10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

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 001-36295

Egalet Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	46-3575334 (I.R.S. Employer Identification No.)
600 Lee Road Suite 100 Wayne, PA (Address of Principal Executive Offices)	19087 (Zip Code)

Registrant’s telephone number, including area code: (610) 833-4200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)

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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒  No ☐

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 ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
Emerging growth company ☒

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. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $0.001 par value                                 Shares outstanding as of August 9, 2018: 56,772,101

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of December 31, 2017 and June 30, 2018 (unaudited)	1
	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2017 and 2018	2
	Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2017 and 2018	3
	Consolidated Statements of Cash Flows (unaudited) for the three and six months ended June 30, 2017 and 2018	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
SIGNATURES		51

Unless otherwise indicated or the context otherwise requires, references to the “Company”, “we”, “us” and “our” refer to Egalet Corporation and its subsidiaries. The Egalet logo is our trademark and Egalet is our registered trademark. All other trade names, trademarks and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We have assumed that the reader understands that all such terms are source-indicating. Accordingly, such terms, when first mentioned in this Quarterly Report on Form 10-Q, appear with the trade name, trademark or service mark notice and then throughout the remainder of this Quarterly Report on Form 10-Q without the trade name, trademark or service mark notices for convenience only and should not be construed as being used in a descriptive or generic sense. Unless otherwise indicated, all statistical information provided about our business in this report is as of June 30, 2018.

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PART I

ITEM 1.  FINANCIAL STATEMENTS

Egalet Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

	December 31, 2017		June 30, 2018
			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	31,090	$	37,829
Marketable securities, available for sale		59,953		32,178
Accounts receivable		4,120		9,083
Inventory		3,225		3,183
Prepaid expenses and other current assets		2,672		1,539
Other receivables		893		889
Total current assets		101,953		84,701
Intangible assets, net		6,583		5,466
Restricted cash		400		400
Property and equipment, net		9,911		8,565
Deposits and other assets		1,011		848
Total assets	$	119,858	$	99,980
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	10,160	$	8,758
Accrued expenses		16,104		27,949
Deferred revenue		7,456		—
Debt - current, net		1,081		22,386
Warrant liability		8,166		2,833
Total current liabilities		42,967		61,926
Debt - non-current portion, net		98,890		78,620
Deferred income tax liability		26		1,005
Derivative liability		16,623		1,153
Other liabilities		727		634
Total liabilities		159,233		143,338
Commitments and contingencies (Note 12)
Stockholders’ deficit:
Common stock--$0.001 par value; 75,000,000 and 275,000,000 shares authorized at December 31, 2017 and June 30, 2018, respectively; 45,939,663 and 56,298,373 shares issued and outstanding at December 31, 2017 and June 30, 2018, respectively		46		52
Additional paid-in capital		254,871		273,379
Accumulated other comprehensive income		1,008		926
Accumulated deficit		(295,300)		(317,715)
Total stockholders' deficit		(39,375)		(43,358)
Total liabilities and stockholders’ deficit	$	119,858	$	99,980

See accompanying notes to unaudited consolidated financial statements.

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 Egalet Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2018		2017		2018
Revenue
Net product sales	$	6,255	$	7,443	$	11,682	$	13,704
Total revenue		6,255		7,443		11,682		13,704
Costs and Expenses
Cost of sales (excluding amortization of product rights)		1,072		1,565		2,397		3,780
Amortization of product rights		522		531		1,025		1,068
General and administrative		12,471		6,694		20,962		13,767
Sales and marketing		9,340		9,019		18,598		18,074
Research and development		4,594		999		11,114		2,302
Total costs and expenses		27,999		18,808		54,096		38,991
Loss from operations		(21,744)		(11,365)		(42,414)		(25,287)
Other (income) expense:
Change in fair value of warrant and derivative liability		—		(3,181)		(12)		(8,306)
Interest expense, net		4,749		3,804		9,283		7,360
Other (gain) loss		(14)		(25)		167		(25)
		4,735		598		9,438		(971)
Loss before provision (benefit) for income taxes		(26,479)		(11,963)		(51,852)		(24,316)
Provision (benefit) for income taxes		—		—		—		—
Net loss	$	(26,479)	$	(11,963)	$	(51,852)	$	(24,316)
Per share information:
Net loss per share of common stock, basic and diluted	$	(1.04)	$	(0.22)	$	(2.06)	$	(0.48)
Weighted-average shares outstanding, basic and diluted		25,542,733		53,302,399		25,145,440		50,302,419

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2018		2017		2018
Net loss	$	(26,479)	$	(11,963)	$	(51,852)	$	(24,316)
Other comprehensive income (loss):
Unrealized loss on available for sale securities		(2)		59		(37)		29
Foreign currency translation adjustments		491		(235)		620		(111)
Comprehensive loss	$	(25,990)	$	(12,139)	$	(51,269)	$	(24,398)

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2017		2018
Operating activities:
Net loss	$	(51,852)	$	(24,316)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,568		2,407
Change in fair value of warrant and derivative liability		(12)		(8,306)
Stock-based compensation expense		3,362		1,954
Non-cash interest and amortization of debt discount		3,055		1,242
Amortization of premium (discount) on marketable securities		56		(144)
Changes in assets and liabilities:
Accounts receivable		(3,999)		(5,334)
Inventory		(249)		(115)
Prepaid expenses and other current assets		1,171		1,133
Other receivables		(121)		(23)
Deposits and other assets		(1,044)		164
Accounts payable		790		(1,403)
Accrued expenses		3,084		6,825
Deferred revenue		2,209		—
Other current liabilities		3		(1)
Other liabilities		(90)		(91)
Net cash used in operating activities		(41,069)		(26,008)
Investing activities:
Payments for purchase of property and equipment		(117)		(9)
Purchases of investments		(55,945)		(23,451)
Sales of investments		3,400		—
Maturity of investments		37,297		51,400
Net cash (used in) provided by investing activities		(15,365)		27,940
Financing activities:
Net proceeds from issuance of common stock		3,809		5,048
Net proceeds from debt and royalty rights		38,304		—
Royalty payments in connection with the 13% Notes		(146)		(201)
Net cash provided by financing activities		41,967		4,847
Effect of foreign currency translation on cash and cash equivalents		380		(40)
Net (decrease) increase in cash and restricted cash		(14,087)		6,739
Cash and restricted cash at beginning of period		44,355		31,490
Cash and restricted cash at end of period	$	30,268	$	38,229
Supplemental disclosures of cash flow information:
Cash interest payments	$	5,462	$	5,878
Non-cash financing activities:
Reclassification to additional paid-in capital of derivative liability	$	—	$	12,497

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Organization and Description of the Business

Organization and Business Overview

Egalet Corporation (the “Company”) is a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain and other conditions. Given the need for acute and chronic pain products and the issue of prescription abuse, the Company is focused on bringing non-narcotic and abuse-deterrent (“AD”) formulations of opioids to patients and healthcare providers. The Company is currently marketing SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”), OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”) and ARYMO® ER (morphine sulfate) extended-release (“ER”) tablets, for oral use CII (“ARYMO ER”).

SPRIX Nasal Spray is a nonsteroidal anti-inflammatory drug indicated in adult patients for the short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level.  OXAYDO is an immediate release (“IR”) oxycodone product designed to discourage abuse via snorting, indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. ARYMO ER is an ER morphine product formulated with AD properties and approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. ARYMO ER is the Company’s first product developed using its proprietary Guardian™ Technology.

The Company also has a pipeline of products developed using Guardian Technology which it may look to partner. The Company plans to continue to grow revenues of its three commercial products, explore business development opportunities and leverage its proprietary Guardian Technology.

Liquidity and Substantial Doubt in Going Concern

As of June 30, 2018, the Company was not in compliance with certain Nasdaq Global Market listing requirements. The Company’s outstanding 5.50% convertible notes (the “5.50% Notes”) in the principal amount of $24.7 million contain redemption features in the event the Company was not able to maintain its Nasdaq Global Market listing. On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the transfer of the listing of the Company’s Common Stock from the Nasdaq Global Market to the Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Transfer”).  The Transfer represents a fundamental change under the 5.50% Notes, whereby the 5.50% Note holders are entitled to require the Company to repurchase for cash all or any portion of the 5.50% Notes at a repurchase price equal to 100% of the principal amount thereof. The continued listing on the Nasdaq Capital Market is subject to (i) the fulfillment of certain conditions and milestones and (ii) the Company’s evidencing a market value of the Company’s common stock of over $35 million for at least 10 consecutive trading days not later than November 20, 2018.  Due to this short-term redemption feature of the 5.50% Notes, the Company reclassified the principal amount of the 5.50% Notes and the related debt discount from non-current liabilities to current liabilities in the Company’s consolidated balance sheet at June 30, 2018. Refer to Note 15 – Subsequent Events for further information.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. As of June 30, 2018, the Company had an accumulated deficit of $317.7 million and will need to improve cash generated from product sales and may require additional capital to fund its commercialization strategies for SPRIX Nasal Spray, OXAYDO and ARYMO ER.  The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to its commercial infrastructure.  

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The Company’s outstanding 6.50% Notes (as defined below) in the principal amount of $23.9 million contain redemption features in the event the Company is not able to maintain any Nasdaq listing. Refer to Note 7 – Long Term Debt for further information. These factors, in combination with others described above, raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date that these financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company continues to seek other sources of capital and alternatives, such as contemplating a reverse stock split, to maintain its listing on the Nasdaq. However, if the Company is unable to raise sufficient capital or maintain its Nasdaq listing to prevent the redemption of its convertible notes, both the 6.50% Notes referred to herein and the 5.50% Notes described above, the Company will not have sufficient liquidity to fund its business operations for at least the next year following the date that the financial statements are issued.  Accordingly, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

2. Summary of Significant Accounting Policies and Basis of Accounting

Basis of Presentation

The unaudited consolidated financial statements are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial information at June 30, 2018 and the three and six months ended June 30, 2017 and 2018 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of June 30, 2018, the consolidated results of its operations and comprehensive loss for the three and six months ended June 30, 2017 and 2018, and consolidated cash flows for the six months ended June 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2017 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018 with the SEC.

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies, except as described in Note 3 – Revenue from contracts with customers.

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line on the Company’s consolidated balance sheets, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the Company’s consolidated balance sheet. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU increased the beginning and ending cash balances in the Company’s statement

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of cash flows. . The Company has adopted the standard in the first quarter of 2018. The adoption had no material impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated balances sheet or statement of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has defined a process to meet the accounting and reporting requirements of the guidance and is assessing lease arrangements in order to determine the impact ASU 842 adoption will have on the financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company has adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the three and six months ended June 30, 2018.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance became effective in calendar year 2018. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.

In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers:  Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers:  Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition (collectively “ASC 606”). These standards are effective for the Company beginning in the first quarter of 2018.

The Company formed a task force that analyzed the Company’s customer contracts and the impacts the standard had on previously reported revenues and future revenues. Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the Company now recognizes net product sales under such contracts earlier under ASC 606 than it would have recognized under the historic guidance.

The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. Refer to Note 3 — Revenue From Contracts with Customers for further details.

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3. Revenue From Contracts with Customers

Adoption of ASC Topic 606, Revenue from Contracts with Customers

The Company adopted ASC 606 on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption, referred to herein as the “new guidance”. The reported results as of, and for the three and six months ended June 30, 2018 reflect the application of ASC 606 guidance while the reported results as of, and for the three and six months ended June 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 had a material impact on the Company’s consolidated financial position, results of operations and stockholders’ deficit as of the adoption date and for the three and six months ended June 30, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's products to its customers and will provide financial statement readers with enhanced disclosures.

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers for which all performance obligations were satisfied as of January 1, 2018, was recorded as an adjustment to accumulated deficit as of the adoption date. For contracts which were modified before the adoption date, the Company has not restated the contract for those modifications. Rather, the Company has reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price, if necessary. As a result of applying the modified retrospective method in adopting the new revenue guidance, the following adjustments were made to accounts on the Company’s consolidated balance sheets as of January 1, 2018:

	December 31, 2017		Adjustments due to ASU 2014-09		January 1, 2018
Accounts receivable		4,120		(371)		3,749
Inventory		3,225		(157)		3,068
Accrued expenses		16,104		5,028		21,132
Deferred revenue		7,456		(7,456)		-
Accumulated deficit		(295,300)		1,900		(293,400)

Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the adjustments reflect the recognition of all deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related decrease in inventory.  In addition, the Company recorded accrued expenses for patient discount programs, commercial and government rebates and a reduction in accounts receivable for estimated returns.  An adjustment to accumulated deficit was recorded for the net impact of the preceding adjustments as of January 1, 2018.

Revenue Recognition

Under ASC 606, revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers.  To recognize revenue pursuant to the provisions 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 the Company will collect substantially all 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 whether the goods or services promised within each contract are distinct to determine those that are performance obligations.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The Company then recognizes as revenue the amount of the

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transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price to which the Company expects to be entitled after giving effect to returns, rebates, sales allowances and other variable elements with contracts between the Company and its customers.  Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.  Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance under the contract and all information (historical, current and forecasted) that is reasonably available.  Sales taxes and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component.  Applying the significant financing practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less.  None of the Company’s contracts contained a significant financing component as of June 30, 2018.

The Company’s existing contracts with customers contain only a single performance obligation and, as such, the entire transaction price is allocated to the single performance obligation.  Should future contracts contain multiple performance obligations, those would require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation.  The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available.

The Company’s performance obligations are to provide pharmaceutical products to several wholesalers or a single specialty pharmaceutical distributor.  All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good to a customer, which is typically upon delivery.  Payments for invoices are generally due within 30 days of invoice date.

Disaggregation of Revenue

The following table summarizes revenue by revenue source for the three and six months ended June 30, 2018:

(in thousands)	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Product lines
SPRIX Nasal Spray	$	5,404	$	10,218
OXAYDO		1,688		2,948
ARYMO ER		351		538
Total	$	7,443	$	13,704

Reserves for Variable Consideration

Revenues from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates and sales allowances that are offered within or impacted by contracts between the Company and its customers. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract as of the date of determination.  The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  Actual amounts of consideration ultimately received may differ from the Company’s estimates.  If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

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Consistent with industry practice, the Company generally offers customers a limited right of return for its products. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized.  The Company estimates product return liabilities using the expected value method based on its historical sales information and other factors that it believes could significantly impact its expected returns, including product recalls and expirations, of which it becomes aware. These factors include its estimate of actual and historical return rates for non-conforming product and open return requests.

Specialty Pharmacy Fees 

The Company pays certain specialty pharmaceutical distributor fees based on a contractually determined rate. The Company records the fees on shipment to the distributor and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Wholesaler Fees

The Company pays certain pharmaceutical wholesalers fees based on a contractually determined rate. The Company accrues the fees on shipment to the respective wholesalers and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Prompt Pay Discount

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company estimates for cash discounts using the mostly likely amount method by reducing accounts receivable by the prompt pay discount amount. The discount is recognized as a reduction of revenue in the same period as the related revenue.

Patient Discount Programs

The Company offers co-pay discount programs for SPRIX Nasal Spray, OXAYDO and ARYMO ER to patients, in which patients receive a co-pay discount on their prescriptions. The Company estimates the total amount that will be redeemed using the expected valuemethod based on the quantity of product shipped. The Company recognizes the discount as a reduction of revenue in the same period as the related revenue.

Commercial and Government Rebates

The Company contracts with various private and government payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products.  The Company estimates these rebates using the expected valuemethod and records such estimates in the same period the related revenue is recognized, resulting in a reduction of net product sales and the establishment of an accrued expense.

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The following table summarizes activity in each of the net product sales allowance and reserve categories for the  six months ended June 30, 2018:

(in thousands)	Fees and distribution costs		Co-pay assistance		Rebates		Returns		Total
Balances at December 31, 2017	$	595	$	3,644	$	579	$	—	$	4,818
Adjustment for ASU 2014-09		—		4,221		656		—		4,877
Allowances for current period sales		4,052		36,335		3,908		510		44,805
Adjustment related to prior period sales		—		—		180		—		180
Credits or payments made for prior period sales		(555)		(7,840)		(1,214)		—		(9,609)
Credits or payments made for current period sales		(3,463)		(22,965)		(1,633)		(394)		(28,455)
Balance at June 30, 2018	$	629	$	13,395	$	2,476	$	116	$	16,616
Total gross product sales									$	58,690
Total provision for product sales allowances and accruals as a percentage of total gross sales										76%

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the Company’s reported consolidated balance sheet as of June 30, 2018 to the pro-forma amounts had the previous guidance been in effect:

			Adjustments Due to		Pro Forma if the previous
	As reported		ASU 2014-09		accounting was in effect
Accounts receivable		9,083		371		9,454
Inventory		3,183		423		3,606
Accrued expenses		27,949		(9,850)		18,099
Deferred revenue		-		14,022		14,022
Accumulated deficit		(317,715)		(3,372)		(321,087)

Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the adjustments reflect the accrual of deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related increase in inventory for deferred cost of goods sold.  In addition, the Company would not have accrued expenses for patient discount programs, commercial and government rebates or a reduction in accounts receivable for estimated returns until the product was dispensed to patients.  The adjustment to accumulated deficit represents the net impact of these items.

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The following table compares the Company’s reported consolidated statement of operations for the three and six months ended June 30, 2018 to the pro-forma amounts had the previous guidance been in effect:

			Adjustments Due to		Three Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	7,443	$	(391)	$	7,052
Cost of sales (excluding amortization of product rights)		1,565		(144)		1,421
Net loss	$	(11,963)	$	(247)	$	(12,210)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.22)	$	(0.01)	$	(0.23)
Weighted-average shares outstanding, basic and diluted		53,302,399		53,302,399		53,302,399
			Adjustments Due to		Six Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	13,704	$	(1,867)	$	11,837
Cost of sales (excluding amortization of product rights)		3,780		(395)		3,385
Net loss	$	(24,316)	$	(1,472)	$	(25,788)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.48)	$	(0.03)	$	(0.51)
Weighted-average shares outstanding, basic and diluted		50,302,419		50,302,419		50,302,419

Amounts reported on certain line items within net cash used in operating activities on the consolidated statement of cash flows changed as a result of the adoption of ASU 2014-09, but there was no change in the reported amounts of total operating, investing and financing cash flow.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2018. The guidance provides certain practical expedients that limit this requirement including performance obligations that are part of a contract that has an original expected duration of one year or less. All of the Company’s contracts are eligible for the practical expedient provided by ASC 606, therefore the Company elected not to disclose any remaining performance obligations.

Contract Balances from Contracts with Customers

When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of goods or services to the customer under the terms of a contract, the Company records a contract liability. Contract liabilities are recognized as revenue after control of the products is transferred to the customer and all revenue recognition criteria have been met. The Company classifies contract liabilities as deferred revenue. The Company had no deferred revenue as of January 1, 2018 or June 30, 2018.

Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time.  Contract assets are transferred to accounts receivable when the rights become unconditional.  The Company had no contract assets as of January 1, 2018 or June 30, 2018.

Costs to Obtain and Fulfill a Contract

The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, the Company has elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of finished products to customers are expensed as incurred and are recorded in costs of goods sold in the accompanying consolidated statements of operations. The Company expenses incremental costs of obtaining a contract with a customer (for example, commissions) when incurred as the period of benefit is less than one year.

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4. Investments

Marketable Securities

Marketable securities consisted of the following at December 31, 2017: 

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	60,000	$	—	$	(47)	$	59,953
Total	$	60,000	$	—	$	(47)	$	59,953

Marketable securities consisted of the following as of June 30, 2018:

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	32,195	$	—	$	(17)	$	32,178
Total	$	32,195	$	—	$	(17)	$	32,178

The fair value of marketable securities as of June 30, 2018 with a maturity of less than one year is $32.2 million.  There were no marketable securities with a maturity of greater than one year as of June 30, 2018.

At June 30, 2018, the Company held sixteen marketable securities that were in a continuous loss position for less than one year and one marketable security that was in a continuous loss position for one to two years.  The unrealized losses are immaterial in amount and are the result of current economic and market conditions and the Company has determined that no other than temporary impairment exists at June 30, 2018.

5. Inventory

Inventory is stated at the lower of cost or market using actual cost net of reserve for excess and obsolete inventory. The following represents the components of inventory at December 31, 2017 and June 30, 2018:

	December 31,		June 30,
(in thousands)	2017		2018
Raw materials	$	850	$	841
Work in process		772		863
Finished goods		1,446		1,479
Deferred cost of sales		157		—
Total	$	3,225	$	3,183

6. Intangible Assets

The following represents the balance of the intangible assets at December 31, 2017:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,695	$	(3,273)	$	4,422	4.00
SPRIX Nasal Spray product rights		4,978		(2,964)		2,014	2.00
IP R&D		183		(36)		147	4.00
Total	$	12,856	$	(6,273)	$	6,583

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The following represents the balance of the intangible assets at June 30, 2018:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,653	$	(3,801)	$	3,852	3.60
SPRIX Nasal Spray product rights		4,891		(3,401)		1,490	1.60
IP R&D		177		(53)		124	3.50
Total	$	12,721	$	(7,255)	$	5,466

There was no impairment to intangible assets in the three and six months ended June 30, 2017 or in the three and six months ended June 30, 2018.

