Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
 x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
 OR
 ☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM        TO      
 COMMISSION FILE NUMBER 001-13111
 ASSERTIO THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
94-3229046
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
 100 South Saunders Road, Suite 300
Lake Forest, Illinois 60045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES; ZIP CODE)
 (224) 419-7106
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
    
Trading Symbol(s):
 
Name of each exchange on which registered:
Common Stock, $0.0001 par value
 
ASRT
 
The NASDAQ Stock Market LLC

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
Accelerated filer x
 Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
The number of issued and outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of May 3, 2019 was 64,405,162.
 
 
 
 
 



ASSERTIO THERAPEUTICS, INC.
 Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2019

TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. 
 
 
 
 
Item 3. 
 
 
 
 
Item 4. 
 
 
 
 
 
 
Item 1. 
 
 
 
 
Item 1A. 
 
 
 
 
Item 6. 
 
 
 
 
 

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PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
109,691

 
$
110,949

Accounts receivable, net
43,488

 
37,211

Inventories, net
3,077

 
3,396

Prepaid and other current assets
25,726

 
56,551

Total current assets
181,982

 
208,107

Property and equipment, net
16,625

 
13,064

Intangible assets, net
666,655

 
692,099

Investments
10,362

 
11,784

Other long-term assets
7,840

 
7,812

Total assets
$
883,464

 
$
932,866

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,421

 
$
6,138

Accrued rebates, returns and discounts
71,655

 
75,759

Accrued liabilities
19,976

 
31,361

Current portion of Senior Notes
115,000

 
120,000

Interest payable
8,794

 
11,645

Other current liabilities
2,116

 
1,133

Total current liabilities
222,962

 
246,036

Contingent consideration liability
1,066

 
1,038

Senior Notes
136,418

 
158,309

Convertible Notes
292,604

 
287,798

Other long-term liabilities
21,869

 
19,350

Total liabilities
674,919

 
712,531

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Common stock
6

 
6

Additional paid-in capital
405,445

 
402,934

Accumulated deficit
(196,901
)
 
(182,600
)
Accumulated other comprehensive loss
(5
)
 
(5
)
Total shareholders’ equity
208,545

 
220,335

Total liabilities and shareholders' equity
$
883,464

 
$
932,866


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Product sales, net
$
26,450

 
$
44,354

Commercialization agreement, net
30,856

 
83,800

Royalties and milestones
623

 
250

Total revenues
57,929

 
128,404

Costs and expenses:
 
 
 
Cost of sales (excluding amortization of intangible assets)
2,575

 
12,044

Research and development expenses
1,793

 
1,528

Selling, general and administrative expenses
25,045

 
29,033

Amortization of intangible assets
25,444

 
25,444

Restructuring charges

 
9,017

Total costs and expenses
54,857

 
77,066

Income from operations
3,072

 
51,338

Other (expense) income:
 
 
 
Interest income and other (expense) income, net
(609
)
 
229

Interest (expense)
(16,554
)
 
(18,068
)
Net (loss) income before income taxes
(14,091
)
 
33,499

Income taxes (expense) benefit
(210
)
 
325

Net (loss) income
$
(14,301
)
 
$
33,824

Basic net (loss) income per share
$
(0.22
)
 
$
0.53

Diluted net (loss) income per share
$
(0.22
)
 
$
0.48

Shares used in computing basic net (loss) income per share
64,239

 
63,503

Shares used in computing diluted net (loss) income per share
64,239

 
81,877

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net (loss) income
$
(14,301
)
 
$
33,824

Unrealized (loss) gain on available-for-sale securities, net of tax

 
2

Comprehensive (loss) income
$
(14,301
)
 
$
33,826

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Loss
 
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2017
63,400

 
$
6

 
$
389,015

 
$
(219,508
)
 
$
(5
)
 
$
169,508

Issuance of common stock upon exercise of options
120

 

 
636

 

 

 
636

Issuance of common stock in conjunction with vesting of restricted stock units
33

 

 

 

 

 

Stock-based compensation

 

 
2,234

 

 

 
2,234

Shares withheld for payment of employee's withholding tax liability

 

 
(114
)
 

 

 
(114
)
Net income

 

 

 
33,824

 

 
33,824

Unrealized gain on available-for-sale securities

 

 

 

 
2

 
2

Balances at March 31, 2018
63,553

 
$
6

 
$
391,771

 
$
(185,684
)
 
$
(3
)
 
$
206,090

 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
64,185

 
$
6

 
$
402,934

 
$
(182,600
)
 
$
(5
)
 
$
220,335

Issuance of common stock upon exercise of options
14

 

 
25

 

 

 
25

Issuance of common stock in conjunction with vesting of restricted stock units
132

 

 

 

 

 

Stock-based compensation

 

 
2,702

 

 

 
2,702

Shares withheld for payment of employee's withholding tax liability

 

 
(216
)
 

 

 
(216
)
Net (loss)

 

 

 
(14,301
)
 

 
(14,301
)
Balances at March 31, 2019
64,331

 
$
6

 
$
405,445

 
$
(196,901
)
 
$
(5
)
 
$
208,545

 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2019
 
2018
Operating Activities
 
 
 
Net (loss) income
$
(14,301
)
 
$
33,824

Adjustments for non-cash items:
 
 
 
Depreciation and amortization
25,990

 
26,918

Accretion of debt discount and debt issuance costs
6,164

 
5,418

Provision for inventory obsolescence
359

 
218

Gain on disposal of property and equipment

 
(134
)
Stock-based compensation
2,702

 
2,234

Change in fair value of contingent consideration
28

 
(201
)
Other
1,297

 
34

Changes in assets and liabilities:
 
 
 
Accounts receivable
(6,278
)
 
10,055

Inventories
(40
)
 
7,457

Prepaid and other assets
30,592

 
(34,497
)
Accounts payable and other accrued liabilities
(12,361
)
 
(33,515
)
Accrued rebates, returns and discounts
(4,105
)
 
(42,730
)
Interest payable
(2,852
)
 
(2,055
)
Income taxes payable

 
(1
)
Net cash provided by (used in) operating activities
27,195

 
(26,975
)
Investing Activities
 
 
 
Purchases of property and equipment
(13
)
 
(1
)
Proceeds from disposal of property and equipment

 
145

Proceeds from sale of other assets

 
80

Maturities of marketable securities

 
1,200

Net cash provided by (used in) investing activities
(13
)
 
1,424

Financing Activities
 
 
 
Payment of contingent consideration liability

 
(162
)
Repayment of Senior Notes
(25,000
)
 

Fees for modification of Senior Notes
(3,249
)
 

Proceeds from issuance of common stock
25

 
636

Shares withheld for payment of employee's withholding tax liability
(216
)
 
(114
)
Net cash provided by (used in) financing activities
(28,440
)
 
360

Net (decrease) in cash and cash equivalents
(1,258
)
 
(25,191
)
Cash and cash equivalents at beginning of year
110,949

 
126,884

Cash and cash equivalents at end of period
$
109,691

 
$
101,693

Supplemental Disclosure of Cash Flow Information
 
 
 
Net cash paid for income taxes
$

 
$
1

Cash paid for interest
$
13,213

 
$
14,653

Capital expenditures incurred but not yet paid
$
130

 
$
119


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ASSERTIO THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
Assertio Therapeutics, Inc. (Assertio or the Company) is a specialty pharmaceutical company focused on neurology, orphan and specialty medicines. The Company’s current specialty pharmaceutical business includes the following three products which the Company markets in the United States (U.S.):

Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN), that was launched in October 2011.

CAMBIA® (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, that was acquired by the Company in December 2013.

Zipsor® (diclofenac potassium liquid filled capsules), a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, that was acquired by the Company in June 2012.

The Company also has the exclusive rights to market long-acting cosyntropin (synthetic adrenocorticotropic hormone, or ACTH) in the U.S. and Canada. Long-acting cosyntropin is an alcohol-free formulation of a synthetic analogue of ACTH. In February 2019, notification of acceptance for filing was received from the U.S. Food and Drug Administration (FDA) for our collaborative partner's 505(b)(2) New Drug Application (NDA) for the novel injectable formulation of long-acting cosyntropin. The Company, together with its collaborative partner, seeks approval for the use of this product as a diagnostic drug in the screening of patients presumed to have adrenocortical insufficiency.

The Company maintains a Commercialization Agreement with Collegium Pharmaceutical, Inc. (Collegium) pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA® franchise of pain products in the United States. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The Company receives a royalty on all NUCYNTA revenues based on certain net sales thresholds.
Basis of Presentation
 
The unaudited condensed consolidated financial statements and the related footnote information of the Company have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the information for the periods presented. The results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the entire year ending December 31, 2019 or future operating periods.
 
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC (the 2018 Form 10-K). The balance sheet as of December 31, 2018 has been derived from the audited financial statements at that date, as filed in the Company’s 2018 Form 10-K.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Depomed Bermuda Ltd (Depo Bermuda), Depo NF Sub, LLC (Depo NF Sub) and Depo DR Sub, LLC (Depo DR Sub). All intercompany accounts and transactions have been eliminated on consolidation.
 

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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 sales discounts and returns, depreciable and amortizable lives, share-based compensation assumptions and taxes on income. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company’s business and operations, actual results could differ materially from these estimates.
Segment Information

The Company maintains one operating segment and has operations solely in the United States. To date, substantially all of the Company's revenues from product sales are related to sales in the United States.

Acquisitions
 
The Company accounts for acquired businesses using the acquisition method of accounting, 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 (IPR&D) with no alternative future use is charged to expense at the acquisition date.

Revenue Recognition
 
The Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective transition method. There was no adjustment to the Company’s opening balance of accumulated deficit resulting from the adoption of this guidance.

Under 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

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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.

Commercialization Agreement
 
The Company derives revenue under its Commercialization Agreement with Collegium whereby the Company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the United States. The Company entered into the Commercialization Agreement in December 2017, which became effective in January 2018, and amended the agreement in August 2018 and again in November 2018. The Company views its performance obligations as a series of distinct goods or services that are substantially the same and that have the same pattern of transfer. Prior to the November 2018 amendment, the consideration related to the license and facilitation services was fixed and recognized ratably over the contract term. Following the November 2018 amendment, the royalty payments owed to the Company from Collegium, pursuant to the terms of the Commercialization Agreement, represent variable compensation that is subject to the sales based royalty exception for licenses of intellectual property because the License, as defined in Note 5, is the predominant component of this arrangement.

The Company is responsible for royalty payments to a third party related to sales of NUCYNTA. Under the terms of the Commercialization Agreement, a portion of these payments are remitted from Collegium to the third party and a portion are the responsibility of the Company. Following the November 2018 amendment, Collegium reimburses the Company for all royalties paid to the third party. As the Company is not actively commercializing NUCYNTA, such royalties are recorded by the Company on a systematic basis in proportion to the underlying net product sales and are included as gross-to-net adjustments within Commercialization Agreement, Net on the Company’s Statements of Operations.

