The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report. This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with theSEC . See "Cautionary Note Regarding Forward-Looking Statements" below. Overview Strategy Our strategy is evolving with the establishment of our commercial footprint. We seek to continue to build a well-balanced, diversified, high-growth specialty pharmaceutical company focused on delivering innovative therapies for individuals living with serious and debilitating chronic conditions. Through our industry-leading commercialization infrastructure, we are executing the commercialization of our existing products. As part of our corporate growth strategy, we have licensed, and will continue to explore opportunities to acquire or license, additional products that meet the needs of patients living with debilitating chronic conditions. As we gain access to these drugs and technologies, we will employ our commercialization experience to bring them to the marketplace. With a strong commitment to patient access and a focused business-development approach for transformative acquisitions or licensing opportunities, we will leverage our experience and apply it to developing new partnerships that enable us to commercialize novel products that can change the lives of people suffering from debilitating chronic conditions. Our commercial strategy for BELBUCA (buprenorphine buccal film) is to further drive continued adoption in the large long-acting opioid market based on its unique profile coupled with growing physician interest, policy tailwinds, and expanding payor access. We aim to leverage the specialized commercial infrastructure we established for BELBUCA as a vehicle to enable commercial growth in Symproic, a peripherally acting mu-opioid receptor antagonist, which we view as a complementary asset. Recent Developments InSeptember 2021 , we completed our acquisition of theU.S. and Canadian rights to ELYXYB™ (celecoxib oral solution), the only FDA-approved ready-to-use oral solution for the acute treatment of migraine, with or without aura, in adults. We believe the acquisition will allow us to expand into the migraine market and deepen our presence in neurology. We intend to launch ELYXYB in the first quarter of 2022. Appointment of Chief Accounting Officer OnOctober 21, 2021 , our Board of Directors announced that we had appointedJohn Golubieski as our Chief Accounting Officer, effective as ofOctober 25, 2021 .Mr. Golubieski will serve as Chief Accounting Officer untilNovember 4, 2021 , at which time he will resign from the position of Chief Accounting Officer and become Chief Financial Officer.Mr. Golubieski will also serve as the Company's principal financial officer and principal accounting officer, effective as ofNovember 4, 2021 . Results of Operations Comparison of the three months endedSeptember 30, 2021 and 2020 Product Sales. We recognized$41.1 million and$38.8 million in product sales during the three months endedSeptember 30, 2021 and 2020, respectively. The increase in 2021 is principally due to BELBUCA and Symproic product sales which have been driven by increased paid prescriptions across all channels of business. Product Royalty Revenues. During the three months endedSeptember 30, 2021 and 2020, we recognized$0.02 million and$0.7 million in PAINKYL and BREAKYL product royalty revenue under our license agreements with TTY and Mylan, respectively. Cost of Sales. We incurred$6.4 million and$5.4 million in cost of sales during the three months endedSeptember 30, 2021 and 2020, respectively. Cost of sales includes product cost, royalties paid, obsolescence reserves, depreciation, yield adjustments and quarterly minimum royalty payments toCDC IV, LLC ("CDC"). 22 -------------------------------------------------------------------------------- Table of contents Selling, General and Administrative Expenses. During the three months endedSeptember 30, 2021 and 2020, selling, general and administrative expenses totaled$25.5 million and$22.5 million , respectively. Selling, general and administrative costs include all costs not related to the manufacturing of product. The increase in selling, general and administrative expenses during the three months endedSeptember 30, 2021 as compared to the same period in the prior year is primarily due to increased sales and marketing expenses associated with BELBUCA and Symproic. Interest expense, net . During the three months endedSeptember 30, 2021 and 2020, we had net interest expense of$2.0 million , which consisted of$1.9 million of scheduled interest payments, and$0.1 million of amortization of discount and loan costs, respectively. Comparison of the nine months endedSeptember 30, 2021 and 2020 Product Sales. We recognized$122.4 million and$112.9 million in product sales during the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in 2021 is principally due to increased BELBUCA and Symproic product sales from higher patient utilization and the impact of price increases. Product Royalty Revenues. During the nine months endedSeptember 30, 2021 and 2020, we recognized$1.2 million and$1.4 million in PAINKYL and BREAKYL product royalty revenue under our license agreements with TTY and Mylan, respectively. Product royalty revenue related to PAINKYL and BREAKYL is primarily via government demand in the Ex-U.S. countries where the products are sold by TTY and Mylan, respectively. Cost of Sales. We incurred$16.5 million and$16.4 million in cost of sales during the nine months endedSeptember 30, 2021 and 2020, respectively. Cost of sales includes product cost, royalties paid, obsolescence reserves, depreciation, yield adjustments and quarterly minimum royalty payments to CDC. Cost of sales for the nine months endedSeptember 30, 2021 includes$1.4 million for the recovery of certain costs associated with previously reserved inventory, which was offset by$0.7 million of obsolescence reserves. Cost of sales for the nine months endedSeptember 30, 2020 includes a$0.3 million one-time depreciation charge due to BUNAVAIL equipment write-off. Selling, General and Administrative Expenses. During the nine months endedSeptember 30, 