Intangible Assets

9 Months Ended

Sep. 30, 2019

Intangible Assets

Intangible Assets

8. Intangible Assets

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

Nucynta Intangible Asset  

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

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

Acquisition consideration:
Upfront cash paid	$	18,877
Minimum royalty payment obligation (1)		112,719
Rebates, incentives, trade allowances and chargebacks assumed		22,660
Warrant issued		8,043
Total acquisition consideration:	$	162,299

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

The Company then allocated the consideration transferred to the individual assets acquired on a relative fair value basis as summarized in the table below:

Assets acquired:
Nucynta Intangible Asset	$	154,089
Inventory		6,223
Prepaid expenses		1,987
Total consideration allocated to assets acquired:	$	162,299

Under the original terms of the Nucynta Commercialization Agreement, the Company was obligated to make guaranteed annual minimum royalty payments of $537,000 to Assertio, which consisted of scheduled payments of $132,000 in 2018, $135,000 in 2019, $135,000 in 2020, and $135,000 in 2021. Due to the nature of the guaranteed minimum royalty payment obligation and the fact that it was required to be settled in cash, the Company determined that the future minimum royalty payments represented a liability that should be recorded at its fair value as of the Nucynta Commercialization Closing Date. The Company calculated the fair value of the future minimum royalty payments to be

$482,300 using a discount rate of 5.7%. The discount rate was determined based on a review of observable market data relating to similar liabilities. The fair value of the future minimum royalty payments was recorded as a component of the intangible asset. The Company determined the $54,700 discount should be recognized as interest expense in the Statement of Operations using the effective interest method and over the repayment period from January 9, 2018 through December 2021. Prior to the Third Amendment to the Nucynta Commercialization Agreement in November 2018, the Company recognized interest expense of $19,281 relating to the minimum royalty payments and amortization expense of $107,662 related to the intangible asset.

Effective November 8, 2018 (the “Third Amendment Date”), the Company entered into the Third Amendment to the Nucynta Commercialization Agreement, which eliminated the guaranteed minimum royalty payment obligations for years 2019, 2020 and 2021. As a result, the Company remeasured the remaining contractual obligation as of the Third Amendment Date and recorded a reduction of the acquired intangible asset and obligation.

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

	As of September 30,		As of December 31,
	2019		2018
Gross carrying amount	$	154,089	$	154,089
Accumulated amortization		(120,898)		(109,834)
Intangible assets, net	$	33,191	$	44,255

Warrant

In November 2018, in connection with the Third Amendment to the Nucynta Commercialization Agreement, the Company issued a warrant to Assertio to purchase 1,041,667 shares of common stock of the Company at an exercise price of $19.20 per share. The terms of the warrant are fixed, with the exception of customary adjustments for changes in the Company’s capitalization. The warrant may only be settled with the issuance of shares of common stock upon exercise and will expire in November 2022. The Company has recorded the relative fair value of the warrant as a component of equity interest issued by the Company as consideration transferred in the cost accumulation model for the asset acquisition. The Company estimated the fair value of the warrant on the date of issuance to be approximately $8,043 using the Black-Scholes option-pricing model. The Company concluded that the warrant met the definition of an equity instrument and was recorded as a component of additional paid-in capital in the Company’s Condensed Consolidated Balance Sheet as of the issuance date.

Amortization

The Company has been amortizing the Nucynta Intangible Asset over its useful life, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company determined that the useful life for the intangible asset was approximately 4.0 years from the Nucynta Commercialization Closing Date. The Company recognizes amortization expense as a component of cost of product revenues in the Statement of Operations on a straight-line basis over its useful life as it approximates the period of economic benefits expected to be realized from future cash inflows from sales of the Nucynta Products. Prior to the Third Amendment to the Nucynta Commercialization Agreement, the Company had recognized $107,662 of amortization expense. As the accumulated cost basis of the intangible asset was reduced with the Third Amendment to the Nucynta Commercialization Agreement, the Company will continue to prospectively amortize the residual net intangible asset on a straight-line basis over the remaining useful life.

For the three months ended September 30, 2019 and 2018, the Company recognized amortization expenses of $3,688 and $32,407 respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized amortization expenses of $11,064 and $94,340 respectively. As of September 30, 2019, the remaining amortization period is approximately 2.3 years and the remaining estimated amortization for 2019, 2020 and 2021 is expected to be $3,688, $14,752, and $14,751, respectively.