Product Sales
 
The Company sells commercial products to wholesale distributors, specialty pharmacies and retail 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 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 12 months after its product expiration date. The Company estimates product returns and associated credit on NUCYNTA ER and NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda. 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 ER and NUCYNTA previously sold by Janssen Pharma or Lazanda product previously sold by Archimedes Pharma US Inc. Under the Commercialization Agreement with Collegium for NUCYNTA ER and NUCYNTA and the divestiture of Lazanda to Slán, the Company is only financially responsible for product returns for product that were sold by the Company, which are identified by

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specific lot numbers.
 
The shelf life of NUCYNTA ER and NUCYNTA is 24 months to 36 months from the date of tablet manufacture. The shelf life of Gralise is 24 months to 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 months to 48 months from the manufacture date. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of Lazanda is 24 to 36 months from the manufacture date. 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.
 
Wholesaler and Retail Pharmacy Discounts — The Company offers contractually determined discounts to certain wholesale distributors and retail 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 pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.
 
Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide 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.
 
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. These federal 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.
 
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 the quarter in which prescriptions subject to the rebate are filled.
 
Medicare Part D Coverage Gap Rebates—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.
 
Royalties
 
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 (1) when the related sales occur, or (2) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Milestones

For arrangements that include milestones, the Company recognizes such revenue using the most likely method. As part of adopting ASC 606, the Company evaluated whether the future milestones should have been included as part of the transaction price in periods before January 1, 2018. The Company concluded that because of development and regulatory risks at the time, it was probable that a significant revenue reversal could have occurred. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, 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.


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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 net property and equipment, other current liabilities, and other long term liabilities in the consolidated balance sheet.

The Company has elected to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize the cost of those leases in the Consolidated Statements of Operations on a straight-line basis over the lease term.
 
Stock Based Compensation
 
The Company uses the Monte Carlo simulation method to determine the fair value of performance-based restricted stock units and 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 these awards on the date of grant is affected by the Company’s stock price as well as assumptions, which include the Company’s 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 its common stock price by using the historical volatility over the expected term of the award. The Company bases the risk free interest rate on U.S. Treasury zero coupon issues with terms similar to the expected term of the award 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 valuation models. The fair value of restricted stock units equals the market value of the underlying stock on the date of grant. 

As a result of adopting ASU 2016-09 Improvements to Employee Share-Based Payment Accounting, the Company made an accounting policy election to account for forfeitures as they occur, rather than estimating expected forfeitures at the time of the grant.
 
Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance enhances comparability and transparency among organizations by requiring the recognition of right-of-use assets and liabilities on the balance sheet for both financing and operating leases greater than 12 months. The Company adopted the standard as of January 1, 2019 using the modified retrospective approach with cumulative effect. There was no adjustment to the Company's opening balance of accumulated deficit resulting from the adoption of this guidance. In addition, the Company elected the package of practical expedients, which among other things, allowed for the carryforward of the historical lease classification. The Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

The adoption of the new standard resulted in the recognition of additional operating lease assets and lease liabilities of $3.7 million and $8.9 million, respectively, as of January 1, 2019. The recognition of lease assets was offset by deferred rent and tenant improvement allowances of $5.2 million, which were recognized by the Company as of December 31, 2018. Had the Company not adopted this new lease guidance the ROU asset and liability would not have been recorded and the deferred rent and tenant improvement allowances capitalized against the ROU asset would have remained on the balance sheet in other current liabilities and other long term liabilities. The new standard did not materially affect the Company’s consolidated net income nor have a notable impact on its liquidity. The standard had no impact on the Company’s debt-covenant compliance under its current agreements.

Recently Issued Accounting Standards
 
In June 2016, the FASB issued ASU 2016-13 (ASU 2016-13) Financial Instruments-Credit Losses (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. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements.

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In June 2018, the FASB issued ASU 2018-18 (ASU 2018-18) Collaborative Arrangements which clarifies the interaction between ASC 808, Collaborative Arrangements and ASC 606, Revenue from Contracts with Customers. 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. This update will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606 and early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2018-18 on the Company’s consolidated financial statements.

In August 2018, the FASB issues ASU 2018-13 (ASU 2019-18) Fair Value Measurement Disclosure Framework 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. Modifications to the required disclosures are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact on disclosures.


NOTE 2.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 
Securities classified as cash and cash equivalents and short-term investments as of March 31, 2019 and December 31, 2018 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Cash and cash equivalents
 
 
 
 
 
 
 
 
Cash
 
$
94,311

 
$

 
$

 
$
94,311

Money market funds
 
41

 

 

 
41

Commercial paper
 
14,594

 

 
(3
)
 
14,591

U.S. Treasury Securities
 
748

 

 

 
748

Total cash and cash equivalents
 
$
109,694

 
$

 
$
(3
)
 
$
109,691

December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Cash and cash equivalents
 
 
 
 
 
 
 
 
Cash
 
$
95,660

 
$

 
$

 
$
95,660

Money market funds
 
11

 

 

 
11

Agency bond
 
1,250

 

 

 
1,250

Commercial paper
 
14,028

 

 

 
14,028

Total cash and cash equivalents
 
$
110,949

 
$

 
$

 
$
110,949

 
The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents generally consist of cash on deposit with banks, money market instruments, U.S. Agency discount notes, commercial paper and corporate debt securities.
 
The Company invests its cash in money market funds and marketable securities including U.S. Treasury and government agency securities, commercial paper, and high-quality debt securities of financial and commercial institutions. To date, the Company has not experienced material losses on any of its balances. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in “interest income and other (expense) income, net” in the consolidated statement of operations. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest income and other (expense) income, net” in the consolidated statement of operations.
 
As of March 31, 2019 and December 31, 2018, the Company did not hold any securities in a continuous loss position.

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NOTE 3.  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 represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
 
(in thousands)
Financial Statement
 
 
 
 
 
 
 
 
March 31, 2019
Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
Cash and cash equivalents
 
$
41

 
$

 
$

 
$
41

Commercial paper
Cash and cash equivalents
 

 
14,591

 

 
14,591

U.S. Treasury Securities
Cash and cash equivalents
 

 
748

 

 
748

Collegium warrants
Investments
 

 
7,155

 

 
7,155

Total
 
 
$
41

 
$
22,494

 
$

 
$
22,535

Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration—Zipsor
Contingent consideration liability
 
$

 
$

 
$
545

 
$
545

Contingent consideration—CAMBIA
Contingent consideration liability
 

 

 
521

 
521

Total
 
 
$

 
$

 
$
1,066

 
$
1,066

 
 
(in thousands)
Financial Statement
 
 
 
 
 
 
 
 
December 31, 2018
Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
Cash and cash equivalents
 
$
11

 
$

 
$

 
$
11

Agency bond
Cash and cash equivalents
 

 
1,250

 

 
1,250

Commercial paper
Cash and cash equivalents
 

 
14,028

 

 
14,028

Collegium warrants
Investments
 

 
8,784

 

 
8,784

Total
 
 
$
11

 
$
24,062

 
$

 
$
24,073

Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration—Zipsor
Contingent consideration liability
 
$

 
$

 
$
531

 
$
531

Contingent consideration—CAMBIA
Contingent consideration liability
 

 

 
507

 
507

Total
 
 
$

 
$

 
$
1,038

 
$
1,038


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The fair value measurement of the contingent consideration obligations arises from the Zipsor and CAMBIA acquisitions and relates to fair value of the potential future contingent milestone payments and royalties payable under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of the contingent consideration obligation resulting from the passage of time are recorded within interest expense until the contingent consideration is settled. The table below provides a summary of the changes in fair value recorded in interest expense and selling, general and administrative expenses for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Fair value, beginning of the period
$
1,038

 
$
1,613

Changes in fair value recorded in interest expense
28

 
40

Changes in fair value recorded in selling, general and administrative expenses

 
(242
)
Royalties and milestone paid

 
(162
)
Total
$
1,066

 
$
1,249

 
The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 is based on a market approach. The estimated fair value was approximately $277.1 million and $231.8 million (par value $345.0 million) as of March 31, 2019 and December 31, 2018, respectively, and represents a Level 2 valuation. The principal amount of the Senior Notes, as defined in Note 10, approximates their fair value as of March 31, 2019 and December 31, 2018, respectively and represents a Level 2 valuation. 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 three months ended March 31, 2019 and 2018.

NOTE 4.  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. 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 shares issuable in connection with stock options, restricted stock units (RSUs), performance-based restricted stock units (PSUs), the ESPP 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, including stock options, RSUs, PSUs and ESPP, 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. Basic and diluted earnings per common share are calculated as follows:
 

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Three Months Ended March 31,
(in thousands, except for per share amounts)
 
2019
 
2018
Basic net income (loss) per share
 
 
 
 
Net income (loss)
 
$
(14,301
)
 
$
33,824

Denominator
 
64,239

 
63,503

Basic net income (loss) per share
 
$
(0.22
)
 
$
0.53

 
 
 
 
 
Diluted net income (loss) per share
 
 
 
 
Numerator:
 
 
 
 
Net income (loss)
 
$
(14,301
)
 
$
33,824

Add: Interest Expense on convertible debt, net of tax
 

 
5,187

Denominator:
 
 
 
 
Denominator for basic net income (loss) per share
 
64,239

 
63,503

Add effect of diluted securities:
 
 
 
 
Stock options and equivalents and convertible debt
 

 
18,374

Denominator for diluted net income (loss) per share
 
64,239

 
81,877

Diluted net income (loss) per share
 
$
(0.22
)
 
$
0.48

 
The following table sets forth 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:
 
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Convertible debt
 
17,931

 

Stock options and equivalents
 
6,103

 
4,248

Total potentially dilutive common shares
 
24,034

 
4,248


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NOTE 5.  REVENUE
 
Disaggregated Revenue
 
The following table summarizes revenue from contracts with customers for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Product sales, net
 
 
 
 
Gralise
 
$
13,278

 
$
14,827

CAMBIA
 
8,808

 
6,416

Zipsor
 
4,231

 
4,746

Total neurology product sales, net
 
26,317

 
25,989

NUCYNTA products
 
62

 
18,145

Lazanda
 
71

 
220

Total product sales, net
 
26,450

 
44,354

Commercialization agreement:
 
 
 
 
Commercialization rights and facilitation services, net
 
30,856

 
28,095

Revenue from transfer of inventory
 

 
55,705

Royalties and milestone revenue
 
623

 
250

Total revenues
 
$
57,929

 
$
128,404

 
NUCYNTA product sales for the three months ended March 31, 2018 reflect the Company's sales of NUCYNTA between January 1 and January 8, 2018. Separately, during the first quarter of 2018, in connection with the Collegium transaction, the Company recognized revenue of $12.5 million related to the release of NUCYNTA sales reserves which were primarily recorded in the fourth quarter of 2017, as financial responsibility for those reserves transferred to Collegium upon closing of the Commercialization Agreement. During the three months ended March 31, 2019 the Company recognized an insignificant amount of sales reserve estimate adjustments related to sales recognized for NUCYNTA and Lazanda in prior periods. 
 