Collaboration and License Agreement with Acura Pharmaceuticals, Inc. (“Acura”)

In January 2015, the Company entered into a Collaboration and License Agreement with Acura to commercialize OXAYDO™ (oxycodone hydrochloride) tablets containing Acura’s Aversion® Technology (the “OXAYDO License Agreement”). The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO.  The Company also incurred transaction costs of $172,000 associated with the OXAYDO License Agreement.  Refer to Note 13 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and six months ended June 30, 2017, the Company recognized amortization expense of $270,000 and $539,000, respectively, related to the OXAYDO product rights intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $274,000 and $550,000, respectively, related to the OXAYDO product rights intangible asset.

Purchase Agreement with Luitpold Pharmaceuticals, Inc. (“Luitpold”)

In January 2015, the Company entered into and consummated the transactions contemplated by the Purchase Agreement with Luitpold to purchase SPRIX Nasal Spray (the “SPRIX Purchase Agreement”).  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million. The Company recorded an intangible asset of $4.6 million related to this transaction.  Refer to Note 13 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and six months ended June 30, 2017, the Company recognized amortization expense of $235,000 and $469,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $248,000 and $500,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.

In-Process Research and Development (“IP R&D”)

In connection with the acquisition of Egalet A/S, the Company recognized an IP R&D asset related to the drug delivery platform specifically designed to help deter physical abuse of pain medications, the Guardian Technology. Through December 31, 2017, the IP R&D was considered an indefinite-lived intangible asset and was assessed for impairment annually or more frequently if impairment indicators existed.  Following the approval of ARYMO ER in January 2017, the Company began to amortize the intangible asset over a useful life of five years. 

During the three and six  months ended June 30, 2017, the Company recognized amortization expense of $17,000 related to the IP R&D intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $9,000 and $18,000, respectively, related to the IP R&D intangible assets.

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7. Debt

5.50% Convertible Notes Due 2020 (the “5.50% Notes”)

In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year and commenced on October 1, 2015. As of June 30, 2018, a total of $24.7 million in principal amount of the 5.50% Notes remain outstanding.

The 5.50% Notes are general, unsecured and unsubordinated obligations and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the 5.50% Notes.  The 5.50% Notes rank equal in right of payment to the Company’s existing and future indebtedness and other liabilities that are not so subordinated.  The 5.50% Notes are effectively subordinated to any of the Company’s future secured indebtedness to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries, including trade payables. The 5.50% Notes rank equal in right of the payment to the 13% Notes (as defined below).

The Company may not redeem the 5.50% Notes prior to maturity. The 5.50% Notes are convertible prior to maturity, subject to certain conditions described below, into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at an initial conversion rate of 67.2518 shares per $1,000 principal amount of the 5.50% Notes (equivalent to an initial conversion price of approximately $14.87 per share of Common Stock).  This conversion rate is subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for accrued and unpaid interest.  The Company is obligated to satisfy the conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s Common Stock or a combination thereof, at the Company’s election.

Holders may convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding January 1, 2020 only under the following circumstances:

· on or after the date that is six months after the last date of original issuance of the 5.50% Notes, if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to the conversion price for the 5.50% Notes on each applicable trading day;

· during the five business day period after any five consecutive trading day period, (the “measurement period”), in which the trading price per $1,000 principal amount of 5.50% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Common Stock and the conversion rate on each such trading day; or

· upon the occurrence of specified corporate events, including Fundamental Changes, as defined in the indenture governing the 5.50% Notes (“the 5.50% Notes Indenture”).

On or after January 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date (April 1, 2020), holders may convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

Upon conversion, the Company is obligated to pay or deliver cash, shares of the Company’s Common Stock or a combination of cash and shares of the Company’s Common Stock, at the Company’s election, and an interest make-whole payment in shares of the common stock, if applicable. If the Company satisfies the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s Common Stock, the amount of cash and shares of Common Stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50 trading day observation period.

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In addition, following certain corporate events that occur prior to the maturity date, the Company is obligated to increase the conversion rate for a holder who elects to convert its 5.50% Notes in connection with such a corporate event in certain circumstances.  Holders will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, interest will be deemed to be paid in full, rather than cancelled, extinguished or forfeited from the consideration paid to the holders upon conversion of a 5.50% Note. 

On or after the date that is six months after the last date of original issuance of the 5.50% Notes, if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to the conversion price for the 5.50% Notes on each applicable trading day, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the 5.50% Notes to be converted had such notes remained outstanding from the conversion date through April 1, 2018, computed using a discount rate equal to 2%. The Company is obligated to pay any interest make-whole payment by delivering shares of the Company’s Common Stock valued at 95% of the simple average of the daily volume weighted average price for the 10 trading days ending on and including the trading day immediately preceding the conversion date.  Notwithstanding the foregoing, the number of shares the Company may deliver in connection with a conversion of the 5.50% Notes, including those delivered in connection with an interest make-whole payment, will not exceed 77.3395 shares of Common Stock per $1,000 principal amount of 5.50% Notes, subject to adjustment.  The Company will not be required to make any cash payments in lieu of any fractional shares or have any further obligation to deliver any shares of Common Stock or pay any cash in excess of the threshold described above. In addition, if in connection with any conversion the conversion rate is adjusted, then such holder will not receive the interest make-whole payment with respect to such 5.50% Note.

Certain provisions in the 5.50% Notes could require accelerated payment of principal and interest.  The 5.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq Global Market would constitute a “fundamental change” under the 5.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 5.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. 

On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the Transfer. Under the 5.50% Notes Indenture, the Company’s Common Stock ceasing to be listed on The Nasdaq Global Market as a result of the Transfer constituted a “Fundamental Change.” In accordance with the 5.50% Notes Indenture, on July 31, 2018, the Company delivered to the holders of the 5.50% Notes a Fundamental Change Company Notice, Make-Whole Fundamental Change notice and Offer to Repurchase (the “Fundamental Change Company Notice”) pursuant to which, as a result of the Transfer and pursuant to the terms of the 5.50% Notes Indenture and 5.50% Notes, the Company offered to repurchase, at the option of each holder, all 5.50% Notes that are validly tendered for repurchase, and not properly withdrawn, at any time prior to 5:00 p.m., New York City time, on September 18, 2018 (the “Expiration Time”), which is the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date. Pursuant to Section 15.02(a) of the 5.50% Notes Indenture, the Fundamental Change Repurchase Date must be a date not less than 20 nor more than 35 business days after the date of the Fundamental Change Company Notice. Accordingly, the Fundamental Change Repurchase Date is scheduled for September 19, 2018.

Pursuant to the terms of the 5.50% Notes Indenture and the 5.50% Notes, the Company is obligated, on the Fundamental Change Repurchase Date, to pay the Fundamental Change Repurchase Price, payable in cash, equal to 100% of the principal amount of the Notes being repurchased. As the Fundamental Change Repurchase Date falls after the next Regular Record Date (as defined in the 5.50% Notes Indenture) of September 15, 2018 but prior to the next Interest Payment Date (as defined in the 5.50% Notes Indenture) to which such Regular Record Date relates of October 1, 2018, the Company is obligated to pay the full amount of accrued and unpaid interest to holders of record as of such Regular Record Date on such Interest Payment Date in accordance with the 5.50% Notes Indenture. Refer to Note 1– Organization and Description of the Business and Note 15 – Subsequent Events for further details.

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The Company accounts for convertible debt instruments by recording the liability and equity components of the convertible debt separately. The liability is computed based on the fair value of a similar debt instrument that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the 5.50% Notes.  The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the 5.50% Notes, using the effective interest method.

The liability component of the 5.50% Notes on the date of issuance was computed as $41.6 million, including the value of the embedded interest make-whole derivative of $0.9 million and the carrying value of the 5.50% Notes of $40.6 million. Accordingly, the equity component on the date of issuance was $19.4 million.  The discount on the 5.50% Notes is being amortized to interest expense over the term of the 5.50% Notes, using the effective interest method. 

The conversion criteria for the 5.50% Notes have not been met at June 30, 2018.  As a result of the Transfer and the corresponding Fundamental Change under the 5.50% Notes Indenture, the conversion criteria for the 5.50% Notes was met as of July 11, 2018.

If an event of default (as defined in the 5.50% Indenture) occurs and is continuing (other than specified events of bankruptcy or insolvency with respect to the Company), the trustee or the holders of at least 25% in aggregate principal amount of the outstanding 5.50% Notes may declare all the outstanding 5.50% Notes to be due and payable immediately. If an event of default relating to specified events of bankruptcy or insolvency with respect to the Company occurs, all the outstanding 5.50% Notes will immediately become due and payable without any declaration or other act on the part of the trustee or any holders of the 5.50% Notes.  Notwithstanding the foregoing, the 5.50% Notes Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the 5.50% Notes Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 5.50% Notes.  Events of default under the 5.50% Notes Indenture include, among other things, a default in payment of principal on the 5.50% Notes (including upon any required repurchase), a default in payment of any other indebtedness for money borrowed in excess of $5,000,000 if such default is not cured or waived within 30 days and certain events of bankruptcy or insolvency, both voluntary and involuntary.

Transaction costs of $4.1 million related to the issuance of the 5.50% Notes were allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt discount and equity issuance costs, respectively. Approximately $1.3 million of this amount was allocated to equity and the remaining $2.8 million was recorded as debt discount at issuance.

In September 2016, in connection with the issuance of the 13% Notes (as defined below), the Company and its subsidiaries entered into supplemental indentures with the trustee for the 5.50% Notes pursuant to which the Company’s subsidiaries became guarantors under the 5.50% Notes Indenture.

In December 2017, the Company exchanged, with certain existing 5.50% Noteholders, $36.4 million in principal amount of the 5.50% Notes for (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock and (iii) payments, in cash, of all accrued but unpaid interest as of the closing of the 5.50% Notes exchanged in the transaction.  This exchange was accounted for as a debt extinguishment and the gain on debt extinguishment of $13.2 million, inclusive of the make-whole payments and write-off of deferred financing fees, is reflected in the Company’s consolidated statements of operations during the year ended December 31, 2017. 

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The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	24,650	$	24,650
Unamortized debt discount		(4,222)		(3,404)
Carrying value	$	20,428	$	21,246

The carrying value of the 5.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017. The carrying value of the 5.50% Notes was classified as a current liability on the Company’s consolidated balance sheets at June 30, 2018 due to the fundamental change provisions of the 5.50% Notes Indenture. Refer to Note 1- Organization and Description of the Business for further details.

6.50% Convertible Notes Due 2024 (the “6.50% Notes”)

In December 2017, the Company entered into exchange agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 5.50% Notes pursuant to which the Holders agreed to exchange, in the aggregate, approximately $36.4 million of outstanding principal amount of the 5.50% Notes for, in the aggregate, (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock at an exercise price of $0.01 per share and (iii) payments, in cash, of all accrued but unpaid interest as of the closing on the 5.50% Notes exchanged in the transaction (the “Exchange”).  At the closing of the Exchange, 2.5 million warrants were exercised.  The remaining 1.0 million warrants were exercised in January 2018.

The Company consummated the Exchange in reliance upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”) and pursuant to an indenture (the “Indenture”), dated December 27, 2017, by and among the Company, the subsidiary guarantors party thereto as of the date thereof, and The Bank of New York Mellon, as trustee (the “Trustee”).

The Company is obligated to pay interest on the 6.50% Notes semiannually in arrears on January 1 and July 1 of each year commencing July 1, 2018 at a rate of 6.50% per year, which rate is subject to adjustment in accordance with the terms of the Indenture (the 6.50% Notes Indenture”) and as described below.  The 6.50% Notes are general unsecured obligations of the Company and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The 6.50% Notes will mature on December 31, 2024, unless earlier repurchased, redeemed or converted in accordance with the terms of the 6.50% Notes Indenture prior to such date. Subject to certain conditions, on or after January 1, 2021, the Company may redeem for cash all or a part of the 6.50% Notes.  The 6.50% Notes will be convertible at any time until the close of business on the business day immediately preceding the maturity date.  Upon conversion and subject to certain conditions, holders of the 6.50% Notes are entitled to receive shares of the Company’s Common Stock at an initial conversion rate of 749.6252 shares of Common Stock per $1,000 principal amount of 6.50% Notes, which is equivalent to an initial conversion price of approximately $1.33 per share and is subject to adjustment under the terms of the 6.50% Notes Indenture. Similar to the 5.50% Notes, the 6.50% Notes provide for an interest make-whole payment in connection with conversions that occur prior to January 1, 2021.  For any Conversion Date that occurs prior to the close of business on the business day immediately preceding January 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with any conversion of Notes, make an interest make-whole payment in cash or in shares of Common Stock, at the Company’s election, to such converting Holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the Notes to be converted had such Notes remained outstanding from the Conversion Date through January 1, 2021. The present values will be computed using a discount rate equal to 2% by a U.S. nationally recognized independent investment banking firm.

If an event of default (as defined in the 6.50% Notes Indenture) occurs and is continuing (other than specified events of bankruptcy or insolvency with respect to the Company), the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 6.50% Notes may declare all the outstanding 6.50% Notes to be due and payable immediately. If an event of default relating to specified events of bankruptcy or insolvency with respect to the Company

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occurs, all the outstanding 6.50% Notes will immediately become due and payable without any declaration or other act on the part of the trustee or any holders of the 6.50% Notes.  Notwithstanding the foregoing, the 6.50% Notes Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the 6.50% Notes Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 6.50% Notes. Events of default under the 6.50% Notes Indenture include, among other things, a default in payment of principal on the 6.50% Notes (including upon any required repurchase), a default in payment of any other indebtedness for money borrowed in excess of $5,000,000 if such default is not cured or waived within 30 days and certain events of bankruptcy or insolvency, both voluntary and involuntary.

In addition, the 6.50% Notes Indenture required the Company to use its reasonable best efforts to (i) seek stockholder approval of an amendment to the Company’s Third Amended & Restated Certificate of Incorporation, as amended, to increase the amount of authorized shares available for issuance thereunder, and (ii) upon such approval, to reserve from such amount the number of shares that may be issued in respect of the 6.50% Notes and any other securities issued in connection with the Exchange.  In February 2018, the Company held a special meeting of stockholders (the “Special Meeting”) and received stockholder approval of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to increase authorized shares by 200,000,000 shares. Refer to Footnote 8- Stockholders’ Equity for further details. The Exchange Agreements also provide that, for a period of nine months, the Company will not enter into additional exchange transactions with the other holders of the 5.50% Notes the economic terms of which, taken is a whole, are more favorable to the 5.50% Note holders than the December 2017 Exchange.  

Certain provisions in the 6.50% Notes could require accelerated payment of principal and interest.  The 6.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq exchange would constitute a “fundamental change” under the 6.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 6.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon.  Transfer does not constitute a fundamental change under the 6.50% Notes, but if the Company were to be delisted from the Nasdaq Capital Market, such delisting would constitute such a fundamental change under the 6.50% Notes Indenture.   Refer to Note 1- Organization and Description of the Business and Note 15 – Subsequent Events for further details.

At the date of Exchange, December 27, 2017, the Company did not have sufficient unissued authorized shares to cover the conversion of the outstanding 6.50% Notes and as a result was required to account for the bifurcated conversion feature as a derivative liability which results in a debt discount on the 6.50% Notes.  The fair value of the derivative liability for the conversion feature at the date of Exchange was determined to be approximately $15.0 million and was classified as a liability in the Company’s consolidated balance sheet as of December 31, 2017, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.  

As a result of the Charter Amendment, as of June 30, 2018, the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes and accordingly, the conversion feature is considered indexed to the Company’s Common Stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.

The conversion criteria for the 6.50% Notes have not been met at June 30, 2018.  Should the 6.50% Notes become convertible, management will determine whether the intent is to settle in cash which would result in the liability component of the 6.50% Notes being classified as a current liability and the equity component being presented as redeemable equity if the liability is considered current.

Transaction costs of $1.7 million related to the issuance of the 6.50% Notes were accounted for as debt discount.

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The following table summarizes how the issuance of the 6.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	23,888	$	23,888
Unamortized debt discount		(20,919)		(20,834)
Carrying value	$	2,969	$	3,054

The carrying value of the 6.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018. 

13% Senior Secured Notes (the “13% Notes”)

In August 2016, the Company completed the initial closing (the “Initial Closing”) of its offering (the “Offering”) of up to $80.0 million aggregate principal amount of its 13% Notes and entered into an indenture (the “Indenture”) governing the 13% Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). 

The Company issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing and issued an additional $40.0 million aggregate principal amount upon the FDA’s approval of ARYMO™ ER in January 2017 (the “Second Closing”).  Net proceeds from the Initial Closing and Second Closing were $37.2 million and $38.3 million, respectively, after deducting the estimated Offering expenses payable by the Company in connection with the Initial Closing and Second Closing. The 13% Notes were sold only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.

The Company has used and will use the net proceeds from the 13% Notes and the Royalty Rights (as defined below) to repay all outstanding obligations to Hercules under the Loan Agreement with Hercules, to support the commercialization of ARYMO ER and for general corporate purposes.

Prior to the Second Closing, interest on the 13% Notes accrued at a rate of 13% per annum and was payable semi-annually in arrears on March 20 and September 20 of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, the Company was required to also pay an installment of principal of the 13% Notes pursuant to a straight-line fixed amortization schedule. Following the Second Closing in January 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018, the Company is obligated to pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of SPRIX Nasal Spray, OXAYDO, ARYMO ER and, if approved, Egalet-002 for the two consecutive fiscal quarterly period most recently ended, less the amount of interest payable on the 13% Notes on such Payment Date.

The 13% Notes are senior secured obligations of the Company and equal in right of payment to all existing and future pari passu indebtedness of the Company (including the Company’s outstanding 5.50% Notes due 2020), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, have the benefit of a security interest in the 13% Notes collateral and are junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred, which includes intellectual property (“IP”), from time to time in accordance with the indenture governing the 13% Notes (the “13% Notes Indenture”). Following the Second Closing, the stated maturity date of the 13% Notes became September 30, 2033. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the 13% Notes Indenture), holders of the 13% Notes may require the Company to repurchase for cash all or part of their 13% Notes at a repurchase price equal to 101.00% of the principal amount of the 13% Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.

The Company may redeem the 13% Notes at its option, in whole or in part from time to time, prior to August 31, 2018, at a redemption price equal to 100.00% of the principal amount of the 13% Notes being redeemed, plus accrued and unpaid interest, if any, through the redemption date, plus a make-whole premium computed using a discount

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rate equal to the treasury rate in respect of such redemption date plus 100 basis points. The Company may redeem the 13% Notes at its option, in whole or in part from time to time, on or after August 31, 2018 at a redemption price equal to: (i) from and including August 31, 2018 to and including August 30, 2019, 109.00% of the principal amount of the 13% Notes to be redeemed, (ii) from and including August 31, 2019 to and including August 30, 2020, 104.50% of the principal amount of the 13% Notes to be redeemed, and (iii) from and including August 31, 2020 and thereafter, 100.00% of the principal amount of the 13% Notes to be redeemed, in each case, plus accrued and unpaid interest to the redemption date. In addition, prior to August 31, 2018, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the 13% Notes with the proceeds of one or more public or private equity offerings at a redemption price equal to 113.50% of the aggregate principal amount of the 13% Notes to be redeemed, plus accrued and unpaid interest to the date of redemption in accordance with the 13% Notes Indenture; provided that at least 65% of the aggregate principal amount of 13% Notes issued under the 13% Notes Indenture remains outstanding immediately after each such redemption and provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.  No sinking fund is provided for the 13% Notes, which means that the Company is not required to periodically redeem or retire the 13% Notes.

The obligations of the Company under the 13% Notes Indenture and the 13% Notes are unconditionally guaranteed on a secured basis by the Guarantors. Under the terms of the 13% Notes Indenture, the Company may designate entities within its corporate structure as unrestricted subsidiaries, which entities will therefore not be guarantors provided that certain conditions set forth in the Indenture are met.

Pursuant to the 13% Notes Indenture, the Company and its restricted subsidiaries must also comply with certain affirmative covenants, such as furnishing financial statements to the holders of the 13% Notes, and negative covenants, including limitations on the following: the incurrence of debt; the issuance of preferred and/or disqualified stock; the payment of dividends, the repurchase of shares and under certain conditions making certain other restricted payments; the prepayment, redemption or repurchase of subordinated debt; the merger, amalgamation or consolidation involving the Company; engaging in certain transactions with affiliates; and the making of investments other than those permitted by the 13% Notes Indenture.

