DEBT

12 Months Ended

Dec. 31, 2022

The following table reflects the Company’s debt as of December 31, 2022 and 2021 (in thousands):


	December 31,
	2022		2021
6.5% Senior Convertible Notes due 2027	$	70,000	$	—
13.0% Senior Secured Notes due 2024	—		70,750
Royalty Rights obligation	470		2,743




Total principal amount	70,470		73,493
Plus: derivative liability for embedded conversion feature	252		—
Less: unamortized debt issuance costs	(3,849)		—
Carrying value	66,873		73,493
Less: current portion of long-term debt	(470)		(12,174)
Long-term debt, net	$	66,403	$	61,319

6.5% Convertible Senior Notes due 2027

On August 22, 2022, Assertio entered into a purchase agreement (the “Purchase Agreement”), with U.S. Bank Trust Company as the trustee (the “2027 Convertible Note Trustee”) of the initial purchasers (the “Initial Purchasers”) to issue $60.0 million in aggregate principal amount of 6.5% Convertible Senior Notes due 2027 (the “2027 Convertible Notes”). Under the Purchase Agreement, the Initial Purchasers were also granted an overallotment option to purchase up to an additional $10.0 million aggregate principal amount of the 2027 Convertible Notes solely to cover overallotment (the “Overallotment Option”) within a 13-day period from the date the initial 2027 Convertible Notes were issued. On August 24, 2022, the Initial Purchasers exercised the Overallotment Option in full for the $10.0 million aggregate principal of additional 2027 Convertible Notes. The 2027 Convertible Notes are senior unsecured obligations of the Company.

The terms of the 2027 Convertible Notes are governed by an indenture dated August 25, 2022 (the “2027 Convertible Note Indenture”). The terms of the 2027 Convertible Notes allow for conversion into the Company’s common stock, cash, or a combination of cash and common stock, at the Company’s election only, at an initial conversion rate of 244.2003 shares of the Company’s common stock per $1,000 principal amount (equal to an initial conversion price of approximately $4.09 per share), subject to adjustments specified in the 2027 Convertible Note Indenture (the “Conversion Rate”). The 2027 Convertible Notes will mature on September 1, 2027, unless earlier repurchased or converted.

The 2027 Convertible Notes bear interest from August 25, 2022 at a rate of 6.5% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2023.

Pursuant to the terms of the 2027 Convertible Note Indenture, the Company and its restricted subsidiaries must comply with certain covenants, including mergers, consolidations, and divestitures; guarantees of debt by subsidiaries; issuance of preferred and/or disqualified stock; and liens on the Company’s properties or assets. The Company is in compliance with its covenants with respect to the 2027 Convertible Notes as of December 31, 2022.

The Company incurred approximately $4.0 million in issuance costs including legal fees, accounting service fees, printing fees, and trustee fees associated with the 2027 Convertible Notes. The issuance costs were recognized as a discount to the 2027 Convertible Notes and are amortized as interest expense over the term of the 2027 Convertible Notes using the effective interest method with an effective interest rate determined to be 7.8%.

The following table reflects the carrying balance of the 2027 Convertible Notes as of December 31, 2022 (in thousands):


	December 31,
	2022
Principal balance	$	70,000
Derivative liability for embedded conversion feature	252
Unamortized debt issuance costs	(3,849)
Carrying balance	$	66,403

During the year ended December 31, 2022, the Company amortized $0.2 million of debt issuance costs on the 2027 Convertible Notes.

The Company determined that an embedded conversion feature included in the 2027 Convertible Notes required bifurcation from the host contract and to be recognized as a separate derivative liability carried at fair value. The estimated fair value of the derivative liability, which represents a Level 3 valuation, was $0.3 million as of December 31, 2022 and was determined using a binomial lattice model using certain assumptions and consideration of an increased conversion ratio on the underlying convertible notes that could result from the occurrence of certain events. Accordingly, the Company has recognized a loss on the fair value adjustment of the derivative liability in the amount of $0.3 million in Other (loss) gain in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2022. All of the other embedded features of the 2027 Convertible Notes were clearly and closely related to the debt host and did not require bifurcation as a derivative liability, or the fair value of the bifurcated features was immaterial to the Company’s financial statements.