Original Commercialization Agreement with Collegium
 
In December 2017, the Company, Collegium and Collegium NF, LLC, a Delaware limited liability company and wholly owned subsidiary of Collegium (Newco), entered into a Commercialization Agreement (Commercialization Agreement), pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the United States.  Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The Company also agreed to provide services to Collegium, including to arrange for the supply of NUCYNTA products by the Company’s existing contract manufacturing organizations (CMOs) (the Facilitation Services). The Company identified the following three promised goods and services under the Commercialization Agreement: (1) the license to commercialize the NUCYNTA pain products (License), (2) services to arrange for supplies of NUCYNTA pain products using the Company’s existing contract manufacturing contracts with third parties (Facilitation Services); and (3) the transfer of control of all NUCYNTA finished goods held at closing (Inventory Transfer).
The Inventory Transfer was deemed to be a distinct performance obligation which was completed during the first quarter of 2018. The Company concluded that the License and the Facilitation Services are not distinct from one another as the Commercialization Agreement does not grant to Collegium a license to manufacture NUCYNTA. The Company (i) exclusively controls the intellectual property underlying the NUCYNTA products for the United States market, (ii) retains responsibility for facilitating NUCYNTA product supply through its CMOs, and (iii) exclusively maintains all CMO contractual relationships. As a result, Collegium’s right to commercialize NUCYNTA is inherently dependent upon the Facilitation Services. Because (i) Collegium is contractually required to use the Facilitation Services to arrange for product supply and (ii) tapentadol, the active pharmaceutical ingredient used in NUCYNTA, is a Schedule II controlled substance for which manufacturing arrangements are not easily transferred or bypassed, there is strong interdependency between the License and the Facilitation Services. These Facilitation Services are administrative in nature but necessary for the commercialization right to have utility to Collegium.

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In January 2018, the Company determined the total fixed elements of the transaction price to be $553.2 million, which consisted of $537.0 million in total annual minimum royalty payments for years 2018 through 2021, $10.0 million upfront fee, and a $6.2 million payment for NUCYNTA finished goods inventory. The Company determined that the duration of the Commercialization Agreement began on the effective date of January 9, 2018 and lasts through December 31, 2021, including the minimum royalty period and the period in which Collegium would incur a $25.0 million termination penalty on terminating the Commercialization Agreement. Beginning January 1, 2022 and for each year of the Commercialization Agreement thereafter, royalties are: (i) 58% of net sales of NUCYNTA up to $233 million, payable quarterly within 45 days of the end of each calendar quarter, plus (ii) 25% of annual net sales of NUCYNTA between $233 million and $258 million, plus (iii) 17.5% of annual net sales of NUCYNTA above $258 million. Payments described in clauses (ii) and (iii) hereof will be paid annually within 60 days of the end of the calendar year.
 
The portion of the transaction price allocated to the Inventory Transfer was $55.7 million and was recognized on the closing date as the control of such inventory was transferred to Collegium. The portion of the transaction price allocated to the License and Facilitation Services, as a combined performance obligation, was $497.5 million and would be recognized ratably though December 31, 2021.

In addition, Collegium assumed responsibility for a portion of the royalties owed by the Company to a third party on sales of NUCYNTA. The royalties owed by Collegium to the third party are 14% of sales with the Company ensuring a minimum royalty of $34.0 million per year on net sales of NUCYNTA greater than $180.0 million. The Company was obligated to cover any shortfall between the minimum royalty amount of $34.0 million and the amounts paid to the third party by Collegium for each of the years ended December 31, 2018 through 2021, as a result of which the Company could have been obligated to pay up to $8.8 million per year for each of the years ended December 31, 2018 through 2021.

Amended Commercialization Agreement with Collegium

On November 8, 2018, the Company, Collegium and Newco entered into a third amendment to the Commercialization Agreement (Commercialization Amendment). Pursuant to the Commercialization Amendment, the royalties payable by Collegium to the Company in connection with Collegium’s commercialization of NUCYNTA were amended such that effective as of January 1, 2019 through December 31, 2021, the Company will receive: (i) 65% of net sales of NUCYNTA up to $180 million, plus (ii) 14% of annual net sales of NUCYNTA between $180 million and up to $210 million, plus (iii) 58% of annual net sales of NUCYNTA between $210 million and $233 million, plus (iv) 20% of annual net sales of NUCYNTA between $233 million and up to $258 million, plus (v) 15% of annual net sales of NUCYNTA above $258 million. The Commercialization Amendment does not change the royalties that the Company will receive on annual net sales of NUCYNTA by Collegium for the period beginning January 1, 2022 and for each year of the Commercialization Agreement term thereafter.

In addition, the Commercialization Amendment provides that Collegium shall reimburse the Company for the amount of any minimum annual royalties paid by the Company to the third party on net sales of NUCYNTA during the first four years of the Commercialization Agreement beginning in 2019. The Commercialization Amendment also provides for Collegium to share certain costs related to the License. The reimbursement and the cost sharing are considered variable consideration. The Commercialization Amendment is being accounted for prospectively.

In connection with the Commercialization Amendment, Collegium issued the Company a warrant to purchase up to 1,041,667 shares of Collegium common stock at an exercise price of $19.20 per share (Warrant). The Warrant is exercisable for a period of four years and contains customary terms, including with regard to net exercise. The Warrant was valued at $8.8 million as of the date of the Commercialization Amendment and is considered to be a component of the fixed consideration associated with the Commercialization Agreement. These Warrants are included in Investments on the Company’s Consolidated Balance Sheet, however, as they are non-cash they do not impact investing cash flows.

In November 2018, the Company determined the total fixed elements of the transaction price of the Commercialization Agreement to be $157.0 million, which consisted of $132.0 million in total annual minimum royalty payments for 2018, the $10.0 million upfront fee, the $6.2 million payment for NUCYNTA finished goods inventory and the $8.8 million attributed to the Warrant. There were no new performance obligations following the modification of the Commercialization Agreement and at the time of the modification, the remaining periods in the series of services related to the single combined performance obligation to deliver the license and provide facilitation services are distinct from those prior to the modification. As a result, the modification was accounted for as a termination of the old arrangement and the entering into of a new agreement, in accordance with the guidance of ASC 606.


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Pursuant to the Commercialization Amendment, Collegium may only terminate the Commercialization Agreement after December 31, 2020, with 12-months’ notice. In the event any such termination notice has an effective date of termination prior to December 31, 2022, then Collegium shall pay a $5 million termination fee to the Company concurrent with the delivery of such notice. The Company determined that the $5 million termination fee is not substantive and therefore the duration of the Commercialization Agreement is unchanged by the Commercialization Amendment and lasts through December 31, 2021, which is consistent with the contractual period in which the Company and Collegium have enforceable rights and obligations.

The Commercialization Amendment provides that the Company may terminate the Commercialization Agreement upon 60 days’ prior written notice to Collegium in the event that (i) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months ending on or before December 31, 2021 are less than $180 million, or (ii) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months commencing on or after January 1, 2022 are less than $170 million.

Revenue and Cash Collected from the Commercialization Agreement

For the three months ended March 31, 2019, the Company recognized royalty revenue from the Commercialization Agreement of $32.1 million, which represents the variable royalty revenue which became effective for sales beginning January 1, 2019 as recognition of such royalties are constrained by the sales-based royalty exception related to intellectual property. Other components of revenue recognized by the Company include the amortization of the revenue related to warrants received from Collegium at the time of the contract modification in November 2018 as well as amortization of the contract asset. In addition, the Company recognized $1.0 million of net expense related to the third-party royalty which has been paid by Collegium on behalf of Assertio. It is the Company’s expectation that, in accordance with the amended Commercialization Agreement, Collegium will pay the full royalty owed to the third-party in 2019, 2020 and 2021 and that such amounts, over the course of the calendar year, will have no net impact to the Company.

For the three months ended March 31, 2018, the Company recognized royalty revenue from the Commercialization
Agreement of $28.1 million. The Company also recognized $55.7 million related to the transfer of inventory upon closing in January 2018. Cash collected from Collegium in the three months ended March 31, 2018 includes the upfront payments of $10.0 million for Facilitation Services and $6.2 million for Inventory Transfer as well as the quarterly portion of the annual minimum royalty amounts, payable by Collegium.
 
During the three months ended March 31, 2019 and 2018, the Company collected $30.5 million and $29.3 million from Collegium.

Contract Assets and Liabilities
 
The following table presents changes in the Company’s contract assets and liabilities for the three months ended March 31, 2019 (in thousands):
 
Balance as of
 
 
 
 
 
Balance as of
 
December 31, 2018
 
Additions
 
Deductions
 
March 31, 2019
Contract assets:
 

 
 

 
 

 
 
Contract asset - Cambia Canada
$

 
$
300

 
$

 
$
300

Contract asset - Collegium
2,416

 

 
(199
)
 
2,217

 
$
2,416

 
$
300

 
$
(199
)
 
$
2,517


The Collegium contract asset represents the conditional right to consideration for completed performance under the Commercialization Agreement arising from the transfer of inventory to Collegium on the date of closing of the agreement in January 2018 net of the contract liability of $10.0 million resulting from the upfront payment received and the $8.8 million of warrants received. As of March 31, 2019, $0.8 million and $1.4 million of the contract asset has been recorded within “Prepaid and other current assets” and “Other long-term assets,” respectively.
 
Collaboration and License Agreements
 
Ironwood Pharmaceuticals, Inc.  The future contingent milestones under the Ironwood Agreement are considered variable consideration and are estimated using the most likely method. As part of adopting ASC 606, the Company evaluated

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whether the future milestones under the Ironwood Agreement should have been included as part of the transaction price in periods before January 1, 2018. The Company concluded that because of development and regulatory risks at the time, it was probable that a significant revenue reversal could have occurred. Accordingly, the associated future contingent milestone values were not included in the transaction price for periods before January 1, 2018. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price.