The 13% Notes Indenture contains customary events of default with respect to the 13% Notes, and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 13% Notes by notice to the Company and the Trustee, may (subject to the provisions of the 13% Notes Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 13% Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the 13% Notes Indenture, will be due and payable immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the 13% Notes Indenture), the 13% Notes will automatically become due and payable. Events of default under the 13% Notes Indenture include, among other things, a default in payment of principal on the 13% Notes (including upon any required repurchase or redemption), a default in payment of any other indebtedness for money borrowed in excess of $2,000,000 and certain events of bankruptcy or insolvency, both voluntary and involuntary.

In connection with the Initial Offering in August 2016, the Company entered into royalty rights agreements with each of the 13% Notes Purchasers pursuant to which the Company sold to such Purchasers the right to receive, in the aggregate, a payment equal to 1.5% of the aggregate net sales of OXAYDO and SPRIX Nasal Spray from the Initial Closing through December 31, 2019, inclusive (the “Royalty Rights”).  Following the approval of ARYMO ER in January 2017, the Royalty Rights will continue through December 31, 2020 and include royalties of ARYMO ER as described below.

The Company also entered into separate royalty rights agreements with each of the Purchasers pursuant to which the Company sold to such Purchasers the right to receive 1.5% of the aggregate net sales of ARYMO ER payable from the date of first sale of ARYMO ER through December 31, 2020, inclusive.  The royalty rights agreements also include other terms and conditions customary in agreements of this type.

The Royalty Rights were determined to be a freestanding element with respect to the 13% Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument.  The Company

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has Royalty Rights obligations of $4.1 million and $3.7 million as of December 31, 2017 and June 30, 2018, respectively, which are classified within current and non-current debt in the consolidated balance sheets.

The Company incurred fees and legal expenses of $4.5 million in connection with the issuance of the 13% Notes, which have been recorded as a discount on the debt in the Company’s consolidated balance sheets and are amortized using the effective interest method. The Company calculated an effective interest rate of 15.2% as of June 30, 2018 based on its best estimate of future cash outflows.

The accounting for the 13% Notes requires the Company to make certain estimates and assumptions about the future net sales of OXAYDO, SPRIX Nasal Spray and ARYMO ER in the U.S. The estimates of the magnitude and timing of OXAYDO, SPRIX Nasal Spray and ARYMO ER net sales are subject to significant variability due to the recent product launch and the extended time period associated with the financing transaction and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company continues to gain experience marketing OXAYDO, SPRIX Nasal Spray and ARYMO ER, which may result in future adjustments to the portion of the debt that is classified as a current liability, the amortization of debt issuance costs and discount as well as the accretion of the interest expense. Any such adjustments could be material.  The fair value of the Royalty Rights associated with certain net product sales was estimated to be $5.0 million at the issuance of the 13% Notes using a probability-weighted present value analysis.

The following table summarizes how the issuance of the 13% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Gross proceeds	$	80,000	$	80,000
Unamortized debt discount		(7,572)		(6,981)
Carrying value	$	72,428	$	73,019

The carrying value of the 13% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018. The Royalty Rights issued in connection with the 13% Notes at December 31, 2017 and June 30, 2018 were $4.1 million and $3.7 million, respectively. 

8. Stockholders’ Equity

At the Market Offering

In July 2015, the Company entered into a Controlled Equity Offering Sales Agreement (“2015 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), under which the Company could, at its discretion, from time to time, sell shares of its Common Stock, for an aggregate offering price of up to $30.0 million. The Company provided Cantor with customary indemnification rights, and Cantor is entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold.  Sales of the shares of Common Stock under the 2015 Sales Agreement have been and, if there are additional sales under the 2015 Sales Agreement, will be, made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended. 

The Company has initiated sales of shares under the 2015 Sales Agreement at various times beginning in March 2017 and has sold an aggregate of 9,357,669 shares of Common Stock through June 30, 2018, resulting in gross proceeds of $9.4 million before deducting commissions of $281,000. The Company has sold an aggregate of 428,953 shares under the Sales Agreement during the period subsequent to June 30, 2018, resulting in gross proceeds of $171,000 before deducting commissions of $5,000.

July 2017 Equity Offering

On July 6, 2017, the Company entered into an underwriting agreement with Cantor relating to an underwritten public offering (the “July 2017 Equity Offering”) of 16,666,667 shares of the Company’s Common Stock and

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accompanying warrants to purchase 16,666,667 shares of Common Stock, at a combined public offering price of $1.80 per share and accompanying warrant, for gross proceeds of $30.0 million.  The net offering proceeds were $28.6 million after deducting underwriting discounts and commissions and offering-related costs of $1.4 million. Each warrant had an initial exercise price of $2.70, subject to adjustment in certain circumstances.  As of June 30, 2018, the warrants had an exercise price of $1.92. The shares of Common Stock and warrants were issued separately. The warrants may be exercised at any time on or after the date of issuance and will expire five years from the date of issuance.

The Company accounted for the warrants using ASC 480 – Distinguishing Liabilities from Equity and determined that the warrants were a freestanding financial instrument that are subject to liability classification.  Pursuant to the terms of the agreement, the Company could be required to settle the warrants in cash in the event of an acquisition of the Company, and as a result the warrants are required to be measured at fair value and reported as a liability in the Company’s consolidated balance sheet.  The warrant exercise price is subject to adjustment upon the issuance of certain equity securities at a price less than the exercise price of the warrants then in effect. 

The fair value of the warrants to purchase shares of the Company’s Common Stock in connection with the July 2017 Equity Offering was $9.7 million on the date of issuance, which was determined using a lattice model that takes into account various future financing scenarios and the impact of those scenarios on the fair value of the warrants.  The fair value of the warrants of $9.7 million on the date of issuance was recorded as a liability which will be marked to its estimated fair value at each reporting period. Refer to Footnote 9- Fair Value Measurements for further details.

Reclassification of the Derivative Liability

 In February 2018, the Company received shareholder approval to increase the number of its authorized shares of common stock by 200,000,000 additional shares.  Prior to this approval, the embedded conversion options in the 6.50% Notes were required to be separately accounted for as a derivative liability. Upon the shareholder approval to increase the number of authorized shares, the Company had sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes. The fair value of the derivative liability of $12.5 million was reclassified from a liability into stockholders’ equity during the first quarter of 2018.

9. Fair Value Measurements

The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

· Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

· Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

· Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

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The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis:

(in thousands)	Fair Value Measurements as of December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds)	$	16,973	$	—	$	—	$	16,973
Marketable securities, available-for-sale		—		59,953		—		59,953
Total assets	$	16,973	$	59,953	$	—	$	76,926
Liabilities
Interest make-whole derivatives	$	—	$	—	$	2,589	$	2,589
Conversion feature, 6.50% Notes		—		—		14,034		14,034
Warrant liability		—		—		8,166		8,166
Total liabilities	$	—	$	—	$	24,789	$	24,789

(in thousands)	Fair Value Measurements as of June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds and commercial paper)	$	30,248	$	—	$	—	$	30,248
Marketable securities, available-for-sale		—		32,178		—		32,178
Total assets	$	30,248	$	32,178	$	—	$	62,426
Liabilities
Interest make-whole derivatives	$	—	$	—	$	1,153	$	1,153
Warrant liability		—		—		2,833		2,833
Total liabilities	$	—	$	—	$	3,986	$	3,986

The following tables set forth a summary of changes in the fair value as of  June 30, 2018:

(in thousands)						Reclassification		Fair Value
		December 31,				to Additional		Change in		June 30,
		2017		Additions		Paid in Capital		2018		2018
Interest make-whole derivatives		2,589	$	—	$		$	(1,436)	$	1,153
Conversion feature, 6.50% Notes		14,034		—		(12,497)		(1,537)		—
Warrant liability		8,166		—				(5,333)		2,833
Total liabilities	$	24,789	$	—	$	(12,497)	$	(8,306)	$	3,986

The 6.50% Notes include an interest make-whole feature whereby if a noteholder converts any of the 6.50% Notes prior to July 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the notes to be converted had such notes remained outstanding from the conversion date through July 1, 2021 (6.50% Notes), computed using a discount rate equal to 2%. 

The embedded conversion options in the 6.50% Notes were required to be separately accounted for as derivatives as at December 31, 2017 as the Company did not have enough available authorized shares to cover the

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conversion obligation as of the date of issuance as of December 31, 2017.  In February 2018, the Company received stockholder approval for the Charter Amendment, which increased the Company’s authorized shares of Common Stock by 200,000,000.  As the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes, the conversion feature is considered indexed to their stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.

The Company has determined that the above features are embedded derivatives and has recognized the fair value of the derivatives as liabilities in the Company’s consolidated balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.  

The fair value of the Company’s warrant liability was estimated utilizing a lattice tree model both for the initial valuation and as of June 30, 2018.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value measurement was based on several factors including:

· Various future financing scenarios

· Volatility of the Company’s Common Stock and risk free rate

As of June 30, 2018, the fair value of the 6.50% Notes interest make whole features was calculated utilizing the binomial lattice tree model.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value measurement was based on several factors including:

· Credit spread at the valuation date

· Discount yield as of the valuation date

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2017 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	11,699	$	20,428	$	24,650
6.50% Notes due 2024	$	4,643	$	2,969	$	23,888

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at June 30, 2018 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	8,627	$	21,246	$	24,650
6.50% Notes due 2024	$	2,182	$	3,054	$	23,888

The fair value of the Company’s 13% Notes approximates its carrying value of $73.0 million as the interest rate is reflective of the interest rates on debt the Company could currently obtain with similar terms and conditions and thus represents a Level 2 measurement within the fair value hierarchy.

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10. Net Loss Per Common Share

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

(in thousands, except share and per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
Basic and diluted net loss per common share calculation:
Net loss	$	(26,479)	$	(11,963)	$	(51,852)	$	(24,316)
Weighted average common stock outstanding		25,542,733		53,302,399		25,145,440		50,302,419
Net loss per share of common stock—basic and diluted	$	(1.04)	$	(0.22)	$	(2.06)	$	(0.48)

The following outstanding securities for the three and six months ended June 30, 2017 and 2018 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti-dilutive:

	Three and six months ended June 30,
	2017	2018
Stock options outstanding	4,788,917	4,640,696
Unvested restricted stock awards	72,448	2,120,495
Common shares issuable upon conversion of the 5.50% Notes	4,102,360	1,657,757
Common shares issuable upon conversion of the 6.50% Notes	—	17,907,047
Common shares issuable upon exercise of warrants	—	17,666,667
Total	8,963,725	43,992,662

11. Stock-Based Compensation

2013 Stock-Based Incentive Compensation Plan

In November 2013, the Company adopted its 2013 Stock-Based Incentive Compensation Plan (as subsequently amended from time to time, the “2013 Plan”).  Pursuant to the 2013 Plan, the compensation committee of the Company’s board of directors is authorized to grant equity-based incentive awards to its directors, executive officers and other employees and service providers, including officers, employees and service providers of its subsidiaries and affiliates. The number of shares of the Company’s Common Stock initially reserved for issuance under the 2013 Plan was 1,680,000 in the form of Common Stock, deferred stock, restricted stock, restricted stock units, stock options and stock appreciation rights.  Share increases of 2,000,000, 2,600,000 and 6,000,000, to the number of shares originally reserved for issuance under the 2013 Plan were authorized by the Company’s stockholders in June 2014, June 2016, and May 2018, respectively.  The amount, terms of grants and exercisability provisions are determined by the compensation committee, and in certain circumstances pursuant to delegated authority, the Company’s chief executive officer and chief financial officer, acting jointly. The term of the options may be up to 10 years, and options are exercisable in cash or as otherwise determined by the compensation committee.  All stock options vest over time as stipulated in the individual award agreements.  In September 2015, the compensation committee voted to amend the 2013 Plan to, among other things, allow for monthly vesting of stock options granted thereunder after the first annual vesting.

2017 Inducement Plan

In December 2016, the Company adopted its 2017 Inducement Plan (the “Inducement Plan”), which became effective in January 2017.  Pursuant to the Inducement Plan, the Company’s compensation committee is authorized to grant equity-based incentive awards to its employees, including employees of its subsidiaries, who were not previously employees or non-employee directors of the Company or any of its subsidiaries (or who have had a bona fide period of non-employment with the Company and its subsidiaries) in compliance with Rule 5635(c)(4) of the NASDAQ Global Market. The number of shares of the Company’s Common Stock initially reserved for issuance under the Plan was 300,000, in the form of Common Stock, deferred stock, restricted stock, restricted stock units, stock options and stock

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appreciation rights.  The amount, terms of grants and exercisability provisions are determined by the compensation committee of the Company’s board of directors. The term of stock options issued under the Inducement Plan may be up to 10 years, and stock options are exercisable in cash or as otherwise determined by the compensation committee of the Company’s board of directors. All stock options vest over time as stipulated in the individual award agreements. 

Employee Stock Purchase Plan

In January 2016, the Company established an Employee Stock Purchase Plan (the “Purchase Plan”), which was approved by the Company’s stockholders in June 2016.  A total of 750,000 shares of Common Stock were originally approved for future issuance under the Purchase Plan pursuant to purchase rights granted to the Company’s employees.  Under the Company’s Purchase Plan, eligible employees can purchase the Company’s Common Stock through accumulated payroll deductions at such times as established by the administrator. The Purchase Plan is administered by the compensation committee. Under the Purchase Plan, eligible employees may purchase the Company’s Common Stock at 85% of the lower of the fair market value of a share of the Company’s Common Stock on the first day of an offering period or on the last day of the offering period. Eligible employees may contribute up to 10% of their eligible compensation. A participant may purchase a maximum of 1,500 shares of common stock per offering period. Under the Purchase Plan, a participant may not accrue rights to purchase more than $25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding.

At the end of each offering period, shares of the Company’s Common Stock may be purchased at 85% of the lower of the fair market value of the Company’s Common Stock on the first or last day of the respective offering period. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s Common Stock at the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the pricing date) represents a stock option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company recognized stock-based compensation expense of $7,000 and $15,000, respectively, during the three and six months ended June 30, 2018 and stock-based compensation expense of $35,000 and $70,000 for the three and six months ended June 30, 2017 related to the Purchase Plan.

Shares Available for Future Grant Under Equity Compensation Plans

As of June 30, 2018, the Company has reserved the following shares to be granted under its equity compensation plans:

Shares initially reserved under the 2013 Plan	1,680,000
Shares reserved under the Inducement Plan	300,000
Shares reserved under the Purchase Plan	750,000
Authorized increase to the 2013 Plan	10,600,000
Common stock options granted under the 2013 Plan	(6,127,188)
Common stock options granted under the Inducement Plan	(212,500)
Restricted stock awards granted under the 2013 Plan	(3,043,660)
Restricted stock units granted under the 2013 Plan	(600,000)
Common stock issued under the Purchase Plan	(146,314)
Stock options and restricted stock awards forfeited	1,724,615
Remaining shares available for future grant	4,924,953

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The estimated grant-date fair value of the Company’s share-based awards is amortized ratably over the awards’ service periods. Stock-based compensation expense recognized was as follows:

		Three Months Ended June 30,				Six Months Ended  June 30,
(in thousands)		2017		2018		2017		2018
General and administrative	$	1,265	$	912	$	2,621	$	1,734
Sales and marketing		144		37		303		103
Research and development		159		53		438		117
Total stock based compensation expense	$	1,568	$	1,002	$	3,362	$	1,954

Stock Options Granted Under Equity Compensation Plans

	Stock Options Outstanding
				Weighted-average
				Remaining
	Number of	Weighted-Average		Contractual
	Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2017	4,110,612	$	6.41
Granted	936,250		0.72
Exercised	—		—
Forfeited	(229,585)		5.05
Cancelled	(176,581)		9.26
Outstanding at June 30, 2018	4,640,696	$	5.22	8.31
Vested or expected to vest at June 30, 2018	4,640,696	$	5.22	8.31
Exercisable at June 30, 2018	1,988,964	$	6.86	7.57

The intrinsic value of the 4,640,696  stock options outstanding as of June 30, 2018 was $0, based on a per share price of $0.42, the Company’s closing stock price on that date, and a weighted-average exercise price of $5.22 per share.

The Company uses the Black-Scholes valuation model in determining the fair value of equity awards.  For stock options granted to employees and directors with only service-based vesting conditions, the Company measures stock-based compensation expense at the grant date based on the estimated fair value of the award and recognizes it as expense over the requisite service period on a straight-line basis. The Company records the expense of equity compensation for non-employees based on the estimated fair value of the stock option as of the respective vesting date. Further, the Company expenses the fair value of non-employee stock options that contain only service-based vesting conditions over the requisite service period of the underlying stock options.  Following the adoption of ASU 2016-09, the Company no longer estimates forfeitures in calculating its stock-based compensation expense and adjusts each period to reflect actual forfeitures.

On June 8, 2017, the Company granted stock options for 630,000 shares of the Company’s Common Stock to nine senior executives (the “June 2017 Grant”).   The contractual term of each of the grants made in the June 2017 Grant is 10 years and the exercise price is $2.38 per share.   Provided that the grantee is still employed by the Company, the vesting terms of the June 2017 Grant include a combination of market and service-based conditions as follows:

(a) 25% of the award will vest on the later of (i) the six-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $3.33 for 30 consecutive trading days.

(b) 25% of the award will vest on the later of (i) the twelve-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $4.05 for 30 consecutive trading days.

(c) 50% of the award will vest on the later of (i) the twenty-four-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $4.76 for 30 consecutive trading days.

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The Company used the binomial model to estimate the compensation cost for the June 2017 Grant.  Key assumptions used in calculating the total estimated compensation cost of $1,334,000 included (i) an estimated term of 5.6 years, (ii) expected volatility of 95.54%, (iii) expected dividends of $0.00 and (iv) a risk-free return of 1.80%.  Stock-based compensation expense related to the June 2017 Grant will be recognized ratably over the requisite service period of 5.6 years and amounted to $52,000 and $104,000 for the three and six months ended June 30, 2018.

The per-share weighted-average grant date fair value of the options granted to employees during the six months ended June 30, 2018 was estimated at $0.50 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Six months ended June 30, 2018
Risk-free interest rate	2.79	%
Expected term of options (in years)	5.83
Expected volatility	80.60	%
Dividend yield	—

The weighted-average valuation assumptions were determined as follows:

· Risk-free interest rate: The Company based the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

· Expected term of options: The Company estimated the expected life of its employee stock options using the “simplified” method, as prescribed in Staff Accounting Bulletin (“SAB”) No. 107, “Share Based Payments”, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data.

· Expected stock price volatility: The Company estimated the expected volatility based on its actual historical volatility of the Company’s stock price. The Company calculated the historical volatility by using daily closing prices over a period of the expected term of the associated award.  A decrease in the expected volatility would have decreased the fair value of the underlying instrument. 

· Expected annual dividend yield: The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed an expected dividend yield of 0.0%.

As of June 30, 2018, there was $6.0 million of total unrecognized stock-based compensation expense, related to unvested options granted under the 2013 Plan and the Inducement Plan, which will be recognized over the weighted-average remaining period of 2.22 years.

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Restricted Stock

A summary of the status of the Company’s restricted stock awards and restricted stock units at June 30, 2018 and of changes in restricted stock awards and restricted stock units outstanding under the 2013 Plan for the six months ended June 30, 2018 is as follows:

		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2017	25,047	$	7.07
Granted	2,100,000	$	0.55
Forfeited	—	$	—
Vested restricted stock awards	(4,552)	$	7.07
Unvested at June 30, 2018	2,120,495	$	0.62

For restricted stock awards and restricted stock units that vest subject to the satisfaction of service requirements, stock-based compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period.  All of the restricted stock awards and restricted stock units reflected above vest based on performance conditions or over time as stipulated in the individual award agreements. In the event of a change in control, the unvested awards will be accelerated and fully vested immediately prior to the change in control.

As of June 30, 2018, there was $1.1 million of total unrecognized stock-based compensation expense, related to restricted stock awards and restricted stock units under the 2013 Plan, which will be recognized over the weighted-average remaining period of 1.05 years.