2021 and 2020, selling, general and administrative expenses totaled$79.0 million and$77.4 million , respectively. Selling, general and administrative costs include commercialization costs for BELBUCA and Symproic, legal, accounting, salaries and wages, consulting and professional fees, travel costs, stock based compensation and amortization. The increase in selling, general and administrative expenses during the nine months endedSeptember 30, 2021 as compared to the same period in the prior year is primarily due to an increase in legal spend and sales and marketing expenses in 2021, partially offset by the accelerated stock compensation and severance expense related to the departure of the Company's Chief Executive Officer in 2020. Interest expense, net. During the nine months endedSeptember 30, 2021 , we had net interest expense of$6.0 million , which includes interest expense of$5.7 million and$0.3 million of amortization of discount and loan costs. During the nine months endedSeptember 30, 2020 , we had net interest expense of$5.0 million , which includes interest expense of$5.0 million and$0.2 million of amortization of discount and loan costs. During the nine months endedSeptember 30, 2020 , we also had interest income of$0.2 million . Non-GAAP Financial Information: We report our condensed consolidated financial results in accordance with GAAP; however, we believe that earnings before interest, taxes, depreciation and amortization ("EBITDA") and other non-GAAP results should not be considered in isolation of or as an alternative for, earnings measures prepared in accordance with GAAP. Management uses these non-GAAP measures internally to measure the ongoing operating performance of our Company along with other metrics, and for planning and forecasting purposes. In addition, when evaluating non-GAAP results, we exclude certain items that are considered to be non-cash and if applicable, non-recurring, in nature. EBITDA and Non-GAAP Income: We have presented EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe this financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. Accordingly, we believe that EBITDA provides 23 -------------------------------------------------------------------------------- Table of contents useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making. EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of EBITDA rather than net income, which is the nearest GAAP equivalent. Some of these limitations are: •EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in EBITDA; •EBITDA does not reflect provision for income taxes or the cash requirements to pay taxes; and •EBITDA excludes the impact of currency translation and net interest, including both interest expense and interest income. Non-GAAP net income is an alternative view of our performance that we are providing because management believes this information enhances investors' understanding of our results as it permits investors to better understand the ongoing operations of the business, the impact of any non-recurring one-time events, the cash results of the organization and is an additional measure used by management to assess performance. Non-GAAP net income is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of non-GAAP net income rather than net income, which is the nearest GAAP equivalent. Some of these limitations are: •The expenses and other items that we exclude in our calculation of non-GAAP net income may differ from the expenses and other items, if any, that other companies may exclude from non-GAAP net income when they report their operating results since non-GAAP income is not a measure determined in accordance with GAAP, and it has no standardized meaning prescribed by GAAP; •We exclude stock-based compensation expense from non-GAAP net income although (a) it has been, and will likely continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would likely be higher, which would affect our cash position; and •We exclude amortization of intangible assets from non-GAAP net income due to the non-cash nature of this expense and although it has been and will continue to be for the foreseeable future a recurring expense for our business, these expenses do not affect our cash position. 24
-------------------------------------------------------------------------------- Table of contents Reconciliations of non-GAAP metrics to most directly comparableU.S. GAAP financial measures: The following tables reconcile net income earnings and computations (in thousands) under GAAP to a Non-GAAP basis. Three Months Ended Nine Months Ended September 30, September 30, Reconciliation of GAAP net income to EBITDA (non-GAAP) 2021 2020 2021 2020 GAAP net income$ 6,669 $ 9,383 $ 20,970 $ 15,515 Add back/(subtract): Income tax provision 606 211 1,139 19 Net interest expense 1,984 2,012 5,962 4,991 Depreciation and amortization 1,837 1,754 5,359 5,715 EBITDA$ 11,096 $ 13,360 $ 33,430 $ 26,240 Reconciliation of GAAP net income to Non-GAAP net income GAAP net income$ 6,669 $ 9,383 $ 20,970 $ 15,515 Non-GAAP adjustments: Stock-based compensation expense 1,837 1,473 5,024 4,424 Amortization of intangible assets 1,795 1,734 5,262 5,248 Non-recurring financial impact of CEO transition - 67 - 5,078 Non-recurring financial impact of BUNAVAIL discontinuation - - - 295 Non-GAAP net income$ 10,301 $ 12,657 $ 31,256 $ 30,560
Liquidity and Capital Resources