Slán Medicinal Holdings Limited In November 2017, the Company entered into definitive agreements (Slán Agreements) with Slán Medicinal Holdings Limited and certain of its affiliates (Slán) pursuant to which the Company acquired Slán’s rights to market the specialty drug long-acting cosyntropin in the U.S. and Canada. As outlined in the Slán Agreements, each party will support the development, including clinical development, of the licensed product and efforts to obtain regulatory approval of the initial NDA. The Slán Agreements also detail commercialization activities which are included in the commercialization plan. Subsequent to approval of the initial NDA, Assertio and Slán will share in the net sales of long-acting cosyntropin for a 10-year period (after which time the product will revert back to Slán). The Company has committed to invest $15.0 million in the collaboration with Slán for the commercialization efforts of long-acting cosyntropin. As of December 31, 2018 and March 31, 2019 the Company had $4.6 million and $5.2 million, respectively, of development expenses reimbursable by Slán and recognized within Prepaid and Other Assets on the Company’s Consolidated Balance Sheet. During the three months ended March 31, 2019, Company made a payment of $2.25 million to Slán following the initial NDA filing in December 2018. Long-acting cosyntropin has not yet been launched for commercial sale and therefore no revenue in respect of this product was recognized as of March 31, 2019.


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NOTE 6.  STOCK-BASED COMPENSATION
 
The following table presents stock-based compensation expense recognized for stock options, stock awards, RSUs, PSUs and the Company’s ESPP in the Company’s Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended March 31,
 
2019
 
2018
Cost of sales
$

 
$
14

Research and development expense
273

 
53

Selling, general and administrative expense
2,429

 
1,909

Restructuring

 
258

Total
$
2,702

 
$
2,234

 
At March 31, 2019, the Company had $2.7 million of total unrecognized compensation expense related to stock option grants that will be recognized over an average vesting period of 1.92 years and $22.9 million of total unrecognized compensation expense related to RSUs and PSUs that will be recognized over an average vesting period of 2.32 years.
 
During the three months ended March 31, 2019 the Company granted 1.9 million RSUs at an average fair market value of $4.38 per share and 0.6 million PSUs at an average fair market value of $6.87 per share. The fair value of restricted stock units is determined using the closing stock price on the date of grant and the fair value of the performance RSUs is determined using a Monte Carlo simulation method.

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NOTE 7.  INVENTORIES, NET
 
Inventories, net, consist of raw materials, work in process and finished goods and are stated at the lower of cost or market and consist of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
 
Raw materials
$
1,554

 
$
1,376

Work-in-process
831

 
732

Finished goods
692

 
1,288

Total
$
3,077

 
$
3,396

NOTE 8. ACCOUNTS RECEIVABLES, NET
 
Accounts receivables, net, consist of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
 
Receivables related to product sales, net
$
33,811

 
$
23,078

Receivables from Collegium
9,556

 
14,011

Other
121

 
122

Total accounts receivable, net
$
43,488

 
$
37,211

 
NOTE 9.  ACCRUED LIABILITIES
 
Accrued liabilities consist of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
 
Accrued compensation
$
2,916

 
$
5,475

Accrued royalties
2,192

 
2,773

Accrued restructuring and one-time termination costs
820

 
1,578

Other accrued liabilities
14,048

 
21,535

Total accrued liabilities
$
19,976

 
$
31,361

 
NOTE 10.  DEBT
 
Senior Notes
 
On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes (the Senior Notes) for aggregate gross proceeds of approximately $562.0 million pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement), among the Company and Deerfield Private Design Fund III, L.P., Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., BioPharma Secured Investments III Holdings Cayman LP, Inteligo Bank Ltd. and Phemus Corporation (collectively, the Purchasers) and Deerfield Private Design Fund III, L.P., as collateral agent. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Notes to fund a portion of the Purchase Price paid to Janssen Pharma in connection with the NUCYNTA acquisition. The Company incurred debt issuance costs of $0.5 million for 2015.
 

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The Senior Notes will mature on April 14, 2021 (unless earlier prepaid or repurchased), are secured by substantially all of the assets of the Company and any subsidiary guarantors, and bear interest at the rate equal to the lesser of (i) 9.75% over the three month London Inter-Bank Offer Rate (LIBOR), subject to a floor of 1.0% and (ii) 11.95% (through the third anniversary of the purchase date) and 12.95% (thereafter). The interest rate is determined at the first business day of each fiscal quarter, commencing with the first such date following April 2, 2015. The interest rate for the three months ended March 31, 2019 and 2018 was 12.54% and 11.45%, respectively.

In April 2017, the Company prepaid and retired $100.0 million of the Senior Notes and paid a $4.0 million prepayment fee; and in November 2017, the Company prepaid and retired an additional $10.0 million of the Senior Notes and paid a $0.4 million prepayment fee. The Company recorded a net loss on prepayment of the Senior Notes of $5.9 million which represented the prepayment fees of $4.4 million and the immediate recognition of unamortized balances of debt discount and debt issuance costs of $1.5 million in 2017. This loss is recorded as a loss on prepayment of Senior Notes in the consolidated statements of operations for 2017.
 
The remaining $257.5 million of Senior Notes can be prepaid, at the Company’s option or following a Major Transaction or asset disposition.

The Senior Notes and related indenture contain customary covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates.

In January 2019, the Company entered into a Fourth Amendment to Note Purchase Agreement (the Note Amendment) with respect to the Note Purchase Agreement, dated as of March 12, 2015, among the Company, the other credit parties party thereto, the purchasers party thereto and Deerfield. Pursuant to the Note Amendment, the minimum EBITDA covenant was replaced with a senior secured debt leverage ratio covenant and a minimum net sales covenant, the prepayment premium was adjusted to be 3% of the principal amount of notes prepaid on or prior to April 14, 2020 and 1% of the principal amount of notes prepaid thereafter, flexibility to sell certain royalty assets and/or modify the terms thereof was added, certain definitions were amended and certain other amendments were made. The Company paid a $3.2 million upfront non-refundable amendment fee to the Purchasers in the first quarter of 2019 which was capitalized and is being amortized over the remaining term of the Senior Notes using the effective interest method.

The principal amount of the Senior Notes is repayable as of March 31, 2019 is as follows (amounts in thousands):

2019 (remainder)
$
95,000

2020
80,000

2021
82,500

Total
$
257,500

 
The principal payment of $55.0 million due in April 2019 was paid by the Company in April 2019. The Company is scheduled to make the Senior Notes principal payments of $115.0 million prior to March 31, 2020 and has classified this portion of the Senior Notes within the current liabilities section of the condensed consolidated balance sheet.
 
The following is a summary of the carrying value of the Senior Notes as of March 31, 2019 and December 31, 2018 (in thousands): 
 
March 31,
2019
 
December 31,
2018
 
 
Principal amount of the Senior Notes
$
257,500

 
$
282,500

Unamortized debt discount balance
(2,077
)
 
(2,541
)
Unamortized debt issuance costs
(4,005
)
 
(1,650
)
Total Senior Notes
$
251,418

 
$
278,309


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The debt discount and debt issuance costs are being amortized as interest expense through April 2021 using the effective interest method. The following is a summary of interest expense for the three months ended March 31, 2019 and 2018 (in thousands): 
 
Three Months Ended March 31,
 
2019
 
2018
Contractual interest expense
$
8,206

 
$
10,441

Amortization of debt discount and debt issuance costs
1,357

 
1,008

Total interest expense Senior Notes
$
9,563

 
$
11,449

 

Convertible Debt
 
On September 9, 2014, the Company issued $345.0 million aggregate principal amount of 2.50% Convertible Senior Notes Due 2021 (the Convertible Notes) resulting in net proceeds to the Company of $334.2 million after deducting the underwriting discount and offering expenses of $10.4 million and $0.4 million, respectively.
 
The Convertible 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.
 
The closing price of the Company’s common stock did not exceed 130% of the $19.24 conversion price for the required period during the quarter or the three month period ended March 31, 2019. As a result, the Convertible Notes are not convertible as of March 31, 2019.

The following is a summary of the liability component of the Convertible Notes as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31,
2019
 
December 31,
2018
 
 
Principal amount of the Convertible Notes
$
345,000

 
$
345,000

Unamortized discount of the liability component
(49,967
)
 
(54,521
)
Unamortized debt issuance costs
(2,429
)
 
(2,681
)
Total Convertible Notes
$
292,604

 
$
287,798

 
The debt discount and debt issuance costs are being amortized as interest expense through September 2021. The following is a summary of interest expense for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Stated coupon interest
$
2,156

 
$
2,156

Amortization of debt discount and debt issuance costs
4,807

 
4,410

Total interest expense Convertible Notes
$
6,963

 
$
6,566

 

NOTE 11.  INCOME TAXES
 
As of March 31, 2019, our net deferred tax assets are fully offset by a valuation allowance. The valuation allowance is determined in accordance with the provisions of ASC 740, Income taxes, which require an assessment of both negative and positive evidence when measuring the need for a valuation allowance.  Based on the weight of available evidence, the Company recorded a full valuation allowance against the Company's net deferred assets beginning in the fourth quarter of 2016. The Company continued to provide a full valuation allowance against the Company's net deferred assets in subsequent quarters. The Company reassesses the need for a valuation allowance on a quarterly basis.  If it is determined that a portion or all of the valuation allowance is not required, it will generally be a benefit to the income tax provision in the period such determination is made.
 

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In the three months ended March 31, 2019, the Company recorded an expense from income taxes of approximately $0.2 million that represents an effective tax rate of 1.5%. The difference between the income tax expense of $0.2 million and the tax at the statutory rate of 21% on current year operations is principally due to the change in valuation allowance. For the three months ended March 31, 2018, the difference between the recorded provision for income taxes and the tax benefit based on the federal statutory rate of 21%, was primarily attributable to the impact of the valuation allowance. 
 
The Company files income tax returns in the United States federal jurisdiction and in various states, and the tax returns filed for the years 1997 through 2017 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating losses and unutilized R&D credits, substantially all of the Company’s tax years remain open to examination.  Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense by the Company. At March 31, 2019 the Company had approximately $1.5 million of accrued interest and penalties associated with unrecognized tax benefits.

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NOTE 12.  LEASES

The Company has non-cancelable operating leases for its office and laboratory facilities, automobiles used by its sales force, and as well as certain operating leases for office equipment.

The Company relocated its corporate headquarters from Newark, California to Lake Forest, Illinois in 2018 and subsequently entered into two subleases which, together, account for the entirety of the Newark facility. Each sublease contains abated rent periods resulting in reduced operating lease cash flows through May 2019. Operating lease costs and sublease income related to the Newark facility are accounted for in interest and other (expense) income, net in the Consolidated Statement of Operations. 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. 