12. Commitments and Contingencies

Legal Proceedings

On January 27, 2017 and February 10, 2017, respectively, two putative securities class actions were filed in the U.S. District Court for the Eastern District of Pennsylvania that named as defendants Egalet Corporation and current officers Robert S. Radie and Stanley J. Musial, and former officer Jeffrey M. Dayno (the “Officer Defendants” and together with Egalet Corporation, the “Defendants”). These two complaints, captioned Mineff v. Egalet Corp. et al., No. 2:17-cv-00390-MMB and Klein v. Egalet Corp. et al., No. 2:17-cv-00617-MMB, assert securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired Egalet Corporation securities between December 15, 2015 and January 9, 2017.  On May 1, 2017, the Court entered an order consolidating the two cases (the “Securities Class Action Litigation”) before it, appointing the Egalet Investor Group (consisting of Joseph Spizzirri, Abdul Rahiman and Kyle Kobold) as lead plaintiff and approving their selection of lead and liaison counsel.  On July 3, 2017, the plaintiffs filed their consolidated amended complaint, which named the same Defendants and also asserts claims for purported violations of Sections 10(b) and 20(a) of the Exchange Act.  Plaintiffs brought their claims individually and on behalf of a putative class of all persons who purchased or otherwise acquired shares of the Company between November 4, 2015 and January 9, 2017 inclusive.   The consolidated amended complaint based its claims on allegedly false and/or misleading statements and/or failures to disclose information about the likelihood that ARYMO ER would be approved for intranasal abuse-deterrent labeling.  The Defendants moved to dismiss the consolidated amended complaint on September 1, 2017 (the “Motion to Dismiss”), the plaintiffs filed their opposition on October 31, 2017, and the Defendants filed their reply on December 8, 2017.  The Court heard oral arguments on the Motion to Dismiss on February 20, 2018, and entered an order pursuant to which the plaintiffs filed a motion for leave to file a second amended complaint on March 6, 2018.  The Defendants responded on March 20, 2018 and the plaintiffs filed their reply on March 27, 2018.  The Court heard oral arguments on the plaintiffs’ motion for leave to file a second amended complaint on July 12, 2018.  On August 2, 2018, the Court granted the Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice.  Plaintiffs have 30 days to appeal the decision or 28 days to move under Rule 59 for reconsideration.

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On March 15, 2018, a lawsuit was filed by the State of Arkansas and multiple local governments in Arkansas in the Circuit Court of Crittenden County, Arkansas, against the Company and other pharmaceutical manufacturers, distributors and retailers, and physicians.  The action alleges a variety of claims related to opioid marketing and distribution practices, including false advertising, deceptive trade practices, public nuisance, unjust enrichment, violations of state narcotics statutes and civil conspiracy.  The suit seeks monetary penalties.  The Company was served with the lawsuit on April 30, 2018 and filed its answer on May 30, 2018. The Company disputes the allegations in the lawsuit and intends to defend this action vigorously. The Company cannot determine the likelihood of, nor can it reasonably estimate the range of, any potential loss, if any, from this lawsuit.

On April 4, 2018, Egalet US, Inc. and Egalet Ltd., subsidiaries of the Company, filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Teva Pharmaceuticals USA, Inc. (“Teva”). The lawsuit was filed under the Hatch-Waxman Act for Teva’s infringement of one of the Company’s patents for ARYMO ER listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book— U.S. Patent No. 9,044,402. The lawsuit was filed in response to a paragraph IV certification that the Company received from Teva on February 23, 2018, stating that Teva had submitted an Abbreviated New Drug Application (“ANDA”) to the U.S. Food and Drug Administration (“FDA”) for a generic version of ARYMO ER.  Teva’s paragraph IV certification alleges that this U.S. patent is invalid and/or will not be infringed by Teva’s proposed product.  This patent for ARYMO ER was granted following review by the U.S. Patent and Trademark Office, is presumed to be valid under governing law, and can only be invalidated in federal court with clear and convincing evidence.  Under the Hatch-Waxman Act, the Company was permitted to file suit within 45 days from its receipt of the paragraph IV certification and thereby automatically stay or bar the FDA from approving Teva’s ANDA for 30 months or until a district court decision that is adverse to the asserted patent, whichever is earlier. On May 29, 2018, Teva filed its answer to the Company’s complaint and alleged certain counterclaims.  The Company intends to vigorously enforce its intellectual property rights relating to ARYMO ER.

Halo Manufacturing Agreement

In February 2017, the Company entered into a Drug Product Manufacturing Services Agreement (the “Manufacturing Agreement”) with Halo Pharmaceutical, Inc. (“Halo”) pursuant to which the Company engaged Halo to provide certain services related to the manufacture and supply of ARYMOER tablets for commercial use in the United States.  The Company is obligated to purchase all its requirements for ARYMO ER from Halo through 2019, and seventy-five percent of its requirements thereafter, subject to certain limited exceptions.  The Company is obligated to purchase ARYMO ER pursuant to binding purchase orders at a fixed price based on dosage strength, with specified percentage rebates for annual volumes of product ordered over a specified amount.   In addition, the Company has agreed to purchase certain minimum amounts of manufacturing and additional services per calendar quarter from Halo over the term of the Agreement (the “Quarterly Minimum”).  If the Company fails to meet the Quarterly Minimum, it will be required to pay to Halo the resulting shortfall.  Total commitments to Halo are $3.6 million and $3.6 million in 2018 and 2019, respectively and $7.2 million thereafter.

13. Acquisitions and License and Collaboration Agreements

Collaboration and License Agreement with Acura

In January 2015, the Company entered into the OXAYDO License Agreement with Acura to commercialize OXAYDO tablets containing Acura’s Aversion Technology. OXAYDO (formerly known as Oxecta®) is currently approved by the FDA for marketing in the U.S. in 5 mg and 7.5 mg strengths, but was not actively marketed at the time of the OXAYDO License Agreement. Under the terms of the OXAYDO License Agreement, Acura transferred the approved New Drug Application (“NDA”) for OXAYDO to the Company and the Company was granted an exclusive license under Acura’s intellectual property rights for development and commercialization of OXAYDO worldwide in all strengths.

The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO.  In addition, Acura will be entitled to a one-time $12.5 million milestone payment when OXAYDO net sales reach a level of $150.0 million in a calendar year.

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The Company has recorded a product rights intangible asset of $7.7 million related to the arrangement, which includes $172,000 of transaction costs related to the License Agreement.  The intangible asset is being amortized over a useful life of 7 years, which coincides with the patent protection of the product in the U.S. 

In addition, Acura receives from the Company, a tiered royalty percentage based on sales thresholds.  Based on the Company’s current level of net sales, the royalty percentage payable to Acura is in the mid-single digits; however, the percentage may increase in future years in the event we achieve the higher sales thresholds set forth in the License Agreement.   In addition, in any calendar year in which net sales exceed a specified threshold, Acura is entitled receive a double-digit royalty on all OXAYDO net sales in that year. The Company’s royalty payment obligations commence on the first commercial sale of OXAYDO and expire, on a country-by-country basis, upon the expiration of the last to expire valid patent claim covering OXAYDO in such country (or if there are no patent claims in such country, then upon the expiration of the last valid claim in the U.S.).  Royalties will be reduced upon the entry of generic equivalents, as well for payments required to be made by the Company to acquire intellectual property rights to commercialize OXAYDO, with an aggregate minimum floor.  The term of the Acura license agreement expires, in its entirety, upon the final expiration of any such patent claim in any country. OXAYDO is currently sold in the United States and is covered by six U.S. patents that expire between 2023 and 2025. Patents covering OXAYDO in foreign jurisdictions expire in 2024.  Either the Company or Acura may terminate the license agreement for certain customary reasons, including cause, insolvency or patent challenge. The Company may terminate the license agreement upon 90 days prior written notice.

Purchase Agreement with Luitpold

In January 2015, the Company entered into and consummated the transactions contemplated by the SPRIX Nasal Spray Purchase Agreement with Luitpold (the “SPRIX Purchase Agreement”).  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX Nasal Spray for a purchase price of $7.0 million.  The Company concurrently purchased an additional $1.1 million of glassware, equipment and active pharmaceutical ingredient (“API”) from Luitpold and agreed to purchase an additional $340,000 of API after closing.

Under the purchase agreement with Luitpold pursuant to which the Company acquired certain assets and liabilities associated with SPRIX Nasal Spray, the Company was assigned an exclusive license with Recordati Ireland Ltd. (“Recordati”) for intranasal formulations of ketorolac tromethamine (the “Licensed Product”), the active ingredient in SPRIX Nasal Spray.  The Company was required to pay a fixed, single-digit royalty to Recordati on net sales of the Licensed Product.  The exclusive term of the license agreement expires, on a country-by-country basis, on the later of the final expiration of any patent right in such country that contains a valid claim covering the Licensed Product, or ten years from the date of the first commercial sale of the Licensed Product in such country, and thereafter the Company will retain a non-exclusive, perpetual license in such country. In addition, during the exclusivity period with respect to the United States, Canada and Latin America, the royalty payable to Recordati is decreased if no patent containing a valid claim is in force in the country at the time of sale.  SPRIX Nasal Spray is currently sold in the United States and is covered by a patent that expires in December 2018 and the first commercial sale of SPRIX Nasal Spray in the United States occurred in May 2011.

The Company accounted for the arrangement as a business combination.

14. Income Taxes

In accordance with ASC Topic No. 270 “Interim Reporting” and ASC Topic No. 740 “Income Taxes” (Topic No. 740) at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. For the three and six months ended June 30, 2017 and 2018, the Company had no tax provision since it had a full valuation allowance for federal, foreign and state purposes.

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The Company recorded a deferred tax liability of $61,000 and $981,000, with an offsetting decrease to additional paid in capital during the three and six months ended June 30, 2018, respectively, due to the state tax impact of the embedded conversion liability derivative being reclassified as an equity instrument during the three and six months ended June 30, 2018. Refer to Note 8 – Stockholders Equity for further details.   The Company had no deferred tax liability for the three and six months ended June 30, 2017.  The Company maintains a full valuation against all net deferred tax assets for federal and foreign purposes as management has determined that it is not more likely than not that the Company will realize these future tax benefits.

The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, became effective January 1, 2018. The Tax Act had significant changes to U.S. tax law, lowering U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modified the taxation of other income and expense items.  Due to the valuation allowance on the Company’s deferred tax assets, these provisions do not have any material impact on the Company. 

The Tax Act contains additional international provisions which may impact the Company prospectively, including the tax on Global Intangible Low-Taxed Income.   The Company does not believe the impact will be material given the historical losses in its international subsidiary and projected future losses.

Upon further analyses of certain aspects of the Tax Act and refinement of the Company’s calculations during the three and six months ended June 30, 2018, the Company determined that an adjustment to the provisional amount is not necessary at this time.  The Company will continue to monitor for future updates to guidance or interpretations issued from the Internal Revenue Service.

15. Subsequent Events

On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the transfer of the listing of the Company’s Common Stock from The Nasdaq Global Market to The Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Transfer”). The continued listing on The Nasdaq Capital Market is subject to (i) the fulfillment of certain conditions and milestones and (ii) the Company’s evidencing a market value of the Company’s Common Stock of over $35.0 million for at least 10 consecutive trading days not later than November 20, 2018. The Company is working to meet such conditions and milestones and to demonstrate compliance with the requirements for continued listing on The Nasdaq Capital Market.

Under the 5.50% Notes Indenture, the Company’s Common Stock ceasing to be listed on the Nasdaq Global Market as a result of the Transfer constituted a “Fundamental Change.” In accordance with the Indenture, on July 31, 2018, the Company delivered to the holders of the 5.50% Notes, with $24.7 million of principal currently outstanding, a Fundamental Change Company Notice, Make-Whole Fundamental Change notice and Offer to Repurchase “the “Fundamental Change Company Notice”) pursuant to which, as a result of the Transfer and pursuant to the terms of the 5.50% Notes Indenture, the Company offered to repurchase, at the option of each holder, all 5.50% Notes that are validly tendered for repurchase, and not properly withdrawn, at any time prior to 5:00pm New York City time, on September 18, 2018 (the “Expiration Time”), which is the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date. Pursuant to Section 15.02(a) of the 5.50% Notes Indenture, the Fundamental Change Repurchase Date must be a date not less than 20 nor more than 35 business days after the date of the Fundament Change Company Notice. Accordingly, the Fundamental Change Repurchase Date is scheduled for September 19, 2018.

Pursuant to the terms of the 5.50% Notes Indenture, the Company is obligated, on the Fundamental Change Repurchase Date, to pay the Fundamental Change Repurchase Price, payable in cash, equal to 100% of the principal amount of the 5.50% Notes being repurchased. As the Fundamental Change Repurchase Date falls after the next Regular Record Date (as defined in the 5.50% Notes Indenture) of September 15, 2018 but prior to the next Interest Payment Date (as defined in the 5.50% Notes Indenture) to which such Regular Record Date relates of October 1, 2018, the Company is obligated to pay  the full amount of accrued and unpaid interest to 5.50% Note holders of record as of such Regular Record Date on such Interest Payment Date in accordance with  the 5.50% Notes Indenture. As of June 30, 2018, the Company had cash and cash equivalents, restricted cash and marketable securities of $70.4 million. 

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On August 2, 2018, the Court in the Company’s Securities Class Action Litigation granted the Company’s and Officer Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice.  Plaintiffs have 30 days to appeal the Court’s decision or 28 days to move under Rule 59 for reconsideration.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with our 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “potential,” “continue,” “seek to” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain, including, but not limited to, risks related to: our ability to continue as a going concern; our stock price and our ability to remain listed on the Nasdaq, including our ability to meet the conditions and milestones established by the Nasdaq Hearings Panel and the potential need to redeem portions of our outstanding indebtedness in the event of such a delisting; the amount and potential impact of any redemption of our 5.50% Notes; the potential need to seek bankruptcy protection, whether in connection with the potential obligation to redeem portions of our outstanding indebtedness, our failure to so redeem or in connection with any defaults under our outstanding indebtedness or otherwise; our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; our current and future indebtedness; our ability to obtain additional financing; the level of commercial success of our products and, if approved, our product candidates; our ability to execute on our sales and marketing strategy, including developing relationships with customers, physicians, payors and other constituencies; the continued development of our currently limited commercialization capabilities, including sales and marketing capabilities; the success of competing products that are or become available; the accuracy of our estimates of the size and characteristics of the potential markets for our products and product candidates and our ability to serve those markets; the rate and degree of market and physician acceptance of our products and product candidates; the difficulties in obtaining and maintaining regulatory approval of our products and product candidates, and any related restrictions, limitations and/or warnings in the product label under any approval we may obtain; the potential impact of strengthening the ARYMO ER label or the labels of any of our other products; the performance of third parties, including contract research organizations, manufacturers and collaborators; our success with regard to any business development initiatives; the entry of any generic products for SPRIX Nasal Spray or any delay in or inability to reformulate SPRIX Nasal Spray; the reception by healthcare professionals of any new formulation of SPRIX Nasal Spray and the timing of availability of any new SPRIX Nasal Spray formulation; the success and timing of our preclinical studies and clinical trials; our ability to recruit or retain key scientific or management personnel or to retain our executive officers, including as a result of most of our outstanding employee stock options being underwater; regulatory developments in the U.S. and foreign countries and social concerns about limiting the use of opioids; the outcome of our litigation, including our intellectual property litigation; any reduction in the United States’ Drug Enforcement Agency’s quotas for opioids; obtaining and maintaining intellectual property protection for our products, product candidates and our proprietary technology; our ability to operate our business without infringing the intellectual property rights of others; recently enacted and future legislation regarding the healthcare system; our ability to identify potential acquisition targets, including as a result of limitations under the documents governing our indebtedness and our limited resources, as well as our ability to integrate and grow any businesses or products that we may acquire; the impact of the anti-dilution features in our warrant agreements on our ability to raise additional capital; changes in tax laws or our effective tax rate; and general market conditions.

You should refer to the “Risk Factors” section of this quarterly report on Form 10-Q and our most recent Annual Report on Form 10-K as filed with the SEC, which are incorporated herein by reference, for a discussion of additional important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements.  As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on

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behalf of, us.  Furthermore, such forward-looking statements speak only as of the date of this 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 law.

OurBusiness

We are a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain and other conditions. Given the need for acute and chronic pain products and the issue of prescription abuse, we are focused on bringing non-narcotic and abuse-deterrent (“AD”) formulations of opioids to patients and physicians. We are currently marketing SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”), OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”) and ARYMO® ER (morphine sulfate) extended-release (“ER”) tablets, for oral use CII (“ARYMO ER”).

We acquired SPRIX Nasal Spray, the first and only approved nasal spray formulation of a nonsteroidal anti-inflammatory drug (“NSAID”), used for short-term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. We also licensed OXAYDO, an immediate-release (“IR”) oral formulation of oxycodone designed to discourage intranasal abuse, which is indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. ARYMO ER, an ER morphine product formulated with abuse-deterrent properties and approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate, is our first product developed using our proprietary Guardian™ Technology.

In January 2018, we announced a partnership with OraPharma, Inc. (“OraPharma”), a division of Bausch Health Companies Inc. (formerly Valeant Pharmaceuticals International, Inc.), to co-promote SPRIX to more than 9,000 dentists, dental specialists and oral surgeons across the United States. This partnership is our second partnership for SPRIX Nasal Spray.  In 2017, we partnered with Ascend Therapeutics ("Ascend"), which began to promote SPRIX Nasal Spray to approximately 11,000 women's healthcare practitioners in September 2017. We continue to look for similar partnerships to enable us to bring SPRIX to specialists we are not reaching with our salesforce.

We had success executing on broadening payor coverage of our products in 2018. In February 2018, we announced that both SPRIX Nasal Spray and ARYMO ER were placed in preferred positions for a large Northeast (NE) regional health plan. In April 2018, two additional large regional NE plans also placed ARYMO ER in a preferred formulary position. In May 2018, a large national pharmacy benefit manager put SPRIX in a preferred position and added ARYMO ER as a tier 3 unrestricted product for the 3.5 million-member lives. We continue to work with the payor community to broaden access for all our products on behalf of appropriate patients who require them.

To expand the commercial opportunity for OXAYDO, we filed a supplemental new drug application (“sNDA”) with abuse-deterrent data and a prior approval supplement (“PAS”) with data on new dosage strengths. OXAYDO is currently available in 5 mg and 7.5 mg dosage strengths. We received a complete response letter (“CRL”) from the FDA in June 2017. The FDA requested more information regarding the effect of food on OXAYDO 15 mg and the intranasal AD properties of OXAYDO 10 and 15 mg. In addition, based on discussions with the FDA regarding the sNDA, we believe a contemporary intranasal human abuse potential (“HAP”) study would be needed to complete the sNDA. Given that the issues involved in both the sNDA and PAS are intertwined, we are evaluating our options and the costs associated to proceed on the AD label and/or the additional dosage strengths.   

Beyond our commercial programs, we have a pipeline of products developed using our Guardian Technology including Egalet-002, an AD, ER, oral oxycodone formulation which has completed Phase 3 studies. Our primary effort with regard to our product candidates is to potentially identify partners to advance them.

We continue to focus our business development to augment our product portfolio through potential in-licenses and product acquisitions; enhance the opportunities for our existing products through partnerships that access physicians and patients outside of our commercial focus in the U.S. or markets outside the U.S.; and develop partnerships to leverage our Guardian Technology by collaborating on our current product candidates or exploring new product opportunities.

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Financial Operations

Our net losses were $26.5 million and $12.0 million for the three months ended June 30, 2017 and 2018, respectively, and $51.9 million and $24.3 million for the six months ended June 30, 2017 and 2018, respectively.  We recognized revenues in the three months ended June 30, 2017 and 2018 of $6.3 million and $7.4 million, respectively, and $11.7 million and $13.7 million for the six months ended June 30, 2017 and 2018, respectively.  As of June 30, 2018, we had an accumulated deficit of $317.7 million. We expect to incur significant expenses and operating losses for the foreseeable future as we incur significant commercialization expenses as we continue to grow our sales, marketing and distribution infrastructure to sell our commercial products in the U.S. 

Until we become profitable, if ever, we will seek to fund our operations primarily through public or private equity or debt financings, growing our revenue from product sales or other sources. Other additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a material adverse effect on our financial condition and our ability to pursue our business strategy. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

Critical Accounting Policies and Significant Judgments and Estimates

We believe there have been no significant changes in our critical accounting policies and significant judgments and estimates as discussed in our audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018, other than as noted in Note 3 – Revenue From Contracts with Customers.