On February 27, 2023, the Company completed a transaction with a limited number of holders of its outstanding 2027 Convertible Notes (the “Exchanged Notes”) to exchange $30.0 million aggregate principal amount of Exchanged Notes pursuant to separate, privately negotiated exchange agreements for a combination of (a) a cash payment, and (b) an agreed number of shares of the Company’s common stock. The Company paid an aggregate of $10.5 million in cash and issued an aggregate of approximately 7.0 million shares of its common stock in the transactions. The Company did not receive any cash proceeds from the issuance of the shares of its common stock.

13.0% Senior Secured Notes due 2024

In accordance with the Zyla Merger, Assertio assumed $95.0 million aggregate principal amount of 13.0% senior secured notes due 2024 (the “2024 Secured Notes”) issued pursuant to an indenture entered into on January 31, 2019 (the “2024 Secured Notes Indenture”), by and among Zyla Life Sciences, the guarantors party thereto (the “Guarantors”) and Wilmington Savings Fund Society, FSB (as successor to U.S. Bank National Association) as trustee and collateral agent (the “2024 Secured Notes Trustee”). The 2024 Secured Notes were issued in two series: (i) $50.0 million of Series A-1 Notes and (ii) $45.0 million of Series A-2 Notes.

The Company used the net proceeds from the issuance of the 2027 Convertible Notes to repurchase the remaining $59.0 million aggregate principal amount of its outstanding 2024 Secured Notes and $3.0 million in associated interest payment pursuant to privately negotiated exchange agreements entered into concurrently with the pricing of the 2027 Convertible Notes. The 2024 Secured Notes were derecognized upon extinguishment with no gain or loss recognized, as no unamortized cost remained at time of extinguishment. The Company expects to use the remaining net proceeds from the issuance of the 2027 Convertible Notes for general corporate purposes. As of December 31, 2022, there was no outstanding aggregate principal amount of the 2024 Secured Notes.

Royalty Rights Obligation

In accordance with the Zyla Merger, the Company assumed a royalty rights agreement (the “Royalty Rights”) with each of the holders of its 2024 Secured Notes pursuant to which the Company agreed to pay an aggregate 1.5% royalty on net sales (as defined in the 2027 Secured Notes Indenture) through December 31, 2022. The Royalty Rights terminated on December 31, 2022 and the Company has no further Royalty Rights obligations on net sales subsequent to December 31, 2022. The Royalty Rights were determined to be a freestanding element with respect to the 2024 Secured Notes and as such, the Company accounted for the obligation relating to future royalties as a debt instrument at fair value in conjunction with the Zyla Merger.

On December 31, 2022, as the Royalty Rights had terminated, the Company concluded that the conditions had been met to derecognize the remaining debt balance in excess of the final amount payable as of December 31, 2022, and recorded a gain on extinguishment of debt of $1.0 million in Other (loss) gain in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2022.

The Company has Royalty Rights obligations of $0.5 million which are classified as Long-term debt, current portion as of December 31, 2022. As of December 31, 2021, the Company had Royalty Rights obligations of $2.6 million and $0.1 million which are classified as Long-term debt, current portion and Long-term debt, respectively, in the Company’s Consolidated Balance Sheets.

Interest Expense

Royalty Rights and debt issuance costs are amortized as interest expense using the effective interest method. The following table reflects debt related interest included in Interest expense in the Company’s Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2022 and 2021 (in thousands):


	Year ended December 31,
	2022		2021
Interest on 2027 Convertible Notes	$	1,592	$	—
Interest on 2024 Secured Notes	6,065		10,020
Amortization of Royalty Rights (1)	68		185
Amortization of debt issuance costs	236		15
Total interest expense	$	7,961	$	10,220

(1)As a result of the extinguishment of the Royalty Rights obligation, there will be no additional amortization expense recognized in future periods.