Lease expense during the period included the following:
 
 
 
Three months ended
(in thousands)
Financial Statement Classification
 
March 31, 2019
Operating lease cost
Selling, general and administrative expenses
 
$
187

Operating lease cost
Interest income and other (expense) income, net
 
148

Total lease cost
 
 
$
335

Sublease Income
Interest and other (expense) income, net
 
$
362


Supplemental cash flow and other information related to leases were as follows:
 
 
Three months ended
(in thousands)
 
March 31, 2019
Cash paid for amounts included in measurement of liabilities:
 
 
Operating cash flows from operating leases
 
$
582


Supplemental balance sheet information related to leases consisted of the following:
(in thousands)
Financial Statement Classification
 
March 31, 2019
Assets
 
 
 
Operating lease right-of-use assets
Property and equipment, net
 
$
3,446

Liabilities
 
 
 
Current operating lease liabilities
Other current liabilities
 
$
2,118

Noncurrent operating lease liabilities
Other long term liabilities
 
6,357

Total lease liabilities
 
 
$
8,475


Maturity of lease liabilities as of March 31, 2019 were as follows:
(in thousands)
Operating Leases
2019 (remainder)
$
1,878

2020
2,443

2021
2,326

2022
2,188

2023
632

Thereafter

Total lease payments
$
9,467

Less: Interest
992

Present value of lease liabilities
$
8,475


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Lease term and discount rate consisted of the following:
 
March 31, 2019
Weighted-average remaining lease term (years):
 
Operating leases
3.9

Weighted-average discount rate:
 
Operating leases
6.0
%

Future minimum lease payments under the Company's non-cancelable operating leases as of December 31, 2018 were as follows:
(in thousands)
Lease Payments
2019 (remainder)
$
2,624

2020
2,526

2021
2,322

2022
2,188

2023
632

Thereafter

Total
$
10,292


NOTE 13.  COMMITMENTS AND CONTINGENCIES
 
Purchase and Other Commitments

As of March 31, 2019 and December 31, 2018, the Company had $5.3 million and $6.0 million, respectively, of non-cancelable purchase orders related to consulting services. The Company also committed to support the commercialization efforts of long-acting cosyntropin, see Note 5, Revenue -- Collaboration and License Agreements, for further discussion. Refer to Note 12, Leases, for the Company's non-cancelable office and laboratory leases, operating leases for vehicles used by our sales force and office equipment leases.

Legal Matters

Company v. NUCYNTA and NUCYNTA ER ANDA Filers

Actavis & Alkem:  In July 2013, Janssen Pharma filed patent infringement lawsuits in the U.S. District Court for the District of New Jersey (the District Court) against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market generic versions of NUCYNTA and NUCYNTA ER before the expiration of U.S. Reissue Patent No. 39,593 (the ’593 Patent), U.S. Patent No. 7,994,364 (the ’364 Patent) and, as to Actavis only, U.S. Patent No. 8,309,060 (the ’60 Patent). In December 2013, Janssen Pharma filed an additional complaint in the District Court against Alkem asserting that newly issued U.S. Patent No. 8,536,130 (the ’130 Patent) was also infringed by Alkem’s ANDA seeking approval to market a generic version of NUCYNTA ER. In August 2014, Janssen Pharma amended the complaint against Alkem to add additional dosage strengths.
Sandoz & Roxane:  In October 2013, Janssen Pharma received a Paragraph IV Notice from Sandoz, Inc. (Sandoz) with respect to NUCYNTA related to the ’364 Patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (Roxane) with respect to NUCYNTA related to the ’364 and ’593 Patents. In response to those notices, Janssen Pharma filed an additional complaint in the District Court against Roxane and Sandoz asserting the ’364 Patent against Sandoz and the ’364 and ’593 Patents against Roxane. In April 2014, Janssen Pharma and Sandoz entered into a joint stipulation of dismissal of the case against Sandoz, based on Sandoz’s agreement not to market a generic version of NUCYNTA products prior to the expiration of the asserted patents. In June 2014, in response to a new Paragraph IV Notice from Roxane with respect to NUCYNTA ER, Janssen Pharma filed an additional complaint in the District Court asserting the ’364, ’593, and ’130 Patents against Roxane.

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Watson:  In July 2014, in response to a Paragraph IV Notice from Watson Laboratories, Inc. (Watson) with respect to the NUCYNTA oral solution product and the ’364 and ’593 Patents, Janssen Pharma filed a lawsuit in the District Court asserting the ’364 and ’593 Patents against Watson.
In each of the foregoing actions, the ANDA filers counterclaimed for declaratory relief of non-infringement and patent invalidity. At the time that the actions were commenced, Janssen Pharma was the exclusive U.S. licensee of the patents referred to above. On April 2, 2015, the Company acquired the U.S. rights to NUCYNTA ER and NUCYNTA from Janssen Pharma. As part of the acquisition, the Company became the exclusive U.S. licensee of the patents referred to above. The Company was added as a plaintiff to the pending cases and is actively litigating them.
In September 2015, the Company filed an additional complaint in the District Court asserting the ’130 Patent against Actavis. The ’130 Patent issued in September 2013 and was timely listed in the Orange Book for NUCYNTA ER, but Actavis did not file a Paragraph IV Notice with respect to this patent.  In its new lawsuit, the Company claimed that Actavis would infringe or induce infringement of the ’130 Patent if its proposed generic products were approved. In response, Actavis counterclaimed for declaratory relief of non-infringement and patent invalidity, as well as an order requiring the Company to change the corrected use code listed in the Orange Book for the ’130 Patent.
In February 2016, Actavis, Actavis UT, Roxane and Alkem each stipulated to infringement of the ’593 and ’364 patents.  On March 9, 2016, a two-week bench trial on the validity of the three asserted patents and infringement of the ’130 patent commenced.  Closing arguments took place on April 27, 2016.  On September 30, 2016, the District Court issued its final decision.  The District Court found that the ’593 Patent, ’364 Patent, and ’130 Patent are all valid and enforceable, that Alkem will induce infringement of the ’130 Patent, but that Roxane and Actavis will not infringe the ’130 Patent.
On April 11, 2017, the District Court entered final judgment in favor of the Company on the validity and enforceability of all three patents, on infringement of the ’593 and ’364 Patents by all defendants, and on infringement of the ’130 Patent against Alkem. The judgment includes an injunction enjoining all three defendants from engaging in certain activities with regard to tapentadol (the active ingredient in NUCYNTA), and ordering the effective date of any approval of Actavis, Actavis UT, and Roxane’s ANDAs, and Alkem’s ANDA for NUCYNTA IR to be no earlier than the expiry of the ’364 Patent (June 27, 2025), and the effective date of any approval of Alkem’s ANDA for NUCYNTA ER to be no early than the expiry of the ’130 Patent (September 22, 2028). The period of exclusivity with respect to all four defendants may in the future be extended with the award of pediatric exclusivity.
Notices of appeal were filed by defendants Alkem and Roxane concerning the validity of the ’364 and ’130 patents. The Company filed its own cross-appeal with regard to the District Court’s finding that Roxane and Actavis will not infringe the claims of the ’130 Patent. The appeals were consolidated at the United States Court of Appeals for the Federal Circuit (the Federal Circuit).  Briefing concluded in March 2018 and oral arguments occurred on September 4, 2018. In March 2019, the Federal Circuit affirmed the decision of the District Court in all respects. On April 29, 2019, Alkem filed a petition for rehearing and rehearing en banc with the Federal Circuit.
Company v. Purdue

The Company sued Purdue Pharma L.P (Purdue) for patent infringement in a lawsuit filed in January 2013 in the U.S. District Court for the District of New Jersey. The lawsuit arose from Purdue’s commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the U.S. and alleges infringement of U.S. Patent Nos. 6,340,475 (the ’475 Patent) and 6,635,280 (the ’280 Patent), which expired in September 2016.
On September 28, 2015, the district court stayed the Purdue lawsuit pending the decision of the U.S. Court of Appeals for the Federal Circuit (CAFC) in Purdue’s appeal of the Final Written Decisions of the Patent Trial and Appeal Board (PTAB) described below. On June 30, 2016, the district court lifted the stay based on the CAFC’s opinion and judgment affirming the PTAB’s Final Written Decisions confirming the patentability of the patent claims of the ’475 and ’280 Patents Purdue had challenged. On June 10, 2016, the Company filed a motion for leave to file a second amended Complaint to plead willful infringement. On June 21, 2016, Purdue filed an opposition to the Company’s motion for leave to plead willful infringement. On January 31, 2017, the Court granted the Company’s motion for leave to plead willful infringement.
On February 1, 2017, the Company filed a Second Amended Complaint pleading willful infringement. On July 10, 2017, the case was reassigned to Judge Wolfson. On February 15, 2017, Purdue answered the Company’s Second Amended Complaint and pled counterclaims of non-infringement, invalidity, unenforceability and certain affirmative defenses. On September 26, 2017, the case was reassigned to Judge Martinotti. On December 22, 2017, the Court set the close of expert discovery for March 30, 2018. On January 5, 2018, the Court vacated the January 25, 2018 pretrial conference.
On July 9, 2018, the Court issued an order administratively terminating the case pending the outcome of settlement discussions between the parties. On August 28, 2018, the Company and each of Purdue, The P.F. Laboratories, Inc. a New Jersey corporation, and Purdue Pharmaceuticals L.P., a Delaware limited partnership (collectively, Purdue Companies), entered

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into a Settlement Agreement. Pursuant to the Settlement Agreement: (i) Purdue Companies paid the Company $30 million on August 28, 2018 and paid the Company an additional $32 million on January 30, 2019; (ii) each party covenanted not to the sue the other with regard to any alleged infringement of such party’s patents or patent rights as a result of the commercialization of the other party’s current product portfolio; (iii) each party covenanted not to challenge the other party’s patents or patent rights covering such other party’s current product portfolio; and (iv) each party agreed to a mutual release of claims relating to any claim or potential claim relating to the other party’s current product portfolio.

Securities Class Action Lawsuit and Related Matters

On August 23, 2017, the Company, its current chief executive officer and president, its former 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 United States District Court for the Northern District of California (the District Court). The action (Huang v. Depomed et al., No. 3:17-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 6, 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. The lead plaintiff filed an opposition to the motion on June 8, 2018. The Company and the individuals filed a reply in support of their motion to dismiss on July 23, 2018. Oral arguments took place on December 13, 2018. On March 18, 2019, the District Court granted the Company's motion to dismiss the plaintiffs’ amended complaint. The dismissal was without prejudice, and the plaintiffs filed a second amended compliant on May 2, 2019. The second amended compliant 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. Company believes that the action is without merit and intends to contest it vigorously.
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 class action. 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 first federal derivative action. The Ross, Singh, and Lutz actions were stayed on January 18, 2018, January 23, 2018, and January 11, 2019, respectively, pending the resolution of the motion to dismiss in the securities class action. The parties in the Singh and Youse actions are seeking to consolidate those cases and stay the consolidated matter pending the resolution of the motion to dismiss. The Company believes that these actions are without merit and intends to contest them vigorously.