Results of Operations

Comparison of the three months ended June 30, 2017 and 2018

(in thousands)	Three Months Ended
	June 30,
	2017		2018		Change
Revenue
Net product sales	$	6,255	$	7,443	$	1,188
Total revenue		6,255		7,443		1,188
Costs and Expenses
Cost of sales (excluding amortization of product rights)		1,072		1,565		493
Amortization of product rights		522		531		9
General and administrative		12,471		6,694		(5,777)
Sales and marketing		9,340		9,019		(321)
Research and development		4,594		999		(3,595)
Total costs and expenses		27,999		18,808		(9,191)
Loss from operations		(21,744)		(11,365)		10,379
Other (income) expense:
Change in fair value of warrant and derivative liability		—		(3,181)		(3,181)
Interest expense, net		4,749		3,804		(945)
Other gain		(14)		(25)		(11)
		4,735		598		(4,137)
Loss before provision (benefit) for income taxes		(26,479)		(11,963)		14,516
Provision (benefit) for income taxes		—		—		—
Net loss	$	(26,479)	$	(11,963)	$	14,516

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Net Product Sales

Net product sales increased from $6.3 million for the three months ended June 30, 2017 to $7.4 million for the three months ended June 30, 2018.  Net product sales for the three months ended June 30, 2017 consisted of $4.9 million for SPRIX Nasal Spray, $1.3 million for OXAYDO and $31,000 for ARYMO ER.  Net product sales for the three months ended June 30, 2018 consisted of $5.4 million for SPRIX Nasal Spray, $1.7 million for OXAYDO and $351,000 for ARYMO ER. Due to the adoption of the ASC 606 on January 1, 2018, net product sales for the three months ended June 30, 2017 reflected prescriptions dispensed to patients and net product sales for the three months ended June 30, 2018 reflected shipments to customers.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding amortization of product rights) increased from $1.1 million for the three months ended June 30, 2017 to $1.6 million for the three months ended June 30, 2018.

Cost of sales for SPRIX Nasal Spray and OXAYDO for the three months ended June 30, 2017 reflects the average cost of inventory produced and dispensed to patients in the period. Cost of sales for ARYMO ER for the three months ended June 30, 2017 includes the portion of inventory produced after the FDA approval of ARYMO ER in January 2017. The portion of inventory produced before the FDA approval of ARYMO ER was recorded in research and development expense in prior periods.

Cost of sales for SPRIX Nasal Spray, OXAYDO and ARYMO ER for the three months ended June 30, 2018 reflects the average cost of inventory shipped to wholesalers and specialty pharmaceutical companies during the period.

Amortization of Product Rights

Amortization of product rights was comprised of $270,000 for the OXAYDO intangible assets, $235,000 for the SPRIX Nasal Spray intangible assets and $17,000 for the IP R&D intangible asset related to our Guardian Technology in the three months ended June 30, 2017. Amortization of product rights increased from $522,000 for the three months ended June 30, 2017 to $531,000 for the three months ended June 30, 2018.  Amortization of product rights was comprised of $274,000 for the OXAYDO intangible assets, $248,000 for the SPRIX Nasal Spray intangible assets and $9,000 for the In-Process Research and Development (“IP R&D”) intangible asset related to our Guardian Technology in the three months ended June 30, 2018.

General and Administrative Expenses

General and administrative expenses decreased by $5.8 million, or 46.3%, from $12.5 million for the three months ended June 30, 2017 to $6.7 million for the three months ended June 30, 2018.  The decrease was due to $4.5 million related to ARYMO ER post-marketing study fees incurred in the three months ended June 30, 2017 and a decrease in salary and stock-based compensation expense of $1.1 million for the three months ended June 30, 2018 due to reduced headcount.

Sales and Marketing Expenses

Sales and marketing expenses decreased $321,000, or 3.4%, from $9.3 million for the three months ended June 30, 2017 to $9.0 million for the three months ended June 30, 2018. This decrease was due to expenses relating to the ARYMO ER launch  in the three months ending June 30, 2017. 

Research and Development Expenses

Research and development expenses decreased by $3.6 million, or 78.3%, from $4.6 million for the three months ended June 30, 2017 to $1.0 million for the three months ended June 30, 2018.  This decrease was driven primarily by a decrease in compensation-related expenses of $1.1 million and a decrease in development costs for Egalet-002 of $3.1 million in the three months ended June 30, 2018.

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Change in Fair Value of Warrant and Derivative Liability

The interest make-whole provisions of the 6.50% Notes, as well as the warrant liability associated with the warrants issued in our July 2017 equity offering are subject to re-measurement at each balance sheet date.  Refer to Note 8 – Stockholders’ Equity for further details.  We recognize any change in fair value in our consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liabilities.   During the three months ended June 30, 2018, we recognized a change in the fair value of our derivative liabilities of $3.2 million, which is due primarily to the changes in the value of our common stock during the three months ended June 30, 2018.

Interest expense

Interest expense was $4.7 million for the three months ended June 30, 2017 and $3.8 million for the three months ended June 30, 2018.  The decrease was driven primarily by the decrease in interest expense of $1.2 million related to the extinguishment of $36.4 million of the 5.50% Notes in December 2017, offset by an increase of $451,000 for the addition of $23.9 million of 6.50% Notes.

The interest expense of $4.7 million for the three months ended June 30, 2017 includes non-cash interest and amortization of debt discount totaling $1.6 million.  The interest expense of $3.8 million for the three months ended June 30, 2018 includes non-cash interest and amortization of debt discount totaling $697,000.

Provision (benefit) for Income Taxes

We had no provision nor benefit for income taxes for the three months ended June 30, 2017 or June 30, 2018 since we have been in a full valuation allowance for federal and state purposes. 

Comparison of the six months ended June 30, 2017 and 2018

(in thousands)	Six Months Ended
	June 30,
	2017		2018		Change
Revenue
Net product sales	$	11,682	$	13,704	$	2,022
Total revenue		11,682		13,704		2,022
Costs and Expenses
Cost of sales (excluding amortization of product rights)		2,397		3,780		1,383
Amortization of product rights		1,025		1,068		43
General and administrative		20,962		13,767		(7,195)
Sales and marketing		18,598		18,074		(524)
Research and development		11,114		2,302		(8,812)
Total costs and expenses		54,096		38,991		(15,105)
Loss from operations		(42,414)		(25,287)		17,127
Other (income) expense:
Change in fair value of derivative liability		(12)		(8,306)		(8,294)
Interest expense, net		9,283		7,360		(1,923)
Other (gain) loss		167		(25)		(192)
		9,438		(971)		(10,409)
Loss before provision (benefit) for income taxes		(51,852)		(24,316)		27,536
Provision (benefit) for income taxes		—		—		—
Net loss	$	(51,852)	$	(24,316)	$	27,536

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Net Product Sales

Net product sales increased from $11.7 million for the six months ended June 30, 2017 to $13.7 million for the six months ended June 30, 2018.  Net product sales for the six months ended June 30, 2017 consisted of $9.1 million for SPRIX Nasal Spray, $2.6 million for OXAYDO and $31,000 for ARYMO ER.  Net product sales for the six months ended June 30, 2018 consisted of $10.2 million for SPRIX Nasal Spray, $2.9 million for OXAYDO and $538,000 for ARYMO ER. Due to the adoption of the ASC 606 on January 1, 2018, net product sales in the six months ended June 30, 2017 reflected prescriptions dispensed to patients and net product sales in the six months ended June 30, 2018 reflected shipments to customers.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding amortization of product rights) increased from $2.4 million for the six months ended June 30, 2017 to $3.8 million for the six months ended June 30, 2018.

Cost of sales for SPRIX Nasal Spray and OXAYDO for the six months ended June 30, 2017 reflects the average cost of inventory produced and dispensed to patients in the period. Cost of sales for ARYMO ER for the six months ended June 30, 2017 includes the portion of inventory produced after the FDA approval of ARYMO ER in January 2017. The portion of inventory produced before the FDA approval of ARYMO ER was recorded in research and development expense in prior periods. 

Cost of sales for SPRIX Nasal Spray, OXAYDO and ARYMO ER for the six months ended June 30, 2018 reflects the average cost of inventory shipped to wholesalers and specialty pharmaceutical companies during the period.

Amortization of Product Rights

Amortization of product rights was $1.0 million for the six months ended June 30, 2017 and 2018.  Amortization of product rights was comprised of $539,000 for the OXAYDO intangible assets and $469,000 for the SPRIX Nasal Spray intangible assets and $17,000 for the IP R&D intangible asset in the six months ended June 30, 2017. Amortization of product rights was comprised on $550,000 for the OXAYDO, $500,000 for the SPRIX Nasal Spray intangible assets and $18,000 for the IP R&D intangible asset related to our Guardian Technology in the six months ended June 30, 2018.

General and Administrative Expenses

General and administrative expenses decreased by $7.2 million, or 34.3%, from $21.0 million for the six months ended June 30, 2017 to $13.8 million for the six months ended June 30, 2018.  The decrease was due to decreases in salary and stock-based compensation expenses related to reduced headcount, administrative expenses and ARYMO ER post-marketing study fees of $2.0 million, $1.0 million and $3.9 million, respectively in the six months ended June 30, 2018.

Sales and Marketing Expenses

Sales and marketing expenses decreased $524,000, or 2.8%, from $18.6 million for the six months ended June 30, 2017 to $18.1 million for the six months ended June 30, 2018. The decrease was due to expenses relating to the ARYMO ER launch in the three months ending June 30, 2017. 

Research and Development Expenses

Research and development expenses decreased by $8.8 million, or 79.3%, from $11.1 million for the six months ended June 30, 2017 to $2.3 million for the six months ended June 30, 2018.  This decrease was driven primarily by a decrease in salary and stock-based compensation of $1.8 million and a decrease in development costs for Egalet-002 of $6.1 million in the six months ended June 30, 2018.

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Change in Fair Value of Warrant and Derivative Liability

The interest make-whole provisions of the 6.50% Notes, as well as the warrant liability associated with the warrants issued in our July 2017 equity offering are subject to re-measurement at each balance sheet date.  In addition, the embedded conversion feature of the 6.50% Notes was subject to re-measurement prior to the reclassification of the derivative liability to stockholders’ equity in February 2018. Refer to Note 8 – Stockholders’ Equity for further details.  We recognize any change in fair value in our consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liabilities.   During the six months ended June 30, 2017 and 2018, we recognized a change in the fair value of our derivative liabilities of $12,000 and $8.3 million, respectively.  The change in fair value of the derivative liabilities was due primarily to the changes in the value of our common stock during the six months ended June 30, 2017 and 2018.

Interest expense

Interest expense was $9.3 million for the six months ended June 30, 2017 and $7.4 million for the six months ended June 30, 2018.  The decrease was driven primarily by the decrease in interest expense of $2.5 million related to the extinguishment of $36.4 million of the 5.50% Notes in December 2017, partially offset by an increase of $857,000 for the addition of $23.9 million of 6.50% Notes.

The interest expense of $9.3 million for the six months ended June 30, 2017 includes non-cash interest and amortization of debt discount totaling $3.3 million.  The interest expense of $7.4 million for the six months ended June 30, 2018 includes non-cash interest and amortization of debt discount totaling $1.2 million.

Provision (benefit) for Income Taxes

We had no provision nor benefit for income taxes for the six months ended June 30, 2017 or June 30, 2018 since we have been in a full valuation allowance for federal and state purposes. 

Liquidity and Capital Resources

Since our inception, we have incurred net losses and generally negative cash flows from our operations. We incurred net losses of $51.9 million and $24.3 million for the six months ended June 30, 2017 and 2018, respectively. Our operating activities used $41.1 million of cash and $26.0 million of cash during the six months ended June 30, 2017 and 2018, respectively.  At June 30, 2018, we had an accumulated deficit of $317.7 million, a working capital surplus of $22.8 million and cash, restricted cash, cash equivalents and marketable securities totaling $70.4 million.

Since our initial public offering (“IPO”) we have engaged in the following financing transactions.

In January 2015, we entered into the Loan Agreement with Hercules and certain other lenders, pursuant to which we borrowed $15.0 million under a term loan.  In August 2016, we repaid all outstanding obligations under the Loan Agreement, using the proceeds from the 13% Notes.  Refer to Note 7 — Long-term Debt in the Notes to our most recent Annual Report on Form 10-K filed with the SEC on March 16, 2018 for additional information.

In April and May 2015, we issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes.  Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2015. Refer to Note 7 — Long-term Debt for additional information.

In July 2015, we completed an underwritten public offering of 7,666,667 shares of our common stock (including the exercise in full of the underwriters’ option to purchase additional shares) at an offering price of $11.25 per share for gross proceeds of $86.3 million.  The net offering proceeds from the sale were $80.8 million, after deducting underwriting discounts and commissions of $5.2 million and offering costs of $293,000.

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Through December 31, 2015, we received $4.1 million in payments from our collaborative research and development agreements along with aggregate upfront and milestone payments of $20.0 million under our collaborative research and license agreement with Shionogi Limited.

In August 2016, we issued $40.0 million in aggregate principal amount of the 13% Senior Secured Notes and issued another $40.0 million in aggregate principal amount following FDA approval of ARYMO ER in January 2017 (the “13% Notes”).  Interest on the 13% Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on March 20and September 20of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, we will also be obligated to pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of OXAYDO (oxycodone HCI, USP) tablets for oral use only – CII, SPRIX Nasal Spray, ARYMO ER and Egalet-002, if approved, for the two consecutive fiscal quarter periods most recently ended, less the amount of interest paid on the 13% Notes on such Payment Date.

In March 2017, we initiated sales of shares under our July 2015 Controlled Equity Offering Sales Agreement (“2015 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) and sold an aggregate of 9,357,669 shares of Common Stock through June 30, 2018, resulting in gross proceeds of $9.4 million before deducting commissions of $281,000.  Under the 2015 Sales Agreement, we may, at our discretion, from time to time sell shares of our Common Stock, for an aggregate offering price of up to $30.0 million (inclusive of amounts sold to date). We provided Cantor with customary indemnification rights, and Cantor is entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold.  Sales of the shares under the 2015 Sales Agreement have been made and, any additional sales under the 2015 Sales Agreement, will be made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended. We have sold an aggregate of 428,953 shares under the Sales Agreement during the period subsequent to June 30, 2018, resulting in gross proceeds of $171,000 before deducting commissions of $5,000.

In July 2017, we completed an underwritten public offering of 16,666,667 shares of our common stock and accompanying warrants to purchase 16,666,667 shares of our common stock, at a combined public offering price of $1.80 per share and accompanying warrant for gross proceeds of $30.0 million.  The net offering proceeds were $28.6 million after deducting underwriting discounts and commissions of $1.4 million. Each warrant has an exercise price of $2.70, subject to adjustment in certain circumstances. The shares of common stock and warrants were issued separately.

In December 2017, we entered into exchange agreements with certain holders (the “Holders”) of the 5.50% Notes pursuant to which the Holders agreed to exchange, in the aggregate, approximately $36.4 million of outstanding principal amount of the 5.50% Notes for, in the aggregate, (i) approximately $23.9 million of our new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the our common stock and (iii) payments, in cash, of all accrued but unpaid interest as of the closing on the 5.50% Notes exchanged in the transaction.  The Company is obligated to pay interest on the 6.50% Notes semiannually in arrears on January 1 and July 1 of each year commencing July 1, 2018 at a rate of 6.50% per year.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2017 and 2018:

(in thousands)	Six Months Ended
	June 30,
	2017		2018
Net cash provided by (used in):
Operating activities	$	(41,069)	$	(26,008)
Investing activities		(15,365)		27,940
Financing activities		41,967		4,847
Effect of foreign currency translation on cash		380		(40)
Net (decrease) increase in cash and restricted cash	$	(14,087)	$	6,739

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Cash Flows from Operating Activities

Net cash used in operating activities for the six months ended June 30, 2017 was $41.1 million and consisted primarily of a net loss of $51.9 million.  The net loss was partially offset by $9.0 million net non-cash adjustments to reconcile net loss to net cash used in operations, which included depreciation and amortization of $2.6 million, stock-based compensation expense of $3.4 million and non-cash interest and amortization of debt discount of $3.1 million. Net cash inflows from changes in operating assets and liabilities of $1.8 million consisted of a decrease in accounts receivable of $4.0 million and a decrease in accrued expenses of $3.1 million and a decrease in deferred revenue of $2.2 million.

Net cash used in operating activities for the six months ended June 30, 2018 was $26.0 million and included a net loss of $24.3 million.  Net non-cash adjustments to reconcile net loss to net cash provided by operations were $2.8 million, and included $8.3 million in change in fair value of our derivative liability, partially offset by depreciation and amortization expense of $2.4 million, stock-based compensation expense of $2.0 million and non-cash interest and amortization of debt discount of $1.2 million. Net cash outflows from changes in operating assets and liabilities of $1.2 million consisted of an increase in accrued expenses of $6.8 million, offset by decreases in accounts receivable of $5.3 million.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2017 was $15.4 million and consisted of $55.9 million used to purchase investments, offset by $37.3 million for the maturity of investments. 

Net cash provided by investing activities for the six months ended June 30, 2018 was $27.9 million and consisted primarily of the maturity of investments for $51.4 million, offset by cash outflows of $23.5 million for the purchase of investments.

Cash Flows from Financing Activities

Net cash provided by financing activities was $42.0 million for the six months ended June 30, 2017 and consisted of $38.3 million in net proceeds from the issuance of the second tranche of the 13% Notes and Royalty Rights and $3.8 million in net proceeds from the issuance of common stock pursuant to our “at-the-market” facility.

Net cash provided by financing activities was $4.8 million for the six months ended June 30, 2018 and included $5.0 million in net proceeds from the issuance of common stock under our at-the-market offering.

Operating and Capital Expenditure Requirements

We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, sales and marketing expenses, commercial infrastructure, legal and other regulatory expense, business development opportunities and general overhead costs, including interest and principal repayments on our outstanding debt. We expect our cash expenditures to decrease in the near term as a result of our corporate restructuring initiative and the reduction of our research and development activities.

Because our approved products are in the early stages of commercialization that will require significant investment and our product candidates are in various stages of clinical and preclinical development, and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the commercialization and development of our products and product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders.  The indenture governing the 13% Notes contains covenants that restrict our ability to issue additional indebtedness.  Although our ability to issue additional indebtedness is significantly limited by such covenants, if we raise additional funds through

43

the issuance of convertible debt securities, these securities could have rights senior to those of our Common Stock and could contain covenants that restrict our operations.  We may also seek to raise additional financing through the issuance of debt which, if available and permitted pursuant to the documents governing the 13% Notes and our other existing indebtedness, may involve agreements that include restrictive covenants limiting our ability to take important actions, such as incurring additional debt, making capital expenditures or declaring dividends.  If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.  There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

As of June 30, 2018, we had cash and cash equivalents, restricted cash and marketable securities of $70.4 million. Given the uncertainty with respect to the various factors and assumptions underlying the previously disclosed date through which we estimated that our cash and cash equivalents would be sufficient to fund our future cash requirements, we are no longer in a position to provide such forward-looking information. The 5.50% Notes and 6.50% Notes each provide that the delisting of our common stock from the Nasdaq exchange (or, in the case of the 5.50% Notes, the Nasdaq Global Market) would constitute a “fundamental change” under the applicable indenture, which would entitle the holders of such notes, at the holders’ option, to require us to repurchase for cash all or any portion of such holder’s notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued  and unpaid interest thereon. Due to the transfer of our common stock listing to the Nasdaq Capital Market in July 2018, we have issued Notice of a Fundamental Change to the holders of the approximately $24.6 million in aggregate principal amount of 5.50% Notes outstanding and made an offer to purchase all or any portion of each holder’s 5.50% Notes on the terms set forth in the related Indenture.  The holders have until September 18, 2018 to exercise their rights to cause us to repurchase their 5.50% Notes. Whether or not such holders exercise their rights or whether or not we are delisted from Nasdaq entirely, we may be forced to, or choose to, sell our company or our assets, cease or wind down operations, seek protection under the provisions of the U.S. Bankruptcy Code, or otherwise liquidate and dissolve our company.  Our future operating and capital requirements will depend on many factors, including: 

· the commercial success of our approved products

· the cost of our current commercialization activities, including marketing, sales and distribution costs, as well as, commercialization activities for any future product candidates that are approved for sale; our ability to establish collaborations or product acquisitions on favorable terms, if at all;

· the results of our clinical trials; 

· the scope, progress, results and costs of product development of our product candidates;

· the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending intellectual property-related claims;

· our ability to raise additional capital, which is currently limited by the covenants and other restrictions contained in the agreements governing our existing indebtedness; and

· our continued listing on the Nasdaq.

Among other things, we plan to explore options for the Company in an effort to maximize both near- and long-term value, which may include, without limitation, an acquisition of another company, acquisitions or in-licensing of products or product candidates, technologies or other assets, the sale of all or substantially all of the assets of the Company, a sale of stock, a strategic merger or other business combination transaction, other transaction between the Company and a third party and/or the restructuring of our existing indebtedness.  In the near term, we plan to continue to finance our operations with our existing cash. We do not have a defined timeline for our exploration of options and we can provide no assurance that the process will result in any particular option being announced or consummated. Given the immediacy of the rights of the 5.50% Noteholders to require us to repurchase their 5.50% Notes, we are working expeditiously to explore our options.

