217 | | | (8,424) | |
| Total provision (benefit) for income taxes | $ | 728 | | | $ | (17,369) | |
The following table reflects a reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the Consolidated Statement of Comprehensive Income for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year ended December 31, |
| | 2021 | | 2020 |
| Tax at federal statutory rate | $ | (116) | | | $ | (9,558) | |
| State tax, net of federal benefit | 242 | | | 276 | |
| Goodwill impairment | — | | | 3,661 | |
| Disallowed officers' compensation | 207 | | | 818 | |
| Non-deductible transaction cost | — | | | 451 | |
| | | |
| | | |
| Change in valuation allowance | (2,131) | | | (13,029) | |
| Uncertain tax provisions | 233 | | | (190) | |
| Tax return benefit | (63) | | | — | |
| Return to provision | 2,330 | | | — | |
| | | |
| | | |
| | | |
| Other | 26 | | | 202 | |
| Total tax provision (benefit) | $ | 728 | | | $ | (17,369) | |
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. The CARES ACT was a massive tax-and-spending package intended to provide additional economic relief to address the impact of the
COVID-19 pandemic. The CARES Act, among other business tax provisions, included legislative changes and updates to net operating losses (NOLs), interest disallowance, and depreciation for qualified improvement property. As the new guidance and regulations continued to be issued during 2021, the Company considered the income tax accounting implications from CARES Act to the Company’s income tax provision calculation for the year ended December 31, 2021. Prior to the enactment of the CARES Act, federal NOLs generated after December 31, 2017 could not be carried back to prior tax years. Upon the enactment of the CARES Act, federal NOLs generated in tax years 2018, 2019, and 2020 can now be carried back to the previous five tax years without taxable income limitation. During 2021, the Company filed a carryback claim for the 2020 federal taxable loss to the 2018 and 2019 tax years to offset taxable income (and federal taxes paid) for those two tax years. The estimated cash tax refund is approximately, $8.3 million which is expected to be received in 2022.
During the year ended December 31, 2021, the Company recorded an income tax expense of $0.7 million, principally due to the state tax expense, disallowed officer’s compensation, and interest accrued for uncertain tax position, offset by the changes in valuation allowance.
During 2020, the Company recorded an income tax benefit of $17.4 million, principally due to the carryback of the Company’s 2020 federal NOL to its 2018 and 2019 tax years under the NOL carryback provisions enacted as part of the CARES Act mentioned above and the current year reversal of valuation allowance related to the utilization of the Company’s deferred tax assets (“DTA”) to offset the deferred tax liabilities (“DTL”) of Zyla recorded through acquisition accounting.
Utilization of the Company’s net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table reflects significant components of the Company’s deferred tax assets are as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating losses | $ | 78,085 | | | $ | 81,471 | |
| Tax credit carryforwards | 2,813 | | | 3,360 | |
| | | |
| Stock-based compensation | 2,770 | | | 2,999 | |
| Operating lease liabilities | 545 | | | 1,248 | |
| Fixed assets | — | | | 1,315 | |
| Reserves and other accruals not currently deductible | 19,800 | | | 20,652 | |
| Disallowed interest carryforward | 15,147 | | | 15,496 | |
| Total deferred tax assets | 119,160 | | | 126,541 | |
| Valuation allowance for deferred tax assets | (101,775) | | | (103,906) | |
| | $ | 17,385 | | | $ | 22,635 | |
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (16,812) | | | $ | (21,739) | |
| Convertible debt | (228) | | | (459) | |
| Fixed Assets | (349) | | | — | |
| Operating lease right-of-use assets | (168) | | | (437) | |
| Net deferred tax liability | $ | (172) | | | $ | — | |
During the year ended December 31, 2021, the Company recorded a valuation allowance of $101.8 million because realization of the future benefits is uncertain. The Company reviewed both positive evidence such as, but not limited to, the projected availability of future taxable income and negative evidence such as the history of cumulative losses in recent years. The Company will continue to assess the realizability of its deferred tax assets on a quarterly basis and assess whether an additional reserve or a release of the valuation allowance is required in future periods.
The valuation allowance decreased $2.1 million to $101.8 million during the year ended December 31, 2021 and increased $13.1 million to $103.9 million during the year ended December 31,2020.
As of December 31, 2021, the Company had federal NOLs of $286.9 million with no expiration and $40.1 million expiring in varying amounts from 2032 through 2036. NOL carryforwards for state income tax purposes are $171.7 million, which begin to expire in 2022. Utilization of the Company’s NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
The Company does not have any significant federal or state tax examinations in process as of December 31, 2021. The federal and state statute of limitations remains open primarily for the 2017 through 2020 tax years. The California statute of limitations is open for the 2007 through 2020 tax years.
The following table reflects activity related to the Company’s unrecognized tax benefits for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | |
| Unrecognized tax benefits—December 31, 2019 | $ | 4,033 | |
| Increases related to current year tax positions | 194 | |
| Changes in prior year tax positions | (2) | |
| Decreases related to lapse of statutes | (124) | |
| Unrecognized tax benefits—December 31, 2020 | $ | 4,101 | |
| Increases related to current year tax positions | — | |
| Changes in prior year tax positions | — | |
| Decreases related to lapse of statutes | — | |
| Unrecognized tax benefits—December 31, 2021 | $ | 4,101 | |
The total amount of unrecognized tax benefit that would affect the effective tax rate is $4.1 million as of December 31, 2021 and December 31, 2020.
The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.