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 received a letter from Senator Claire McCaskill (D-MO), the then-Ranking Member on the U.S. Senate Committee on Homeland Security and Governmental Affairs, requesting certain information from the Company regarding its historical commercialization of opioid products. The Company voluntarily furnished information responsive to Sen. McCaskill’s request. The Company has also received 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 the Company’s historical sales and marketing of opioid products. In addition, the State of California Department of Insurance (CDI) has issued a subpoena to the Company seeking information relating to its historical sales and marketing of Lazanda. The CDI subpoena also seeks information on Gralise, a non-opioid product in the Company’s portfolio. The Company has received subpoenas from the U.S. Department of Justice (DOJ) seeking documents and information regarding its historical sales and marketing of opioid products. The Company also from time to time receives and complies with subpoenas from governmental authorities related to investigations primarily focused on third parties, including health care practitioners. We are cooperating with the foregoing governmental investigations and inquiries.

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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 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 most of the lawsuits include federal and 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 1,000 such cases that were originally filed in U.S. District Courts, or removed to federal court from state court, have been transferred to the MDL Court. The Company is currently involved in 13 lawsuits that have been transferred to the MDL Court, and one additional federal lawsuit in each of the Eastern District of Missouri and the Middle District of Pennsylvania. The Company was previously named in other federal lawsuits in which the plaintiffs have now dropped their claims against the Company. Plaintiffs may file additional lawsuits in which the Company may be named. Previously dismissed claims could also be refiled. Plaintiffs in the pending federal cases include county and municipal governmental entities, employee benefit plans, health clinics and health insurance providers who assert federal and state statutory claims and state common law claims, such as conspiracy, nuisance, fraud, negligence or deceptive trade practices. In these cases, plaintiffs seek a variety of forms of relief, including actual damages to compensate for alleged past and future costs such as to provide care and services to persons with opioid-related addiction or related conditions, injunctive relief to prohibit alleged deceptive marketing practices and abate an alleged nuisance, establishment of a compensation fund, disgorgement of profits, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are in the earliest stages of proceedings, and the Company 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. The Company is currently named in 34 such cases -- four filed in Texas, six in Pennsylvania, six in Utah, four in Missouri, two in Nevada, eleven filed in South Carolina and one filed in Arizona. The Company was previously named as a defendant in a case in Arkansas state court, but the court in that case dismissed the plaintiffs' claims against the Company without prejudice. Plaintiffs may file additional lawsuits in which the Company may be named. Previously dismissed claims could also be refiled. In the pending cases, 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 past and future damages, disgorgement of profits, injunctive relief, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are likewise in their earliest stages, and the Company 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 United States District Court for the Northern District of California (Case No. 3:19-cv-255). Navigators is the Company’s primary product liability insurer. Navigators is 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 policies with Navigators. The Company filed a response to the complaint on February 28, 2019. Navigators filed an answer on April 11, 2019.
General

The Company cannot reasonably predict the outcome of the legal proceedings described above, nor can the Company estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings or the amount of any gain in the event the Company prevails in litigation involving a claim for damages. As such the Company is not currently able to estimate the impact of the above litigation on its financial position or results of operations.
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 above, 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

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condition. However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.

NOTE 14.  INTANGIBLE ASSETS
 
The gross carrying amounts and net book values of intangible assets were as follows (in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
 
 
Remaining
 
Gross
 
    
 
 
 
Gross
 
    
 
    
 
 
Useful Life
 
Carrying
 
Accumulated
 
Net Book
 
Carrying
 
Accumulated
 
Net Book
Product rights
 
(In years)
 
Amount
 
Amortization
 
Value
 
Amount
 
Amortization
 
Value
NUCYNTA
 
6.8
 
$
1,019,978

 
$
(384,466
)
 
$
635,512

 
$
1,019,978

 
$
(360,891
)
 
$
659,087

CAMBIA
 
4.8
 
51,360

 
(27,175
)
 
24,185

 
51,360

 
(25,891
)
 
25,469

Zipsor
 
3.0
 
27,250

 
(20,292
)
 
6,958

 
27,250

 
(19,707
)
 
7,543

Total
 
 
 
$
1,098,588

 
$
(431,933
)
 
$
666,655

 
$
1,098,588

 
$
(406,489
)
 
$
692,099

 
Based on finite-lived intangible assets recorded as of March 31, 2019, and assuming the underlying assets will not be impaired and that the Company will not change the expected lives of the assets, future amortization expenses were estimated as follows (in thousands):
 
 
 
Estimated
 
 
Amortization
Year Ending December 31,
 
Expense
2019 (remainder)
 
$
76,330

2020
 
101,774

2021
 
101,774

2022
 
99,969

Thereafter
 
286,808

Total
 
$
666,655

 
NOTE 15.  RESTRUCTURING CHARGES
 
In June 2017, the Company announced a limited reduction-in-force in order to streamline operations and achieve operating efficiencies. The activities related to that reduction-in-force were completed during the third quarter of 2017.  In December 2017, the Company initiated a company-wide restructuring plan following the entry into the Commercialization Agreement with Collegium. This plan focused on a reduction of the Company’s pain sales force during the first quarter of 2018, a reduction of the staff at its headquarters office during the second quarter of 2018 and a move from its headquarters facility in Newark, California to Lake Forest, Illinois in the third quarter of 2018. The restructuring plan was substantially complete as of December 31, 2018 and therefore no charges were incurred in the three months ended March 31, 2019.
 
The following table summarizes the total expenses recorded related to the 2017 restructuring and one-time termination cost activities by type of activity and the locations recognized within the consolidated statements of operations as restructuring costs (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Employee compensation costs
$

 
$
8,779

Fixed Asset disposals and accelerated depreciation of leasehold improvements

 

Other exit costs

 
238

Total restructuring costs
$

 
$
9,017


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Selected information relating to accrued restructuring, severance costs and one-time termination costs is as follows (in thousands):
 
Employee compensation costs
Balance at December 31, 2018
$
1,578

Net accruals

Non-cash adjustments

Cash paid
(758
)
Balance at March 31, 2019
$
820

 
As of March 31, 2019, the full $0.8 million accrued restructuring liability balance was classified as a current liability in the Condensed Consolidated Balance Sheet.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING INFORMATION
 
Statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:
the commercial success and market acceptance of our products and product candidate, long-acting cosyntropin;
the success of Collegium in commercializing NUCYNTA® ER and NUCYNTA®;
the reversal or any successful appeal of the court's favorable ruling in our patent infringement litigation against the filers of Abbreviated New Drug Applications (each, an ANDA) to market generic versions of NUCYNTA ER and NUCYNTA in the United States (U.S.);
any additional patent infringement or other litigation, investigation or proceeding that may be instituted related to us or any of our products, product candidates or products we may acquire;
our ability to generate sufficient cash flow from our business to make payments on our indebtedness, our ability to restructure or refinance our indebtedness and our compliance with the terms and conditions of the agreements governing our indebtedness;
our and our collaborative partners’ compliance or non-compliance with legal and regulatory requirements related to the development or promotion of pharmaceutical products in the U.S.;
our plans to acquire, in-license or co-promote other products;
the timing and the results of our and our collaborative partners' research and development efforts including clinical studies relating to our and our collaborative partners' product candidates, including long-acting cosyntropin;
approval of regulatory filings, including filings for long-acting cosyntropin;
our ability to raise additional capital, if necessary;
our ability to successfully develop and execute our sales and marketing strategies;
variations in revenues obtained from commercialization and collaborative agreements, including contingent milestone payments, royalties, license fees and other contract revenues, including non-recurring revenues, and the accounting treatment with respect thereto;
our collaborative partners’ compliance or non-compliance with obligations under our collaboration agreements;

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the outcome of both our opioid-related investigations, our opioid-related litigation brought by state and local governmental entities and private parties, and our insurance litigation, and the costs and expenses associated therewith;
the regulatory strategy for long-acting cosyntropin and both our and our collaborative partner’s ability to successfully develop and execute such strategy; and
our ability to attract and retain key executive leadership following our restructuring and office relocation.
Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “RISK FACTORS” section and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update any forward-looking statement publicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of this Quarterly Report on Form 10-Q, even if new information becomes available in the future. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in any such forward-looking statement.

COMPANY OVERVIEW
 
We are a specialty pharmaceutical company focused on neurology, orphan and specialty medicines. Our current specialty pharmaceutical business includes the following three products which we market in the U.S.:

Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN), that we launched in October 2011.

CAMBIA® (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, that we acquired in December 2013.

Zipsor® (diclofenac potassium liquid filled capsules), a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, that we acquired in June 2012.

We also have the exclusive rights to market long-acting cosyntropin (synthetic adrenocorticotropic hormone, or ACTH) in the U.S. and Canada. Long-acting cosyntropin is an alcohol-free formulation of a synthetic analogue of ACTH. In February 2019, notification of acceptance for filing was received from the U.S. Food and Drug Administration (FDA) for our collaborative partner's 505(b)(2) New Drug Application (NDA) for the novel injectable formulation of long-acting cosyntropin. We, together with our collaborative partner, seek approval for the use of this product as a diagnostic drug in the screening of patients presumed to have adrenocortical insufficiency.

We maintain a Commercialization Agreement with Collegium pursuant to which we granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the United States. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. We receive a royalty on all NUCYNTA revenues based on certain net sales thresholds.

Strategy
 
Our business strategy is based on three pillars: Maintain, Grow and Build. We intend to “Maintain” our NUCYNTA franchise of pain products through our Commercialization Agreement with Collegium. We intend to “Grow” our neurology, orphan and specialty medicine business through organic and inorganic growth. We intend to “Build” a portfolio of high-value products positioned to address the needs of patients, physicians and payers.

OUR BUSINESS OPERATIONS
 
As of March 31, 2019, our revenues were generated primarily from the commercialized products set forth below.
 
Gralise (Gabapentin)
 
Gralise is our proprietary, once‑daily formulation of gabapentin indicated for management of PHN, a persistent pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. We made Gralise commercially available in October 2011, following its FDA approval in January 2011. Gralise product sales were $13.3 million and $14.8 million for the three months ended March 31, 2019 and 2018, respectively.
 

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CAMBIA (Diclofenac Potassium for Oral Solution)

CAMBIA is a non‑steroidal anti‑inflammatory drug (NSAID) indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. We acquired CAMBIA in December 2013 from Nautilus Neurosciences, Inc. (Nautilus). We began shipping and recognizing product sales on CAMBIA in December 2013. We began shipping and recognizing product sales on CAMBIA in December 2013. CAMBIA product sales were $8.8 million and $6.4 million for the three months ended March 31, 2019 and 2018, respectively.
 
Zipsor (Diclofenac Potassium) Liquid Filled Capsules
 
Zipsor is an NSAID indicated for relief of mild to moderate acute pain in adults. Zipsor uses proprietary ProSorb delivery technology to deliver a finely dispersed, rapidly absorbed formulation of diclofenac. We acquired Zipsor in June 2012 from Xanodyne Pharmaceuticals, Inc. (Xanodyne). We began shipping and recognizing product sales on Zipsor in June 2012. Zipsor product sales were $4.2 million and $4.7 million for the three months ended March 31, 2019 and 2018, respectively.
 