Please see the “Risk Factors” section of this quarterly report and our most recent Annual Report on Form 10-K filed with the SEC on March 16, 2018 for additional risks associated with our substantial capital requirements.

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Purchase Commitments

Other than as described in our Annual Report on form 10-K as filed with SEC on March 16, 2018, with respect to the purchase of ARYMO ER from Halo Pharmaceutical, Inc., we have no material non‑cancelable purchase commitments with service providers as we have generally contracted on a cancelable purchase order basis.

Employment Agreements

We have entered into employment agreements with our president and chief executive officer, chief financial officer, chief operating officer, chief commercial officer, chief scientific officer, chief accounting officer and general counsel, that provide for, among other things, salary, bonus and severance payments.

Legal Proceedings

Please refer to Note 12 - Commitments and Contingencies — Legal Proceedings and Note 15 - Subsequent Event in the notes to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.

Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

JOBS Act

As an “emerging growth company” under the JOBS Act of 2012, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing not to delay our adoption of such new or revised accounting standards. As a result of this election, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of December 31, 2017 and June 30, 2018 we had cash and cash equivalents, restricted cash and marketable securities of $91.4 million and $70.4 million, respectively, consisting of money market funds, certificates of deposit, commercial paper, U.S. government agency securities and corporate debt securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in marketable debt securities. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.

We have international operations and as a result, contract with vendors internationally. We may be subject to fluctuations in foreign currency rates in connection with payments made under these agreements. Historically, we have not hedged our foreign currency exchange rate risk, as the impacts of changes in foreign currency rates on payments made under these arrangements have not been material.

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ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, our management, including our CEO and CFO, concluded that as of June 30, 2018 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

With the exception for the implementation of certain internal controls related to the new revenue recognition standard adoption on January 1, 2018, there were no changes in our internal control over financial reporting during the three months ended June 30, 2018, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1.  LEGAL PROCEEDINGS

Refer to Note 12 - Commitments and Contingencies—Legal Proceedings and Note 15 – Subsequent Events in the notes to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which are incorporated into this item by reference.

ITEM 1A. RISK FACTORS

We are subject to various risks and uncertainties that could have a material impact on our business, financial condition, results of operations and cash flows. The discussion of these risk factors is included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and is updated for the following: 

If we cannot continue to satisfy the Nasdaq Capital Market continued listing standards, other Nasdaq rules, or the conditions and milestones set by the Nasdaq Hearings Panel, our common stock could be delisted, which would harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock and accelerate our indebtedness, and would trigger our obligation to repurchase our 6.50% Notes.

Our common stock is currently listed on the Nasdaq Capital Market. To maintain the listing of our common stock on the Nasdaq Capital Market, we are required to meet certain listing requirements, including, among others, a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1.0 million and a total market value of listed securities of at least $35.0 million.

On July 9, 2018, we received notice from the Nasdaq Stock Market LLC (“Nasdaq”) that the Nasdaq Hearings Panel approved the transfer of the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Transfer”). In addition to the requirements listed above, pursuant to such notice, the continued listing of our common stock on the Nasdaq Capital Market is also subject to (i) the fulfillment of certain conditions and milestones and (ii) our evidencing a market value of our common stock of over $35.0 million for at least 10 consecutive trading days not later than November 20, 2018. Management is working to meet

46

such conditions and milestones and to demonstrate compliance with the requirements for continued listing on the Nasdaq Capital Market.

Also, as previously disclosed, on March 8, 2018, we received a notice from Nasdaq that we were not in compliance with Nasdaq’s Listing Rule 5450(a), as the closing bid price of our common stock had been below $1.00 for the previous 30 consecutive business days. We were provided with an initial grace period of 180 calendar days, or until September 4, 2018, to regain compliance with the minimum bid price requirement.

There can be no assurance that we will satisfy the Nasdaq Capital Market listing requirements or the conditions and milestones established by the Nasdaq Hearings Panel. In the event that our common stock is delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the over-the-counter (“OTC”) Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.

Further, the indentures governing the 5.50% Notes, the 6.50% Notes and our 13% Notes also contain certain customary covenants that limit or restrict our ability to, among other things, incur additional indebtedness or repay existing indebtedness, grant any security interests, pay cash dividends, repurchase our common stock, make loans, or enter into certain transactions without prior consent.  As a result of our delisting from the Nasdaq Global Market, we are required to repurchase our 5.50% Notes in cash as described herein, and if we are not able to obtain or maintain listing on the Nasdaq Capital Market, we would be similarly required to repurchase our 6.50% Notes for cash. 

A default under our notes, or becoming obligated to repurchase the 5.50% Notes or the 6.50% Notes as a result, including with respect to a Fundamental Change or otherwise, may have a material adverse effect on our financial condition.

If an event of default under the 5.50% Notes, 6.50% Notes or the 13% Notes occurs, the principal amount of such notes, plus accrued and unpaid interest (including additional interest, if any) may be declared immediately due and payable, subject to certain conditions set forth in the indenture governing such notes. Events of default include, but are not limited to: failure to pay principal or interest when due (including, with respect to the 5.50% Notes and 6.50% Notes, in connection with a Fundamental Change (as defined in the respective indentures governing such notes) on the Fundamental Change Repurchase Date (as defined in the respective indentures governing such notes)); failure to deliver shares of common stock upon conversion of any 5.50% Notes or 6.50% Notes; acceleration of our other indebtedness in excess of certain specified amounts; certain types of bankruptcy or insolvency involving us; certain other events specified in the respective indentures governing such notes.  Further, as a result of the “cross-default” provisions contained in such indentures, a default under one such indenture may result in a cascading of defaults across all such indentures, including the indenture governing the 13% Notes if, among other things, we are unable to fulfill our repurchase obligations with respect to the 5.50% Notes and/or 6.50% Notes in compliance with the covenants contained in the indenture governing the 13% Notes.

Accordingly, the occurrence of a default under any of our notes, unless cured or waived, may have a material adverse effect on our results of operations including, without limitation, forcing us to seek bankruptcy protection.  In the event we are unable or determine not to fulfill our repurchase obligations with respect to the 5.50% Notes and/or 6.50% Notes in connection with any Fundamental Change, including, without limitation, making any such repurchase(s) in accordance with the terms of the indenture governing the 13% Notes, it would result in such a default and may force us to seek bankruptcy protection.

In addition, our obligations under 13% Notes are secured by substantially all of our assets (subject to certain exceptions described in the indenture governing the 13% Notes), so if we default on those obligations, the noteholders could foreclose on our assets. As a result of these security interests, such assets may only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent at a time when the value of such assets exceeded the amount of our indebtedness and other obligations. In addition, the existence of these security interests may adversely affect our financial flexibility.

47

In the event of a default in connection with our bankruptcy, insolvency, liquidation, or reorganization, the holders of the 13% Notes will have a prior right to substantially all of our assets to the exclusion of our general creditors. In that event, our assets would first be used to repay in full all secured indebtedness and other obligations, resulting in all or a portion of our assets being unavailable to satisfy the claims of any unsecured indebtedness. Only after satisfying the claims of any unsecured creditors would any amount be available for our equity holders. As a consequence, our equity may receive less than the current trading price of our common stock or nothing at all.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

Exhibit Number	Description
3.1	Third Amended and Restated Certificate of Incorporation of Egalet Corporation, as amended (incorporated by reference to Exhibit 3.1 to Egalet Corporation’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2018).
3.2	Amended and Restated Bylaws of Egalet Corporation (incorporated by reference to Exhibit 3.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on February 11, 2014).
10.1	Form of Egalet Corporation Restricted Stock Award Agreement (filed herewith).
10.2	Amendment No. 3 to the Egalet Corporation 2013 Stock-Based Incentive Compensation Plan (incorporated by reference to Annex A-1 to Egalet Corporation’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on April 6, 2018).
31.1	Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

49

EXHIBIT INDEX

Exhibit Number	Description
3.1	Third Amended and Restated Certificate of Incorporation of Egalet Corporation, as amended (incorporated by reference to Exhibit 3.1 to Egalet Corporation’s quarterly report on Form 10‑Q filed with the Securities and Exchange Commission on August 7, 2015).
3.2	Amended and Restated Bylaws of Egalet Corporation (incorporated by reference to Exhibit 3.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on February 11, 2014).
10.1	Form of Egalet Corporation Restricted Stock Award Agreement (filed herewith).
10.2	Amendment No. 3 to the Egalet Corporation 2013 Stock-Based Incentive Compensation Plan (incorporated by reference to Annex A-1 to Egalet Corporation’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on April 6, 2018).
31.1	Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

50

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 9, 2018
	EGALET CORPORATION
	By:	/s/ STANLEY J. MUSIAL
		Stanley J. Musial
		Chief Financial Officer

51

EX-10.1

Exhibit 10.1

EGALET CORPORATION

Restricted Stock Award Agreement

This Restricted Stock Award Agreement (this "Agreement") is made and entered into as of _________ __], 20__ (the "Grant Date") by and between Egalet Corporation, a Delaware corporation (the "Company") and [________] (the "Grantee").

WHEREAS, the Company has adopted the Egalet Corporation 2013 Stock-Based Incentive Compensation Plan, as amended and/or restated from time to time (the "Plan"), pursuant to which awards of Restricted Stock may be granted; and

WHEREAS, the Committee has determined that it is in the best interests of the Company and its stockholders to grant the award of Restricted Stock provided for herein.

NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:

1.   Grant of Restricted Stock. Pursuant to the terms of the Plan, the Company hereby issues to the Grantee on the Grant Date a Restricted Stock Award consisting of the number of shares of Common Stock (the "Restricted Stock") set forth in the Grant Notice attached hereto as Exhibit A, on the terms and conditions and subject to the restrictions set forth in this Agreement, the attached Grant Notice and the Plan. Capitalized terms that are used but not defined herein have the meaning ascribed to them in the Plan.

2.   Restriction Period; Vesting.  The Restricted Stock shall be eligible to vest in accordance with the vesting schedule set forth in the attached Grant Notice.

3.   Termination.  If the Grantee's service with the Company or an Affiliate terminates for any reason at any time before all of his or her Restricted Stock has vested, the Grantee's unvested Restricted Stock shall be automatically forfeited upon such termination of service and neither the Company nor any Affiliate shall have any further obligations to the Grantee under this Agreement.

4.   Restrictions. Subject to any exceptions set forth in this Agreement, the Grant Notice or the Plan, during the Restriction Period, the Restricted Stock or the rights relating thereto may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Grantee. Any attempt to assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Restricted Stock or the rights relating thereto during the Restriction Period shall be wholly ineffective and, if any such attempt is made, the Restricted Stock will be forfeited by the Grantee and all of the Grantee's rights to such shares shall immediately terminate without any payment or consideration by the Company.

5.   Voting; Dividends.  During the Restriction Period, the Grantee shall have the right to vote the shares of Restricted Stock subject to this Agreement.  During the Restriction Period, no dividend shall be paid with respect to any shares of Restricted Stock subject to this Agreement and the Grantee shall have no future right to any dividend paid during the Restriction Period.

6.   No Right to Continued Service. Neither the Plan nor this Agreement shall confer upon the Grantee any right to be retained in any position, as an Employee, Consultant or Non-Employee Director of the Company or any Affiliate. Further, nothing in the Plan or this Agreement shall be construed to limit the discretion of the Company or any Affiliate to terminate the Grantee's employment or other service at any time, with or without cause.

7.   Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, the shares of Common Stock shall be subject to adjustment in any manner provided under Section 13 of the Plan.

8.   Tax Liability and Withholding.  The Grantee shall be required to pay to the Company, and the Company shall have the right to deduct from any compensation paid to the Grantee pursuant to the Plan or otherwise, the amount of any required withholding taxes in respect of the Restricted Stock and to take all such other action as the Committee deems necessary to satisfy all obligations for the payment of such withholding taxes.  The Grantee may satisfy any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:

(a)    tendering a cash payment.

(b)    authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable or deliverable to the Grantee as a result of the vesting of the Restricted Stock; provided, however, that no shares of Common Stock shall be withheld with a value exceeding the minimum amount of tax required to be withheld by law.

(c)    tendering proceeds received from a broker-dealer authorized by the Grantee to sell all or a portion of the shares of Common Stock delivered to the Grantee as a result of the vesting of the Restricted Stock.

(d)    delivering to the Company previously owned and unencumbered shares of Common Stock.

9.   Compliance with Law. The issuance and transfer of Common Stock shall be subject to compliance by the Company and the Grantee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Common Stock may be listed. No Common Stock shall be issued or transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. The Grantee understands

2

that the Company is under no obligation to register the Common Stock with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.

10. Stock Issuance.  The Company may issue stock certificates or evidence the Grantee's interest by using a restricted book entry account with the Company's transfer agent.  A  physical or electronic legend, as applicable, may be placed on any certificate(s) representing the shares of Restricted Stock granted pursuant to this Agreement indicating restrictions on transferability of such shares or any other restrictions that the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any applicable federal or state securities laws or any stock exchange on which shares of Common Stock are then listed or quoted.  Any such certificate(s) shall be held in escrow by the Company during the Restriction Period.  The Grantee shall sign a stock power endorsed in blank to the Company to be held in escrow during the Restriction Period

11. Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of Delaware without regard to conflict of law principles.

12. Restricted Stock Subject to Plan. This Agreement is subject to the Plan as approved by the Company's stockholders. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

13. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon the Grantee and the Grantee's beneficiaries, executors, administrators and the person(s) to whom the Restricted Stock may be transferred by will or the laws of descent or distribution.

14. Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the Restricted Stock, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Grantee's material rights under this Agreement without the Grantee's consent.

15. Recoupment. The Restricted Stock and any compensation paid with respect thereto shall be subject to mandatory repayment by the Grantee to the Company pursuant to the terms of any Company “clawback” or recoupment policy directly applicable to the Plan and in effect on the date hereof or required by law to be applicable to the Grantee.

3

16. Acceptance. The Grantee hereby acknowledges receipt of a copy of the Plan and this Agreement. The Grantee has read and understands the terms and provisions thereof, and accepts the Restricted Stock subject to all of the terms and conditions of the Plan and this Agreement.

[SIGNATURE PAGE FOLLOWS]

4

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

EGALET CORPORATION

By:

Name:

Title:

GRANTEE

Name:

Exhibit A

Notice of Grant

This Notice of Grant sets forth the specific terms that apply to the Restricted Stock granted to the Grantee identified below under the Restricted Stock Award Agreement (the “Agreement”), made and entered into as of ________ __, 20__, between Egalet Corporation, a Delaware corporation (the “Company”), and the Grantee.  Capitalized terms that are used but not defined herein shall have the meanings given to such terms in the Agreement.

Grantee Name:	[___________]
Shares of Restricted Stock Granted:	[___________]
Grant Date:	[___________]

Vesting Schedule:       [FOR EMPLOYEES: [Unless otherwise provided in the resolutions authorizing such grant, subject to the Grantee’s continuing employment with the Company, [  25%  ] of the shares of Restricted Stock shall vest, and the restrictions applicable thereto shall lapse, on the 181st day following the Grant Date; [the remaining 75% of the shares of Restricted Stock shall be divided into 14 installments that are as equal as possible] shall vest, and the restrictions applicable thereto shall lapse, on the last day of each calendar quarter beginning the quarter thereafter[; provided that [the last installment is slightly larger if necessary to make the other installments equal] shares of Restricted Stock shall vest on the last quarterly installment date,] until 100% of the Restricted Stock is vested The unvested portion of the Restricted Stock will be forfeited for no compensation upon the Grantee's termination of employment for any reason.

Notwithstanding the foregoing, if the Grantee’s service with the Company or an Affiliate is terminated by the Company or such Affiliate without Cause (other than due to the Grantee’s death or Disability), the number of shares of Restricted Stock that, but for such termination of service, would have vested on the last day of the calendar quarter in which such termination of service occurs shall vest upon the Grantee’s termination of service.]

OR

[100% of the Restricted Stock shall vest, and the restrictions applicable thereto shall lapse, on the first anniversary of the Date of Grant, subject to the Grantee’s continued employment or service through such dates.  The unvested portion of the Restricted Stock will be forfeited for no compensation upon the Grantee's termination of employment for any reason.]

Notwithstanding the foregoing, if the Grantee remains in continuous service with the Company or an Affiliate until the date of a Change in Control, 100% of the unvested shares of Restricted Stock shall vest immediately prior to the consummation of such Change in Control.]

[FOR NON-EMPLOYEE DIRECTORS: Subject to the Grantee’s continuing service with the Company, 100% of the Restricted Stock shall vest, and the restrictions applicable thereto shall lapse, on the date immediately preceding the date of the Company’s first annual meeting of stockholders immediately following the Grant Date.  The unvested portion of the Restricted Stock will be forfeited for no compensation upon the Grantee's termination of service for any reason.]

2

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer of Egalet Corporation

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert S. Radie, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Egalet Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2018

/s/ ROBERT S. RADIE

Robert S. Radie

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial and Accounting Officer of Egalet Corporation

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Stanley J. Musial, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Egalet Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2018

/s/ STANLEY J. MUSIAL

Stanley J. Musial

Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Of

Principal Executive Officer

Pursuant To 18 U.S.C. Section 1350,

As Adopted Pursuant To

Section 906 Of The Sarbanes-Oxley Act Of 2002

In connection with the Quarterly Report of Egalet Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert S. Radie, president and chief executive officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.

Date: August 9, 2018	/s/ ROBERT S. RADIE
	President and Chief Executive Officer
	(Principal Executive Officer)

This certification accompanies the Report and shall not be deemed “filed” by the Company with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

Certification Of

Principal Financial and Accounting Officer

Pursuant To 18 U.S.C. Section 1350,

As Adopted Pursuant To

Section 906 Of The Sarbanes-Oxley Act Of 2002

In connection with the Quarterly Report of Egalet Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stanley J. Musial, chief financial officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.