Since inception, we have financed our operations principally from the sale of equity securities, proceeds from borrowings, convertible notes, and notes payable, funded research arrangements, revenue generated as a result of our worldwide license and development agreements and the commercialization of our BELBUCA, Symproic and BUNAVAIL products. We intend to finance our commercialization and working capital needs from existing cash, earnings from the commercialization of BELBUCA and Symproic, royalty revenue, existing and new licensing and commercial partnership agreements and, potentially, through the exercise of outstanding common stock options and warrants to purchase common stock. We expect to incur additional costs in preparation for the expected commercialization of ELYXYB projected for Q1 2022. As ofSeptember 30, 2021 , we had cash and cash equivalents of approximately$100.7 million . We generated$27.3 million of cash in operations during the nine months endedSeptember 30, 2021 . We believe that we have sufficient cash, along with expected proceeds from sales of BELBUCA and Symproic, to manage the business as currently planned. Additional capital may be required to support the continued commercialization of our BELBUCA and Symproic products, our commercial launch of ELYXYB, or other products which may be acquired or licensed by us, and for general working capital requirements. Based on agreements with our partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding. Accordingly, it is possible that we may be required to raise additional capital, which may be available to us through a variety of sources, including: •public equity markets; •private equity financings; •commercialization agreements and collaborative arrangements; •grants and new license revenues; •bank loans; 25 -------------------------------------------------------------------------------- Table of contents •equipment financing; •public or private debt; and •exercise of existing warrants and options. Readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of operations in 2021 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders. Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we had no off-balance sheet arrangements. Effects of Inflation We do not believe that inflation has had a material effect on our financial position or results of operations. However, there can be no assurance that our business will not be affected by inflation in the future. Critical Accounting Policies For information regarding our critical accounting policies and estimates, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" contained in our annual report on Form 10-K for the year endedDecember 31, 2020 . Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk Our cash includes all fully liquid investments with an original maturity of three months or less. Because of the short-term maturities of our cash, we do not believe that an increase in market rates would have a significant impact on the realized value of our investments. We place our cash on deposit with financial institutions in theU.S. TheFederal Deposit Insurance Corporation covers$0.25 million for substantially all depository accounts. Foreign currency exchange risk We currently have, and may in the future have increased, commercial, manufacturing and clinical agreements which are denominated in Euros or other foreign currencies. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between theU.S. dollar or Euro or other applicable currencies, or by weak economic conditions inEurope or elsewhere in the world. Such amounts are currently immaterial to our financial position or results of operations. We are not currently engaged in any foreign currency hedging activities. Market Risk We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalization of our business, we have entered into a secured credit facility consisting of a term loan. Our term loan note bears interest which includes fluctuating interest rates based on LIBOR. Additionally, LIBOR is to be phased out byJune 23, 2023 and replaced. However, we will not be required to renegotiate our loan documents with our current lender. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Quarterly Report, our management, with the participation of our Chief Executive Officer (our principal executive officer) and Executive Vice President, Treasurer and Chief Financial Officer (our principal financial officer) (the "Certifying Officers"), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that 26
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Table of contents information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of theSEC . Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosures. Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective as ofSeptember 30, 2021 . Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during our third quarter of 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (and the "Liquidity and Capital Resources" section thereof) and elsewhere may address or relate to future events and expectations and as such constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to our plans, objectives, projections, expectations and intentions and other statements identified by words such as "projects," "may," "could," "would," "should," "believes," "expects," "anticipates," "estimates," "will," "potential," "intends," "plans" or similar expressions. These statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties, including those detailed in our filings with theU.S. Securities and Exchange Commission . Actual results, including, without limitation: (i) actual sales results (including the results of our continuing commercial efforts with BELBUCA and Symproic), (ii) the success of our planned launch of ELYXYB in the first quarter or 2022, (iii) the application and availability of corporate funds and our need for future funds, (iv) theFDA's review of our products and any regulatory filings related thereto, or (v) the results of our ongoing intellectual property litigations and patent office proceedings, may differ materially from those set forth or implied in the forward-looking statements. Such forward-looking statements also involve other factors which may cause our actual results, performance or achievements to materially differ from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary significantly from reporting period to reporting period. Such factors include, among others, the impact of the COVID-19 pandemic on our business and results of operations, those listed under Item 1A of our most recent Annual Report on Form 10-K filed with theSEC onMarch 11, 2021 and under Item 1A of this Quarterly Report on Form 10-Q and other factors detailed from time to time in our other filings with theU.S. Securities and Exchange Commission . Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
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