NUCYNTA ER (Tapentadol Extended Release Tablets) and NUCYNTA IR (NUCYNTA) (Tapentadol)
 
NUCYNTA ER is an extended release version of tapentadol that is indicated for the management of pain severe enough to require daily, around‑the‑clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults, and for which alternate treatment options are inadequate. NUCYNTA is an immediate release version of tapentadol that is indicated for the management of moderate to severe acute pain in adults. We acquired the U.S. rights to NUCYNTA ER and NUCYNTA from Janssen Pharmaceuticals, Inc. (Janssen Pharma) and began shipping and recognizing product sales on NUCYNTA ER and NUCYNTA in April 2015. We began commercial promotion of NUCYNTA ER and NUCYNTA in June 2015.
 
In December 2017, we entered into a Commercialization Agreement with Collegium, which we amended in November 2018. Pursuant to the Commercialization Agreement, we granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the United States. Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. We receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018. Beginning in 2019, we will receive royalties based on certain annual NUCYNTA net sales thresholds for future years. Both we and Collegium may terminate the Commercialization Agreement under certain circumstances; however, Collegium may not terminate the agreement prior to the end of 2021. Additionally, we retained certain rights to co-promote NUCYNTA products, subject to providing advanced notice to Collegium. See “Item 1. Financial Statements and Supplementary Data - Note 5. Revenue” for additional information regarding the terms of the Commercialization Agreement.

Product Candidate
 
Long-Acting Cosyntropin. In November 2017, we entered into definitive agreements with Slán Medicinal Holdings Limited and certain of its affiliates (Slán) pursuant to which we acquired Slán’s rights to market the specialty drug long-acting cosyntropin (synthetic ACTH) in the U.S. and Canada. In February 2019, notification of acceptance for filing was received from the FDA for our collaborative partner's 505(b)(2) NDA for the novel injectable formulation of long-acting cosyntropin. We, together with our collaborative partner, seek approval for the use of this product as a diagnostic drug in the screening of patients presumed to have adrenocortical insufficiency.

Collaboration and License Agreement with Ironwood Pharmaceuticals, Inc. (Ironwood)

In July 2011, we entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to our Acuform drug delivery technology for IW 3718, an Ironwood product candidate under evaluation for refractory GERD. During the second quarter of 2018, we received a $5.0 million milestone payment related to the dosing of the first patient in a Phase 3 trial. We will receive additional contingent milestone payments upon the occurrence of certain development milestones and royalties on net sales of the product, if approved.There was no revenue recognized related to the Ironwood Agreement during the three months ended March 31, 2019 and 2018.

PDL BioPharma, Inc. (PDL) Royalty Purchase and Sale Agreement

In October 2013, pursuant to the terms and conditions of a Royalty Purchase and Sale Agreement with PDL (Royalty Purchase Agreement), we sold to PDL our right to receive royalty, milestone and other specified payments arising on and after

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October 2013 under each of the following license agreements relating to our Acuform technology in the Type 2 diabetes therapeutic area: (i) the License and Services Agreement, effective as of March 4, 2011, with Boehringer Ingelheim International GMBH (BI) relating to potential future development milestones and sales of BI’s investigational fixed-dose combinations of drugs and extended-release metformin worldwide; (ii) the License Agreement, effective as of August 5, 2010, with Janssen Pharmaceutica N.V. (Janssen) relating to potential future development milestones and sales of Janssen’s investigational fixed-dose combination of Invokana (canagliflozin) and extended-release metformin worldwide; (iii) the Non-Exclusive License, Covenant Not to Sue and Right of Reference Agreement, effective as of July 21, 2009, with Merck & Co., Inc. relating to sales of Janumet XR (sitagliptin and metformin HCL extended-release) worldwide; (iv) the Commercialization Agreement, effective as of August 22, 2011, with Santarus, Inc. relating to sales of Glumetza (metformin HCL extended-release tablets) in the United States; (v) the Amended License Agreement, effective as of January 9, 2007, with LG Life Sciences Ltd. relating to sales of extended-release metformin in Korea; and (vi) the Amended and Restated License Agreement (Extended Release Metformin Formulations — Canada), dated as of December 13, 2005, with Biovail Laboratories International SRL relating to sales of extended-release metformin in Canada. Under the Royalty Purchase Agreement, PDL was entitled to receive all payments due under such license agreements until PDL received $481.0 million, after which all net payments received were to be shared evenly between us and PDL. In August 2018, we amended the Royalty Purchase Agreement and sold our remaining interest in such payments to PDL for $20.0 million.

Segment Information

We maintain one operating segment and have operations solely in the United States. To date, substantially all of our revenues from product sales are related to sales in the United States.

RESTRUCTURING

In June 2017, we announced a limited reduction-in-force in order to streamline operations and achieve operating efficiencies. In December 2017, we continued our restructuring plans by initiating a company-wide restructuring designed to help position the Company for sustainable, long-term growth that we believe will align our staff and office locations to fit our commercial strategy. Pursuant to our restructuring plans, in February 2018 we eliminated our pain sales force, consisting of approximately 230 sales representative and 25 manager positions. We reduced the staff at our headquarters office during the second quarter of 2018. In the third quarter of 2018, we relocated our corporate headquarters from Newark, California to Lake Forest, Illinois and reduced our headquarters office space by 50%. For further information about our restructuring costs, see Note 15, "Restructuring Charges" of the Notes to unaudited condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 
CRITICAL ACCOUNTING POLICIES
 
Critical accounting policies are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies related to revenue recognition, accrued liabilities and use of estimates to be critical policies. These estimates form the basis for making judgments about the carrying value of assets and liabilities. There have been no changes to our critical accounting policies since we filed our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 11, 2019 (the 2018 Form 10-K). The description of our critical accounting policies is incorporated herein by reference to our 2018 Form 10-K.


RESULTS OF OPERATIONS

Three Months Ended March 31, 2019 and 2018.
 
Revenue
 
Total revenues by products are summarized in the following table:

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Three Months Ended March 31,
 
 
2019
 
2018
Product sales, net
 
 
 
 
Gralise
 
$
13,278

 
$
14,827

CAMBIA
 
8,808

 
6,416

Zipsor
 
4,231

 
4,746

Total neurology product sales, net
 
26,317

 
25,989

NUCYNTA products (1)
 
62

 
18,145

Lazanda (2)
 
71

 
220

Total product sales, net
 
26,450

 
44,354

Commercialization agreement:
 


 


Commercialization rights and facilitation services, net
 
30,856

 
28,095

Revenue from transfer of inventory
 

 
55,705

Royalties and Milestone Revenue
 
623

 
250

Total revenues
 
$
57,929

 
$
128,404

 
(1)
NUCYNTA product sales for the three months ended March 31, 2018 reflect our sales of NUCYNTA between January 1 and January 8, 2018. During the first quarter of 2018, in connection with the Collegium transaction, we recognized revenue of $12.5 million related to the release of NUCYNTA sales reserves which were primarily recorded in the fourth quarter of 2017, as financial responsibility for those reserves transferred to Collegium upon closing of the Commercialization Agreement. During the three months ended March 31, 2019 we recognized an insignificant amount of sales reserve estimate adjustments related to sales recognized for NUCYNTA and Lazanda in prior periods. 

(2)
We divested Lazanda in November 2017. Product sales for the three months ended March 31, 2019 and 2018 relate to sales reserve estimate adjustments.

Product Sales
 
Gralise. The decrease of $1.5 million in Gralise product sales during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to lower commercial pricing.
 
CAMBIA. The increase of $2.4 million in CAMBIA product sales during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily the result of increased volume.
 
Zipsor. The decrease of $0.5 million in Zipsor product sales during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily the result of increased returns, the nature of which is not expected to recur.
 
Lazanda.We ceased recording revenues and related costs associated with Lazanda after we divested the product to Slán in November 2017. Product sales for the three months ended March 31, 2019 and 2018 reflect adjustments made for previously recorded sales reserve estimates.

Commercialization Agreement Revenue

We recognized revenue as a result of the Commercialization Agreement for the three months ended March 31, 2019 and 2018 as follows:

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Three months ended March 31,
 
 
2019
 
2018
License Revenue
 
$
32,098

 
$
28,095

Contract Liability Amortization (1)
 
688

 

Contract Asset Amortization
 
(887
)
 

Third-party Royalty, net
 
(1,043
)
 

Inventory Transfer
 

 
55,705

Total Commercialization Revenue
 
$
30,856

 
$
83,800

(1) The contract liability amortization represents the recognition of revenue related to the warrants received in November 2018 which are being recognized over the term of the contract.

For the three months ended March 31, 2019, the Company recognized royalty revenue from the Commercialization Agreement of $32.1 million, which represents the variable royalty revenue which became effective for sales beginning January 1, 2019 as recognition of such royalties are constrained by the sales-based royalty exception related to intellectual property. Other components of revenue recognized by the Company include the amortization of the revenue attributed to warrants received from Collegium at the time of the contract modification in November 2018 which was partially offset by amortization expense of the contract asset. In addition, the Company recognized $1.0 million of expense related to the third-party royalty which has been paid by Collegium on behalf of Assertio. It is the Company’s expectation that in accordance with the amended Commercialization Agreement that Collegium will pay the full royalty owed to the third-party in 2019, 2020 and 2021 and that such amounts, over the course of the calendar year, will have no net impact to the Company.

For the three months ended March 31, 2018, the Company recognized royalty revenue from the Commercialization
Agreement of $28.1 million. The Company also recognized $55.7 million related to the transfer of inventory upon closing in January 2018. Cash collected from Collegium in the three months ended March 31, 2018 includes the upfront payments of $10.0 million for Facilitation Services and $6.2 million for Inventory Transfer as well as the quarterly portion of the annual minimum royalty amounts, payable by Collegium.

Royalties

During the three months ended March 31, 2019 and 2018, we recognized $0.6 million and $0.3 million, respectively, of revenue related to Cambia in Canada. The revenue recognized in 2019 also included a $0.3 million one-time amendment fee to support the continued collaboration with our partner in Canada following their acquisition.

License and Other Revenue

Ironwood Pharmaceuticals, Inc. In July 2011, we entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to our Acuform drug delivery technology for IW‑3718, an Ironwood product candidate under evaluation for refractory GERD. During the second and third quarters of 2018, we recognized and collected, respectively, a $5.0 million contingent milestone payment related to the dosing of the first patient in a Phase 3 trial for IW 3718.