Dated: August 9, 2018	/s/ STANLEY J. MUSIAL
	Chief Financial Officer (Principal Financial Officer)

This certification accompanies the Report and shall not be deemed “filed” by the Company with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 09, 2018
Document and Entity Information
Entity Registrant Name	Egalet Corp
Entity Central Index Key	0001586105
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		56,772,101
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2

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Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 37,829	$ 31,090
Marketable securities, available for sale	32,178	59,953
Accounts receivable	9,083	4,120
Inventory	3,183	3,225
Prepaid expenses and other current assets	1,539	2,672
Other receivables	889	893
Total current assets	84,701	101,953
Intangible assets, net	5,466	6,583
Restricted cash	400	400
Property and equipment, net	8,565	9,911
Deposits and other assets	848	1,011
Total assets	99,980	119,858
Current liabilities:
Accounts payable	8,758	10,160
Accrued expenses	27,949	16,104
Deferred revenue	0	7,456
Debt - current, net	22,386	1,081
Warrant liability	2,833	8,166
Total current liabilities	61,926	42,967
Debt - non-current portion, net	78,620	98,890
Deferred income tax liability	1,005	26
Derivative liability	1,153	16,623
Other liabilities	634	727
Total liabilities	143,338	159,233
Commitments and contingencies (Note 12)
Stockholders? deficit:
Common stock--$0.001 par value; 75,000,000 and 275,000,000 shares authorized at December 31, 2017 and June 30, 2018, respectively; 45,939,663 and 56,298,373 shares issued and outstanding at December 31, 2017 and June 30, 2018, respectively	52	46
Additional paid-in capital	273,379	254,871
Accumulated other comprehensive income	926	1,008
Accumulated deficit	(317,715)	(295,300)
Total stockholders' deficit	(43,358)	(39,375)
Total liabilities and stockholders? deficit	$ 99,980	$ 119,858

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2018	Dec. 31, 2017
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, authorized	275,000,000	75,000,000
Common stock, issued	56,298,373	45,939,663
Common stock, outstanding	56,298,373	45,939,663

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Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenues
Revenues	$ 7,443	$ 6,255	$ 13,704	$ 11,682
Cost and Expenses
Amortization of product rights	531	522	1,068	1,025
General and administrative	6,694	12,471	13,767	20,962
Sales and marketing	9,019	9,340	18,074	18,598
Research and development	999	4,594	2,302	11,114
Total costs and expenses	18,808	27,999	38,991	54,096
Loss from operations	(11,365)	(21,744)	(25,287)	(42,414)
Other (income) expense:
Change in fair value of warrant and derivative liability	(3,181)		(8,306)	(12)
Interest expense, net	3,804	4,749	7,360	9,283
Other (gain) loss	(25)	(14)	(25)	167
Total other (income) expense	598	4,735	(971)	9,438
Loss before provision (benefit) for income taxes	(11,963)	(26,479)	(24,316)	(51,852)
Provision (benefit) for income taxes	0	0	0	0
Net loss	$ (11,963)	$ (26,479)	$ (24,316)	$ (51,852)
Per share information:
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (0.22)	$ (1.04)	$ (0.48)	$ (2.06)
Weighted-average shares outstanding, basic and diluted (in shares)	53,302,399	25,542,733	50,302,419	25,145,440
Product
Revenues
Revenues	$ 7,443	$ 6,255	$ 13,704	$ 11,682
Cost and Expenses
Cost of sales (excluding amortization of product rights)	$ 1,565	$ 1,072	$ 3,780	$ 2,397

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Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Consolidated Statements of Comprehensive Loss
Net loss	$ (11,963)	$ (26,479)	$ (24,316)	$ (51,852)
Other comprehensive income (loss):
Unrealized loss on available for sale securities	59	(2)	29	(37)
Foreign currency translation adjustments	(235)	491	(111)	620
Comprehensive loss	$ (12,139)	$ (25,990)	$ (24,398)	$ (51,269)

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Consolidated Statements of Cash Flows $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)
Operating activities:
Net loss	$ (24,316)	$ (51,852)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,407	2,568
Change in fair value of warrant and derivative liability	(8,306)	(12)
Stock-based compensation expense	1,954	3,362
Non-cash interest and amortization of debt discount	1,242	3,055
Amortization of premium (discount) on marketable securities	(144)	56
Changes in assets and liabilities:
Accounts receivable	(5,334)	(3,999)
Inventory	(115)	(249)
Prepaid expenses and other current assets	1,133	1,171
Other receivables	(23)	(121)
Deposits and other assets	164	(1,044)
Accounts payable	(1,403)	790
Accrued expenses	6,825	3,084
Deferred revenue		2,209
Other current liabilities	(1)	3
Other liabilities	(91)	(90)
Net cash used in operating activities	(26,008)	(41,069)
Investing activities:
Payments for purchase of property and equipment	(9)	(117)
Purchases of investments	(23,451)	(55,945)
Sales of investments		3,400
Maturity of investments	51,400	37,297
Net cash (used in) provided by investing activities	27,940	(15,365)
Financing activities:
Net proceeds from issuance of common stock	5,048	3,809
Net proceeds from debt and royalty rights		38,304
Royalty payments in connection with the 13% Notes	(201)	(146)
Net cash provided by financing activities	4,847	41,967
Effect of foreign currency translation on cash and cash equivalents	(40)	380
Net (decrease) increase in cash and restricted cash	6,739	(14,087)
Cash and restricted cash at beginning of period	31,490	44,355
Cash and restricted cash at end of period	38,229	30,268
Supplemental disclosures of cash flow information:
Cash interest payments	5,878	$ 5,462
Non-cash financing activities:
Reclassification to additional paid-in capital of derivative liability	$ 12,497
13% Notes
Financing activities:
Interest rate (as a percent)	13.00%

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Organization and Description of the Business

6 Months Ended

Jun. 30, 2018

Organization and Description of the Business

Organization and Description of the Business

1. Organization and Description of the Business

Organization and Business Overview

Egalet Corporation (the “Company”) is a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain and other conditions. Given the need for acute and chronic pain products and the issue of prescription abuse, the Company is focused on bringing non-narcotic and abuse-deterrent (“AD”) formulations of opioids to patients and healthcare providers. The Company is currently marketing SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”), OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”) and ARYMO® ER (morphine sulfate) extended-release (“ER”) tablets, for oral use CII (“ARYMO ER”).

SPRIX Nasal Spray is a nonsteroidal anti-inflammatory drug indicated in adult patients for the short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level.  OXAYDO is an immediate release (“IR”) oxycodone product designed to discourage abuse via snorting, indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. ARYMO ER is an ER morphine product formulated with AD properties and approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. ARYMO ER is the Company’s first product developed using its proprietary Guardian™ Technology.

The Company also has a pipeline of products developed using Guardian Technology which it may look to partner. The Company plans to continue to grow revenues of its three commercial products, explore business development opportunities and leverage its proprietary Guardian Technology.

Liquidity and Substantial Doubt in Going Concern

As of June 30, 2018, the Company was not in compliance with certain Nasdaq Global Market listing requirements. The Company’s outstanding 5.50% convertible notes (the “5.50% Notes”) in the principal amount of $24.7 million contain redemption features in the event the Company was not able to maintain its Nasdaq Global Market listing. On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the transfer of the listing of the Company’s Common Stock from the Nasdaq Global Market to the Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Transfer”).  The Transfer represents a fundamental change under the 5.50% Notes, whereby the 5.50% Note holders are entitled to require the Company to repurchase for cash all or any portion of the 5.50% Notes at a repurchase price equal to 100% of the principal amount thereof. The continued listing on the Nasdaq Capital Market is subject to (i) the fulfillment of certain conditions and milestones and (ii) the Company’s evidencing a market value of the Company’s common stock of over $35 million for at least 10 consecutive trading days not later than November 20, 2018.  Due to this short-term redemption feature of the 5.50% Notes, the Company reclassified the principal amount of the 5.50% Notes and the related debt discount from non-current liabilities to current liabilities in the Company’s consolidated balance sheet at June 30, 2018. Refer to Note 15 – Subsequent Events for further information.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. As of June 30, 2018, the Company had an accumulated deficit of $317.7 million and will need to improve cash generated from product sales and may require additional capital to fund its commercialization strategies for SPRIX Nasal Spray, OXAYDO and ARYMO ER.  The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to its commercial infrastructure.  

The Company’s outstanding 6.50% Notes (as defined below) in the principal amount of $23.9 million contain redemption features in the event the Company is not able to maintain any Nasdaq listing. Refer to Note 7 – Long Term Debt for further information. These factors, in combination with others described above, raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date that these financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company continues to seek other sources of capital and alternatives, such as contemplating a reverse stock split, to maintain its listing on the Nasdaq. However, if the Company is unable to raise sufficient capital or maintain its Nasdaq listing to prevent the redemption of its convertible notes, both the 6.50% Notes referred to herein and the 5.50% Notes described above, the Company will not have sufficient liquidity to fund its business operations for at least the next year following the date that the financial statements are issued.  Accordingly, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

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Summary of Significant Accounting Policies and Basis of Accounting

6 Months Ended

Jun. 30, 2018

Summary of Significant Accounting Policies and Basis of Accounting

Summary of Significant Accounting Policies and Basis of Accounting

2. Summary of Significant Accounting Policies and Basis of Accounting

Basis of Presentation

The unaudited consolidated financial statements are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial information at June 30, 2018 and the three and six months ended June 30, 2017 and 2018 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of June 30, 2018, the consolidated results of its operations and comprehensive loss for the three and six months ended June 30, 2017 and 2018, and consolidated cash flows for the six months ended June 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2017 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018 with the SEC.

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies, except as described in Note 3 – Revenue from contracts with customers.

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line on the Company’s consolidated balance sheets, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the Company’s consolidated balance sheet. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU increased the beginning and ending cash balances in the Company’s statement of cash flows. . The Company has adopted the standard in the first quarter of 2018. The adoption had no material impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated balances sheet or statement of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has defined a process to meet the accounting and reporting requirements of the guidance and is assessing lease arrangements in order to determine the impact ASU 842 adoption will have on the financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company has adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the three and six months ended June 30, 2018.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance became effective in calendar year 2018. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.

In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers:  Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers:  Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition (collectively “ASC 606”). These standards are effective for the Company beginning in the first quarter of 2018.

The Company formed a task force that analyzed the Company’s customer contracts and the impacts the standard had on previously reported revenues and future revenues. Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the Company now recognizes net product sales under such contracts earlier under ASC 606 than it would have recognized under the historic guidance.

The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. Refer to Note 3 — Revenue From Contracts with Customers for further details.

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Revenue from Contract with Customers

6 Months Ended

Jun. 30, 2018

Revenue from Contract with Customers

Revenue from Contract with Customers

3. Revenue From Contracts with Customers

Adoption of ASC Topic 606, Revenue from Contracts with Customers

The Company adopted ASC 606 on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption, referred to herein as the “new guidance”. The reported results as of, and for the three and six months ended June 30, 2018 reflect the application of ASC 606 guidance while the reported results as of, and for the three and six months ended June 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 had a material impact on the Company’s consolidated financial position, results of operations and stockholders’ deficit as of the adoption date and for the three and six months ended June 30, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's products to its customers and will provide financial statement readers with enhanced disclosures.

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers for which all performance obligations were satisfied as of January 1, 2018, was recorded as an adjustment to accumulated deficit as of the adoption date. For contracts which were modified before the adoption date, the Company has not restated the contract for those modifications. Rather, the Company has reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price, if necessary. As a result of applying the modified retrospective method in adopting the new revenue guidance, the following adjustments were made to accounts on the Company’s consolidated balance sheets as of January 1, 2018:

	December 31, 2017		Adjustments due to ASU 2014-09		January 1, 2018
Accounts receivable		4,120		(371)		3,749
Inventory		3,225		(157)		3,068
Accrued expenses		16,104		5,028		21,132
Deferred revenue		7,456		(7,456)		-
Accumulated deficit		(295,300)		1,900		(293,400)

Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the adjustments reflect the recognition of all deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related decrease in inventory.  In addition, the Company recorded accrued expenses for patient discount programs, commercial and government rebates and a reduction in accounts receivable for estimated returns.  An adjustment to accumulated deficit was recorded for the net impact of the preceding adjustments as of January 1, 2018.

Revenue Recognition

Under ASC 606, revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers.  To recognize revenue pursuant to the provisions 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 the Company will collect substantially all 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 whether the goods or services promised within each contract are distinct to determine those that are performance obligations.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price to which the Company expects to be entitled after giving effect to returns, rebates, sales allowances and other variable elements with contracts between the Company and its customers.  Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.  Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance under the contract and all information (historical, current and forecasted) that is reasonably available.  Sales taxes and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component.  Applying the significant financing practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less.  None of the Company’s contracts contained a significant financing component as of June 30, 2018.

The Company’s existing contracts with customers contain only a single performance obligation and, as such, the entire transaction price is allocated to the single performance obligation.  Should future contracts contain multiple performance obligations, those would require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation.  The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available.

The Company’s performance obligations are to provide pharmaceutical products to several wholesalers or a single specialty pharmaceutical distributor.  All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good to a customer, which is typically upon delivery.  Payments for invoices are generally due within 30 days of invoice date.

Disaggregation of Revenue

The following table summarizes revenue by revenue source for the three and six months ended June 30, 2018:

(in thousands)	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Product lines
SPRIX Nasal Spray	$	5,404	$	10,218
OXAYDO		1,688		2,948
ARYMO ER		351		538
Total	$	7,443	$	13,704

Reserves for Variable Consideration

Revenues from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates and sales allowances that are offered within or impacted by contracts between the Company and its customers. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract as of the date of determination.  The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  Actual amounts of consideration ultimately received may differ from the Company’s estimates.  If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

Consistent with industry practice, the Company generally offers customers a limited right of return for its products. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized.  The Company estimates product return liabilities using the expected value method based on its historical sales information and other factors that it believes could significantly impact its expected returns, including product recalls and expirations, of which it becomes aware. These factors include its estimate of actual and historical return rates for non-conforming product and open return requests.

Specialty Pharmacy Fees 

The Company pays certain specialty pharmaceutical distributor fees based on a contractually determined rate. The Company records the fees on shipment to the distributor and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Wholesaler Fees

The Company pays certain pharmaceutical wholesalers fees based on a contractually determined rate. The Company accrues the fees on shipment to the respective wholesalers and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Prompt Pay Discount

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company estimates for cash discounts using the mostly likely amount method by reducing accounts receivable by the prompt pay discount amount. The discount is recognized as a reduction of revenue in the same period as the related revenue.

Patient Discount Programs

The Company offers co-pay discount programs for SPRIX Nasal Spray, OXAYDO and ARYMO ER to patients, in which patients receive a co-pay discount on their prescriptions. The Company estimates the total amount that will be redeemed using the expected valuemethod based on the quantity of product shipped. The Company recognizes the discount as a reduction of revenue in the same period as the related revenue.

Commercial and Government Rebates

The Company contracts with various private and government payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products.  The Company estimates these rebates using the expected valuemethod and records such estimates in the same period the related revenue is recognized, resulting in a reduction of net product sales and the establishment of an accrued expense.

The following table summarizes activity in each of the net product sales allowance and reserve categories for the  six months ended June 30, 2018:

(in thousands)	Fees and distribution costs		Co-pay assistance		Rebates		Returns		Total
Balances at December 31, 2017	$	595	$	3,644	$	579	$	—	$	4,818
Adjustment for ASU 2014-09		—		4,221		656		—		4,877
Allowances for current period sales		4,052		36,335		3,908		510		44,805
Adjustment related to prior period sales		—		—		180		—		180
Credits or payments made for prior period sales		(555)		(7,840)		(1,214)		—		(9,609)
Credits or payments made for current period sales		(3,463)		(22,965)		(1,633)		(394)		(28,455)
Balance at June 30, 2018	$	629	$	13,395	$	2,476	$	116	$	16,616
Total gross product sales									$	58,690
Total provision for product sales allowances and accruals as a percentage of total gross sales										76%

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the Company’s reported consolidated balance sheet as of June 30, 2018 to the pro-forma amounts had the previous guidance been in effect:

			Adjustments Due to		Pro Forma if the previous
	As reported		ASU 2014-09		accounting was in effect
Accounts receivable		9,083		371		9,454
Inventory		3,183		423		3,606
Accrued expenses		27,949		(9,850)		18,099
Deferred revenue		-		14,022		14,022
Accumulated deficit		(317,715)		(3,372)		(321,087)

Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the adjustments reflect the accrual of deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related increase in inventory for deferred cost of goods sold.  In addition, the Company would not have accrued expenses for patient discount programs, commercial and government rebates or a reduction in accounts receivable for estimated returns until the product was dispensed to patients.  The adjustment to accumulated deficit represents the net impact of these items.

The following table compares the Company’s reported consolidated statement of operations for the three and six months ended June 30, 2018 to the pro-forma amounts had the previous guidance been in effect:

			Adjustments Due to		Three Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	7,443	$	(391)	$	7,052
Cost of sales (excluding amortization of product rights)		1,565		(144)		1,421
Net loss	$	(11,963)	$	(247)	$	(12,210)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.22)	$	(0.01)	$	(0.23)
Weighted-average shares outstanding, basic and diluted		53,302,399		53,302,399		53,302,399
			Adjustments Due to		Six Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	13,704	$	(1,867)	$	11,837
Cost of sales (excluding amortization of product rights)		3,780		(395)		3,385
Net loss	$	(24,316)	$	(1,472)	$	(25,788)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.48)	$	(0.03)	$	(0.51)
Weighted-average shares outstanding, basic and diluted		50,302,419		50,302,419		50,302,419

Amounts reported on certain line items within net cash used in operating activities on the consolidated statement of cash flows changed as a result of the adoption of ASU 2014-09, but there was no change in the reported amounts of total operating, investing and financing cash flow.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2018. The guidance provides certain practical expedients that limit this requirement including performance obligations that are part of a contract that has an original expected duration of one year or less. All of the Company’s contracts are eligible for the practical expedient provided by ASC 606, therefore the Company elected not to disclose any remaining performance obligations.

Contract Balances from Contracts with Customers

When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of goods or services to the customer under the terms of a contract, the Company records a contract liability. Contract liabilities are recognized as revenue after control of the products is transferred to the customer and all revenue recognition criteria have been met. The Company classifies contract liabilities as deferred revenue. The Company had no deferred revenue as of January 1, 2018 or June 30, 2018.

Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time.  Contract assets are transferred to accounts receivable when the rights become unconditional.  The Company had no contract assets as of January 1, 2018 or June 30, 2018.

Costs to Obtain and Fulfill a Contract

The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, the Company has elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of finished products to customers are expensed as incurred and are recorded in costs of goods sold in the accompanying consolidated statements of operations. The Company expenses incremental costs of obtaining a contract with a customer (for example, commissions) when incurred as the period of benefit is less than one year.

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Investments

6 Months Ended

Jun. 30, 2018

Investments

Investments

4. Investments

Marketable Securities

Marketable securities consisted of the following at December 31, 2017: 

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	60,000	$	—	$	(47)	$	59,953
Total	$	60,000	$	—	$	(47)	$	59,953

Marketable securities consisted of the following as of June 30, 2018:

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	32,195	$	—	$	(17)	$	32,178
Total	$	32,195	$	—	$	(17)	$	32,178

The fair value of marketable securities as of June 30, 2018 with a maturity of less than one year is $32.2 million.  There were no marketable securities with a maturity of greater than one year as of June 30, 2018.

At June 30, 2018, the Company held sixteen marketable securities that were in a continuous loss position for less than one year and one marketable security that was in a continuous loss position for one to two years.  The unrealized losses are immaterial in amount and are the result of current economic and market conditions and the Company has determined that no other than temporary impairment exists at June 30, 2018.

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Inventory

6 Months Ended

Jun. 30, 2018

Inventory

Inventory

5. Inventory

Inventory is stated at the lower of cost or market using actual cost net of reserve for excess and obsolete inventory. The following represents the components of inventory at December 31, 2017 and June 30, 2018:

	December 31,		June 30,
(in thousands)	2017		2018
Raw materials	$	850	$	841
Work in process		772		863
Finished goods		1,446		1,479
Deferred cost of sales		157		—
Total	$	3,225	$	3,183

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Intangible Assets

6 Months Ended

Jun. 30, 2018

Intangible Assets

Intangible Assets

6. Intangible Assets

The following represents the balance of the intangible assets at December 31, 2017:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,695	$	(3,273)	$	4,422	4.00
SPRIX Nasal Spray product rights		4,978		(2,964)		2,014	2.00
IP R&D		183		(36)		147	4.00
Total	$	12,856	$	(6,273)	$	6,583

The following represents the balance of the intangible assets at June 30, 2018:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,653	$	(3,801)	$	3,852	3.60
SPRIX Nasal Spray product rights		4,891		(3,401)		1,490	1.60
IP R&D		177		(53)		124	3.50
Total	$	12,721	$	(7,255)	$	5,466

There was no impairment to intangible assets in the three and six months ended June 30, 2017 or in the three and six months ended June 30, 2018.

Collaboration and License Agreement with Acura Pharmaceuticals, Inc. (“Acura”)

In January 2015, the Company entered into a Collaboration and License Agreement with Acura to commercialize OXAYDO™ (oxycodone hydrochloride) tablets containing Acura’s Aversion® Technology (the “OXAYDO License Agreement”). The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO.  The Company also incurred transaction costs of $172,000 associated with the OXAYDO License Agreement.  Refer to Note 13 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and six months ended June 30, 2017, the Company recognized amortization expense of $270,000 and $539,000, respectively, related to the OXAYDO product rights intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $274,000 and $550,000, respectively, related to the OXAYDO product rights intangible asset.

Purchase Agreement with Luitpold Pharmaceuticals, Inc. (“Luitpold”)

In January 2015, the Company entered into and consummated the transactions contemplated by the Purchase Agreement with Luitpold to purchase SPRIX Nasal Spray (the “SPRIX Purchase Agreement”).  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million. The Company recorded an intangible asset of $4.6 million related to this transaction.  Refer to Note 13 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and six months ended June 30, 2017, the Company recognized amortization expense of $235,000 and $469,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $248,000 and $500,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.

In-Process Research and Development (“IP R&D”)

In connection with the acquisition of Egalet A/S, the Company recognized an IP R&D asset related to the drug delivery platform specifically designed to help deter physical abuse of pain medications, the Guardian Technology. Through December 31, 2017, the IP R&D was considered an indefinite-lived intangible asset and was assessed for impairment annually or more frequently if impairment indicators existed.  Following the approval of ARYMO ER in January 2017, the Company began to amortize the intangible asset over a useful life of five years. 

During the three and six  months ended June 30, 2017, the Company recognized amortization expense of $17,000 related to the IP R&D intangible asset. During the three and six months ended June 30, 2018, the Company recognized amortization expense of $9,000 and $18,000, respectively, related to the IP R&D intangible assets.

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Debt

6 Months Ended

Jun. 30, 2018

Debt

Debt

7. Debt

5.50% Convertible Notes Due 2020 (the “5.50% Notes”)

In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year and commenced on October 1, 2015. As of June 30, 2018, a total of $24.7 million in principal amount of the 5.50% Notes remain outstanding.

The 5.50% Notes are general, unsecured and unsubordinated obligations and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the 5.50% Notes.  The 5.50% Notes rank equal in right of payment to the Company’s existing and future indebtedness and other liabilities that are not so subordinated.  The 5.50% Notes are effectively subordinated to any of the Company’s future secured indebtedness to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries, including trade payables. The 5.50% Notes rank equal in right of the payment to the 13% Notes (as defined below).