Cost of Sales
 
Cost of sales consists of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs, royalties payable to third‑parties, inventory write‑downs, amortization of inventory write-ups associated with business acquisitions, product quality testing, internal employee costs related to the manufacturing process, distribution costs and shipping costs related to our product sales. Cost of sales excludes the amortization of intangible assets described separately below under “Amortization of Intangible Assets.” Total cost of sales for the three months ended March 31, 2019 and 2018, was as follows:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Cost of Sales
 
$
2,575

 
$
12,044

Dollar change from prior year
 
(9,469
)
 
(5,730
)
Percentage change from prior year
 
(78.6
)%
 
(32.3
)%
 

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Cost of sales decreased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the reduction in NUCYNTA net product sales which had a higher cost of sales percentage than our neurology portfolio due to the inclusion of third party royalties in cost of sales for NUCYNTA. Pursuant to the terms of our Commercialization Agreement with Collegium, effective January 9, 2018, we no longer record product sales of NUCYNTA and NUCYNTA ER and, as a result, no longer incur or record the cost of sales of such products. The cost of sales during the three months ended March 31, 2018 includes $6.2 million related to the cost of inventory transferred to Collegium on closing of the Commercialization Agreement. Following the divestiture of Lazanda in November 2017, we no longer record Lazanda product sales or related cost of sales.

The cost of sales as a percentage of sales for Gralise, CAMBIA and Zipsor, combined for the three months ended March 31, 2019 and 2018 was approximately 10% and 8% respectively.
 
Research and Development Expenses
 
Our research and development expenses currently include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. It is difficult to predict the scope and magnitude of future research and development expenses for our product candidates in research and development, as it is difficult to determine the nature, timing and extent of clinical trials and studies and the FDA’s requirements for a particular drug. As potential products proceed through the development process, each step is typically more extensive, and therefore more expensive, than the previous step. Therefore, success in development generally results in increasing expenditures until actual product approval. Total research and development expenses for the three months ended March 31, 2019 and 2018 were as follows:

 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Research and development expenses
 
$
1,793

 
$
1,528

Dollar change from prior year
 
265

 
(3,556
)
Percentage change from prior year
 
17.3
%
 
(69.9
)%
 
Research and development expenses during the three months ended March 31, 2019 increased compared to the prior year period due to an increase in salary and employee benefits.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses primarily consist of personnel, contract personnel, marketing and promotion expenses associated with our commercial products, personnel expenses to support our administrative and operating activities, facility costs, and professional expenses, such as legal fees. Total selling, general and administrative expenses were as follows:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Selling, general and administrative expenses
 
$
25,045

 
$
29,033

Dollar change from prior year
 
(3,988
)
 
(19,486
)
Percentage change from prior year
 
(13.7
)%
 
(40.2
)%
 
The decrease of $4.0 million in selling, general and administrative expense during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to the reduction in our sales force following the restructuring plan announced in December 2017 and the elimination of all commercialization efforts relating to NUCYNTA following the Commercialization Agreement with Collegium. In December 2017, in connection with the signing of the Commercialization Agreement with Collegium we announced the termination of our pain sales force which occurred during the first quarter of 2018, consisting of approximately 255 sales representative and sales manager positions, and our decision to significantly reduce our office staff and reduce our headquarters office space by approximately 50%.
 
In connection with the Multidistrict Opioid Litigation, the State Opioid Litigation and the Opioid-Related Requests and Subpoenas described in Note 13, “Commitments and Contingencies - Legal Matters” of the Notes to unaudited condensed

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Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we expect to incur additional costs and expenses related to our ongoing opioid-related litigation and investigations, which may be significant.

Amortization of Intangible Assets
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Amortization of intangible assets - NUCYNTA
 
$
23,575

 
$
23,575

Amortization of intangible assets - CAMBIA
 
1,284

 
1,284

Amortization of intangible assets - Zipsor
 
585

 
585

Total
 
$
25,444

 
$
25,444

 
The amortization expense during the three months ended March 31, 2019 was in-line with amortization expense for the three months ended March 31, 2018.
 
Restructuring Charges
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Employee compensation costs
 
$

 
$
8,779

Fixed Asset disposals and accelerated depreciation of leasehold improvements
 

 

Other exit costs
 

 
238

Total restructuring costs
 
$

 
$
9,017

 
During 2018 we continued to execute the restructuring plan announced in December 2017. We completed the previously announced termination of our pain sales force during the first quarter of 2018, consisting of approximately 255 sales representative and sales manager positions. We relocated our corporate headquarters from Newark, California to Lake Forest, Illinois, which reduced our headquarters office space requirement by approximately 50%. During the first quarter of 2018, we entered into an Office Lease pursuant to which we lease approximately 31,000 rentable square feet of space in Lake Forest, Illinois. Our initial tenant improvements in the space were completed in August 2018 and we began occupying the space at that time.
 
For the three months ended March 31, 2018, restructuring expenses and one-time termination costs were $9.0 million. We did not incur any restructuring or one-time termination costs for the three months ended March 31, 2019 and expect to incur insignificant restructuring costs throughout 2019.

Other Income and Expense
 
Other income and expense for the three months ended March 31, 2019 and 2018 was comprised of:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Interest and other income
 
$
1,020

 
$
229

Change in fair value of Collegium warrants
 
(1,629
)
 

Interest expense
 
(16,554
)
 
(18,068
)
Total other income (expense)
 
$
(17,163
)
 
$
(17,839
)
 
For the three ended March 31, 2019, other income and expense includes a $1.6 million expense related to the change in fair value of the Collegium warrants.





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The interest expense was comprised of:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Interest payable on Senior Notes
 
$
8,206

 
$
10,441

Interest payable on Convertible Notes
 
2,156

 
2,156

Amortization of debt discounts and issuance costs relating to Senior Notes and Convertible Notes
 
6,164

 
5,418

Changes in fair value of contingent consideration
 
28

 
40

Other
 

 
13

Total interest expense
 
$
16,554

 
$
18,068

 
Interest expense decreased $1.5 million due to lower interest expense for our Senior Notes due to principal payments made in 2018 and Q1 2019. The decrease in interest expense in 2019 as compared to 2018 is due to these principal prepayments, offset in part by the impact of increasing interest rates in 2018. The increase in amortization of debt discounts and issuance costs was primarily due to the modification of the prepayment schedule for our Senior Notes.
 
In January 2019, we amended our Note Purchase Agreement. The amendment replaced our minimum EBITDA covenant with a senior secured debt leverage ratio covenant and a minimum net sales covenant. In addition, the prepayment premium was adjusted to be 3% of the principal amount of notes prepaid on or prior to April 14, 2020 and 1% of the principal amount of notes prepaid thereafter. We paid a $3.2 million upfront non-refundable amendment fee paid to the Purchasers in the first quarter of 2019 which was capitalized and is being amortized over the remaining term of the Senior Notes.
 
Income Tax Provision
 
In the three months ended March 31, 2019, we recorded an expense from income taxes of approximately $0.2 million, that represents an effective tax rate of 1.5%. The difference for the three months ended March 31, 2019 between the income tax benefit of $0.2 million, and the tax at the statutory rate of 21.0% on current year operations is principally due to the change in valuation allowance. In the three months ended March 31, 2018, we recorded a benefit from income taxes of approximately $0.3 million, that represents an effective tax rate of (1.0 %). For the three months ended March 31, 2018, the difference between the recorded provision for income taxes and the tax benefit based on the federal statutory rate of 21%, was primarily attributable to the impact of the valuation allowance. 
 
LIQUIDITY AND CAPITAL RESOURCES
 
 
March 31,
 
December 31,
(in thousands)
 
2019
 
2018
Cash, cash equivalents and short-term investments
 
$
109,691

 
$
110,949

 
The decrease in cash, cash equivalents and short-term investments during the three months ended March 31, 2019 is primarily attributable to the payment of $25.0 million of principal on our Senior Notes in January 2019, an increase in receivables of approximately $9.0 million due to a change in wholesaler customer payment terms, interest payments of approximately $13.2 million, partially offset by $32.0 million received related to the Purdue settlement and operating cash flows.
 
We were in compliance with our covenants, including the Senior Secured Debt Leverage Ratio and Net Sales covenants, with respect to the Senior Notes as of March 31, 2019. While we are currently in compliance with each of the financial and other covenants contained in the Note Purchase Agreement, and anticipate continued compliance with such covenants, we may seek to refinance or restructure our debt, sell assets or obtain additional capital, each of which may be on terms that may be onerous, dilutive or disruptive to our business. Any prepayment of the Senior Notes would be subject to a prepayment fee of up to 3% of the principal amount of the Senior Notes prepaid. In addition, in connection with any refinancing of our debt, we would also accelerate the recognition of the balance of the unamortized debt discount and the debt issuance costs as of the date of any refinancing.

We may incur operating losses in future years. We believe that our existing cash and investment balances and cash we expect to generate from operations will be sufficient to fund our operations, and to meet our existing obligations for the foreseeable future, including our obligations under the Senior Notes and the Convertible Notes. We base this expectation on our

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current operating plan and the anticipated impact of the cash expected to be received from Collegium pursuant to the Commercialization Agreement, which may change as a result of many factors.
 
The following table summarizes our cash flow activities (in thousands):
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Cash (used in) provided by operating activities
 
$
27,195

 
$
(26,975
)
Cash (used in) provided by investing activities
 
(13
)
 
1,424

Cash (used in) provided by financing activities
 
(28,440
)
 
360

Net (decrease) increase in cash and cash equivalents
 
$
(1,258
)
 
$
(25,191
)

Cash Flows from Operating Activities
 
Cash provided by operating activities increased during the three months ended March 31, 2019 as compared to the same period in 2018 primarily due to the receipt of $32.0 million from the Purdue settlement.
 
Cash Flows from Investing Activities
 
The reduction in cash provided by investing activities during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily relates to cash received from the settlement of investment activities. Cash used in investing activities in the three months ended March 31, 2019 includes primarily relates to cash paid for fixed asset additions made in 2018
 
Cash Flows from Financing Activities
 
The increase in cash used in financing activities during the three months ended March 31, 2019 as compared to the same period in 2018 primarily relates to principal payments on our Senior Notes as we made a payment of $25.0 million in January 2019 and a $3.2 million modification fee payment, while there were no payments due or made in the prior year period.

We made principal payments in January and April 2019 of $25.0 million and $55.0 million, respectively, in accordance with the Note Purchase Agreement.
 
Off-Balance Sheet Arrangements
 
There were no off-balance sheet arrangements during the quarter ended March 31, 2019.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in the sources and effects of our market risk compared to the disclosures in Item 7A of our Annual Report on the 2018 Form 10-K.
 
Interest Rate Risk. We are subject to interest rate fluctuation exposure through our borrowings under the Senior Secured Credit Facility and our investment in money market accounts which bear a variable interest rate. Borrowings under the Senior Secured Credit Facility bear interest at a rate equal to the three month LIBOR plus 9.75% per annum, subject to a 1.0% LIBOR floor and certain thresholds. Current LIBOR rates are above the