The Company may not redeem the 5.50% Notes prior to maturity. The 5.50% Notes are convertible prior to maturity, subject to certain conditions described below, into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at an initial conversion rate of 67.2518 shares per $1,000 principal amount of the 5.50% Notes (equivalent to an initial conversion price of approximately $14.87 per share of Common Stock).  This conversion rate is subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for accrued and unpaid interest.  The Company is obligated to satisfy the conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s Common Stock or a combination thereof, at the Company’s election.

Holders may convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding January 1, 2020 only under the following circumstances:

· on or after the date that is six months after the last date of original issuance of the 5.50% Notes, if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to the conversion price for the 5.50% Notes on each applicable trading day;

· during the five business day period after any five consecutive trading day period, (the “measurement period”), in which the trading price per $1,000 principal amount of 5.50% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Common Stock and the conversion rate on each such trading day; or

· upon the occurrence of specified corporate events, including Fundamental Changes, as defined in the indenture governing the 5.50% Notes (“the 5.50% Notes Indenture”).

On or after January 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date (April 1, 2020), holders may convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

Upon conversion, the Company is obligated to pay or deliver cash, shares of the Company’s Common Stock or a combination of cash and shares of the Company’s Common Stock, at the Company’s election, and an interest make-whole payment in shares of the common stock, if applicable. If the Company satisfies the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s Common Stock, the amount of cash and shares of Common Stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50 trading day observation period.

In addition, following certain corporate events that occur prior to the maturity date, the Company is obligated to increase the conversion rate for a holder who elects to convert its 5.50% Notes in connection with such a corporate event in certain circumstances.  Holders will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, interest will be deemed to be paid in full, rather than cancelled, extinguished or forfeited from the consideration paid to the holders upon conversion of a 5.50% Note. 

On or after the date that is six months after the last date of original issuance of the 5.50% Notes, if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to the conversion price for the 5.50% Notes on each applicable trading day, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the 5.50% Notes to be converted had such notes remained outstanding from the conversion date through April 1, 2018, computed using a discount rate equal to 2%. The Company is obligated to pay any interest make-whole payment by delivering shares of the Company’s Common Stock valued at 95% of the simple average of the daily volume weighted average price for the 10 trading days ending on and including the trading day immediately preceding the conversion date.  Notwithstanding the foregoing, the number of shares the Company may deliver in connection with a conversion of the 5.50% Notes, including those delivered in connection with an interest make-whole payment, will not exceed 77.3395 shares of Common Stock per $1,000 principal amount of 5.50% Notes, subject to adjustment.  The Company will not be required to make any cash payments in lieu of any fractional shares or have any further obligation to deliver any shares of Common Stock or pay any cash in excess of the threshold described above. In addition, if in connection with any conversion the conversion rate is adjusted, then such holder will not receive the interest make-whole payment with respect to such 5.50% Note.

Certain provisions in the 5.50% Notes could require accelerated payment of principal and interest.  The 5.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq Global Market would constitute a “fundamental change” under the 5.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 5.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. 

On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the Transfer. Under the 5.50% Notes Indenture, the Company’s Common Stock ceasing to be listed on The Nasdaq Global Market as a result of the Transfer constituted a “Fundamental Change.” In accordance with the 5.50% Notes Indenture, on July 31, 2018, the Company delivered to the holders of the 5.50% Notes a Fundamental Change Company Notice, Make-Whole Fundamental Change notice and Offer to Repurchase (the “Fundamental Change Company Notice”) pursuant to which, as a result of the Transfer and pursuant to the terms of the 5.50% Notes Indenture and 5.50% Notes, the Company offered to repurchase, at the option of each holder, all 5.50% Notes that are validly tendered for repurchase, and not properly withdrawn, at any time prior to 5:00 p.m., New York City time, on September 18, 2018 (the “Expiration Time”), which is the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date. Pursuant to Section 15.02(a) of the 5.50% Notes Indenture, the Fundamental Change Repurchase Date must be a date not less than 20 nor more than 35 business days after the date of the Fundamental Change Company Notice. Accordingly, the Fundamental Change Repurchase Date is scheduled for September 19, 2018.

Pursuant to the terms of the 5.50% Notes Indenture and the 5.50% Notes, the Company is obligated, on the Fundamental Change Repurchase Date, to pay the Fundamental Change Repurchase Price, payable in cash, equal to 100% of the principal amount of the Notes being repurchased. As the Fundamental Change Repurchase Date falls after the next Regular Record Date (as defined in the 5.50% Notes Indenture) of September 15, 2018 but prior to the next Interest Payment Date (as defined in the 5.50% Notes Indenture) to which such Regular Record Date relates of October 1, 2018, the Company is obligated to pay the full amount of accrued and unpaid interest to holders of record as of such Regular Record Date on such Interest Payment Date in accordance with the 5.50% Notes Indenture. Refer to Note 1– Organization and Description of the Business and Note 15 – Subsequent Events for further details.

The Company accounts for convertible debt instruments by recording the liability and equity components of the convertible debt separately. The liability is computed based on the fair value of a similar debt instrument that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the 5.50% Notes.  The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the 5.50% Notes, using the effective interest method.

The liability component of the 5.50% Notes on the date of issuance was computed as $41.6 million, including the value of the embedded interest make-whole derivative of $0.9 million and the carrying value of the 5.50% Notes of $40.6 million. Accordingly, the equity component on the date of issuance was $19.4 million.  The discount on the 5.50% Notes is being amortized to interest expense over the term of the 5.50% Notes, using the effective interest method. 

The conversion criteria for the 5.50% Notes have not been met at June 30, 2018.  As a result of the Transfer and the corresponding Fundamental Change under the 5.50% Notes Indenture, the conversion criteria for the 5.50% Notes was met as of July 11, 2018.

If an event of default (as defined in the 5.50% Indenture) occurs and is continuing (other than specified events of bankruptcy or insolvency with respect to the Company), the trustee or the holders of at least 25% in aggregate principal amount of the outstanding 5.50% Notes may declare all the outstanding 5.50% Notes to be due and payable immediately. If an event of default relating to specified events of bankruptcy or insolvency with respect to the Company occurs, all the outstanding 5.50% Notes will immediately become due and payable without any declaration or other act on the part of the trustee or any holders of the 5.50% Notes.  Notwithstanding the foregoing, the 5.50% Notes Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the 5.50% Notes Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 5.50% Notes.  Events of default under the 5.50% Notes Indenture include, among other things, a default in payment of principal on the 5.50% Notes (including upon any required repurchase), a default in payment of any other indebtedness for money borrowed in excess of $5,000,000 if such default is not cured or waived within 30 days and certain events of bankruptcy or insolvency, both voluntary and involuntary.

Transaction costs of $4.1 million related to the issuance of the 5.50% Notes were allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt discount and equity issuance costs, respectively. Approximately $1.3 million of this amount was allocated to equity and the remaining $2.8 million was recorded as debt discount at issuance.

In September 2016, in connection with the issuance of the 13% Notes (as defined below), the Company and its subsidiaries entered into supplemental indentures with the trustee for the 5.50% Notes pursuant to which the Company’s subsidiaries became guarantors under the 5.50% Notes Indenture.

In December 2017, the Company exchanged, with certain existing 5.50% Noteholders, $36.4 million in principal amount of the 5.50% Notes for (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock and (iii) payments, in cash, of all accrued but unpaid interest as of the closing of the 5.50% Notes exchanged in the transaction.  This exchange was accounted for as a debt extinguishment and the gain on debt extinguishment of $13.2 million, inclusive of the make-whole payments and write-off of deferred financing fees, is reflected in the Company’s consolidated statements of operations during the year ended December 31, 2017. 

The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	24,650	$	24,650
Unamortized debt discount		(4,222)		(3,404)
Carrying value	$	20,428	$	21,246

The carrying value of the 5.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017. The carrying value of the 5.50% Notes was classified as a current liability on the Company’s consolidated balance sheets at June 30, 2018 due to the fundamental change provisions of the 5.50% Notes Indenture. Refer to Note 1- Organization and Description of the Business for further details.

6.50% Convertible Notes Due 2024 (the “6.50% Notes”)

In December 2017, the Company entered into exchange agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 5.50% Notes pursuant to which the Holders agreed to exchange, in the aggregate, approximately $36.4 million of outstanding principal amount of the 5.50% Notes for, in the aggregate, (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock at an exercise price of $0.01 per share and (iii) payments, in cash, of all accrued but unpaid interest as of the closing on the 5.50% Notes exchanged in the transaction (the “Exchange”).  At the closing of the Exchange, 2.5 million warrants were exercised.  The remaining 1.0 million warrants were exercised in January 2018.

The Company consummated the Exchange in reliance upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”) and pursuant to an indenture (the “Indenture”), dated December 27, 2017, by and among the Company, the subsidiary guarantors party thereto as of the date thereof, and The Bank of New York Mellon, as trustee (the “Trustee”).

The Company is obligated to pay interest on the 6.50% Notes semiannually in arrears on January 1 and July 1 of each year commencing July 1, 2018 at a rate of 6.50% per year, which rate is subject to adjustment in accordance with the terms of the Indenture (the 6.50% Notes Indenture”) and as described below.  The 6.50% Notes are general unsecured obligations of the Company and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The 6.50% Notes will mature on December 31, 2024, unless earlier repurchased, redeemed or converted in accordance with the terms of the 6.50% Notes Indenture prior to such date. Subject to certain conditions, on or after January 1, 2021, the Company may redeem for cash all or a part of the 6.50% Notes.  The 6.50% Notes will be convertible at any time until the close of business on the business day immediately preceding the maturity date.  Upon conversion and subject to certain conditions, holders of the 6.50% Notes are entitled to receive shares of the Company’s Common Stock at an initial conversion rate of 749.6252 shares of Common Stock per $1,000 principal amount of 6.50% Notes, which is equivalent to an initial conversion price of approximately $1.33 per share and is subject to adjustment under the terms of the 6.50% Notes Indenture. Similar to the 5.50% Notes, the 6.50% Notes provide for an interest make-whole payment in connection with conversions that occur prior to January 1, 2021.  For any Conversion Date that occurs prior to the close of business on the business day immediately preceding January 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with any conversion of Notes, make an interest make-whole payment in cash or in shares of Common Stock, at the Company’s election, to such converting Holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the Notes to be converted had such Notes remained outstanding from the Conversion Date through January 1, 2021. The present values will be computed using a discount rate equal to 2% by a U.S. nationally recognized independent investment banking firm.

If an event of default (as defined in the 6.50% Notes Indenture) occurs and is continuing (other than specified events of bankruptcy or insolvency with respect to the Company), the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 6.50% Notes may declare all the outstanding 6.50% Notes to be due and payable immediately. If an event of default relating to specified events of bankruptcy or insolvency with respect to the Company occurs, all the outstanding 6.50% Notes will immediately become due and payable without any declaration or other act on the part of the trustee or any holders of the 6.50% Notes.  Notwithstanding the foregoing, the 6.50% Notes Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the 6.50% Notes Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 6.50% Notes. Events of default under the 6.50% Notes Indenture include, among other things, a default in payment of principal on the 6.50% Notes (including upon any required repurchase), a default in payment of any other indebtedness for money borrowed in excess of $5,000,000 if such default is not cured or waived within 30 days and certain events of bankruptcy or insolvency, both voluntary and involuntary.

In addition, the 6.50% Notes Indenture required the Company to use its reasonable best efforts to (i) seek stockholder approval of an amendment to the Company’s Third Amended & Restated Certificate of Incorporation, as amended, to increase the amount of authorized shares available for issuance thereunder, and (ii) upon such approval, to reserve from such amount the number of shares that may be issued in respect of the 6.50% Notes and any other securities issued in connection with the Exchange.  In February 2018, the Company held a special meeting of stockholders (the “Special Meeting”) and received stockholder approval of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to increase authorized shares by 200,000,000 shares. Refer to Footnote 8- Stockholders’ Equity for further details. The Exchange Agreements also provide that, for a period of nine months, the Company will not enter into additional exchange transactions with the other holders of the 5.50% Notes the economic terms of which, taken is a whole, are more favorable to the 5.50% Note holders than the December 2017 Exchange.  

Certain provisions in the 6.50% Notes could require accelerated payment of principal and interest.  The 6.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq exchange would constitute a “fundamental change” under the 6.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 6.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon.  Transfer does not constitute a fundamental change under the 6.50% Notes, but if the Company were to be delisted from the Nasdaq Capital Market, such delisting would constitute such a fundamental change under the 6.50% Notes Indenture.   Refer to Note 1- Organization and Description of the Business and Note 15 – Subsequent Events for further details.

At the date of Exchange, December 27, 2017, the Company did not have sufficient unissued authorized shares to cover the conversion of the outstanding 6.50% Notes and as a result was required to account for the bifurcated conversion feature as a derivative liability which results in a debt discount on the 6.50% Notes.  The fair value of the derivative liability for the conversion feature at the date of Exchange was determined to be approximately $15.0 million and was classified as a liability in the Company’s consolidated balance sheet as of December 31, 2017, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.  

As a result of the Charter Amendment, as of June 30, 2018, the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes and accordingly, the conversion feature is considered indexed to the Company’s Common Stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.

The conversion criteria for the 6.50% Notes have not been met at June 30, 2018.  Should the 6.50% Notes become convertible, management will determine whether the intent is to settle in cash which would result in the liability component of the 6.50% Notes being classified as a current liability and the equity component being presented as redeemable equity if the liability is considered current.

Transaction costs of $1.7 million related to the issuance of the 6.50% Notes were accounted for as debt discount.

The following table summarizes how the issuance of the 6.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	23,888	$	23,888
Unamortized debt discount		(20,919)		(20,834)
Carrying value	$	2,969	$	3,054

The carrying value of the 6.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018. 

13% Senior Secured Notes (the “13% Notes”)

In August 2016, the Company completed the initial closing (the “Initial Closing”) of its offering (the “Offering”) of up to $80.0 million aggregate principal amount of its 13% Notes and entered into an indenture (the “Indenture”) governing the 13% Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). 

The Company issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing and issued an additional $40.0 million aggregate principal amount upon the FDA’s approval of ARYMO™ ER in January 2017 (the “Second Closing”).  Net proceeds from the Initial Closing and Second Closing were $37.2 million and $38.3 million, respectively, after deducting the estimated Offering expenses payable by the Company in connection with the Initial Closing and Second Closing. The 13% Notes were sold only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.

The Company has used and will use the net proceeds from the 13% Notes and the Royalty Rights (as defined below) to repay all outstanding obligations to Hercules under the Loan Agreement with Hercules, to support the commercialization of ARYMO ER and for general corporate purposes.

Prior to the Second Closing, interest on the 13% Notes accrued at a rate of 13% per annum and was payable semi-annually in arrears on March 20 and September 20 of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, the Company was required to also pay an installment of principal of the 13% Notes pursuant to a straight-line fixed amortization schedule. Following the Second Closing in January 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018, the Company is obligated to pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of SPRIX Nasal Spray, OXAYDO, ARYMO ER and, if approved, Egalet-002 for the two consecutive fiscal quarterly period most recently ended, less the amount of interest payable on the 13% Notes on such Payment Date.

The 13% Notes are senior secured obligations of the Company and equal in right of payment to all existing and future pari passu indebtedness of the Company (including the Company’s outstanding 5.50% Notes due 2020), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, have the benefit of a security interest in the 13% Notes collateral and are junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred, which includes intellectual property (“IP”), from time to time in accordance with the indenture governing the 13% Notes (the “13% Notes Indenture”). Following the Second Closing, the stated maturity date of the 13% Notes became September 30, 2033. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the 13% Notes Indenture), holders of the 13% Notes may require the Company to repurchase for cash all or part of their 13% Notes at a repurchase price equal to 101.00% of the principal amount of the 13% Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.

The Company may redeem the 13% Notes at its option, in whole or in part from time to time, prior to August 31, 2018, at a redemption price equal to 100.00% of the principal amount of the 13% Notes being redeemed, plus accrued and unpaid interest, if any, through the redemption date, plus a make-whole premium computed using a discount rate equal to the treasury rate in respect of such redemption date plus 100 basis points. The Company may redeem the 13% Notes at its option, in whole or in part from time to time, on or after August 31, 2018 at a redemption price equal to: (i) from and including August 31, 2018 to and including August 30, 2019, 109.00% of the principal amount of the 13% Notes to be redeemed, (ii) from and including August 31, 2019 to and including August 30, 2020, 104.50% of the principal amount of the 13% Notes to be redeemed, and (iii) from and including August 31, 2020 and thereafter, 100.00% of the principal amount of the 13% Notes to be redeemed, in each case, plus accrued and unpaid interest to the redemption date. In addition, prior to August 31, 2018, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the 13% Notes with the proceeds of one or more public or private equity offerings at a redemption price equal to 113.50% of the aggregate principal amount of the 13% Notes to be redeemed, plus accrued and unpaid interest to the date of redemption in accordance with the 13% Notes Indenture; provided that at least 65% of the aggregate principal amount of 13% Notes issued under the 13% Notes Indenture remains outstanding immediately after each such redemption and provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.  No sinking fund is provided for the 13% Notes, which means that the Company is not required to periodically redeem or retire the 13% Notes.

The obligations of the Company under the 13% Notes Indenture and the 13% Notes are unconditionally guaranteed on a secured basis by the Guarantors. Under the terms of the 13% Notes Indenture, the Company may designate entities within its corporate structure as unrestricted subsidiaries, which entities will therefore not be guarantors provided that certain conditions set forth in the Indenture are met.

Pursuant to the 13% Notes Indenture, the Company and its restricted subsidiaries must also comply with certain affirmative covenants, such as furnishing financial statements to the holders of the 13% Notes, and negative covenants, including limitations on the following: the incurrence of debt; the issuance of preferred and/or disqualified stock; the payment of dividends, the repurchase of shares and under certain conditions making certain other restricted payments; the prepayment, redemption or repurchase of subordinated debt; the merger, amalgamation or consolidation involving the Company; engaging in certain transactions with affiliates; and the making of investments other than those permitted by the 13% Notes Indenture.

The 13% Notes Indenture contains customary events of default with respect to the 13% Notes, and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 13% Notes by notice to the Company and the Trustee, may (subject to the provisions of the 13% Notes Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 13% Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the 13% Notes Indenture, will be due and payable immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the 13% Notes Indenture), the 13% Notes will automatically become due and payable. Events of default under the 13% Notes Indenture include, among other things, a default in payment of principal on the 13% Notes (including upon any required repurchase or redemption), a default in payment of any other indebtedness for money borrowed in excess of $2,000,000 and certain events of bankruptcy or insolvency, both voluntary and involuntary.

In connection with the Initial Offering in August 2016, the Company entered into royalty rights agreements with each of the 13% Notes Purchasers pursuant to which the Company sold to such Purchasers the right to receive, in the aggregate, a payment equal to 1.5% of the aggregate net sales of OXAYDO and SPRIX Nasal Spray from the Initial Closing through December 31, 2019, inclusive (the “Royalty Rights”).  Following the approval of ARYMO ER in January 2017, the Royalty Rights will continue through December 31, 2020 and include royalties of ARYMO ER as described below.

The Company also entered into separate royalty rights agreements with each of the Purchasers pursuant to which the Company sold to such Purchasers the right to receive 1.5% of the aggregate net sales of ARYMO ER payable from the date of first sale of ARYMO ER through December 31, 2020, inclusive.  The royalty rights agreements also include other terms and conditions customary in agreements of this type.

The Royalty Rights were determined to be a freestanding element with respect to the 13% Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument.  The Company has Royalty Rights obligations of $4.1 million and $3.7 million as of December 31, 2017 and June 30, 2018, respectively, which are classified within current and non-current debt in the consolidated balance sheets.

The Company incurred fees and legal expenses of $4.5 million in connection with the issuance of the 13% Notes, which have been recorded as a discount on the debt in the Company’s consolidated balance sheets and are amortized using the effective interest method. The Company calculated an effective interest rate of 15.2% as of June 30, 2018 based on its best estimate of future cash outflows.

The accounting for the 13% Notes requires the Company to make certain estimates and assumptions about the future net sales of OXAYDO, SPRIX Nasal Spray and ARYMO ER in the U.S. The estimates of the magnitude and timing of OXAYDO, SPRIX Nasal Spray and ARYMO ER net sales are subject to significant variability due to the recent product launch and the extended time period associated with the financing transaction and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company continues to gain experience marketing OXAYDO, SPRIX Nasal Spray and ARYMO ER, which may result in future adjustments to the portion of the debt that is classified as a current liability, the amortization of debt issuance costs and discount as well as the accretion of the interest expense. Any such adjustments could be material.  The fair value of the Royalty Rights associated with certain net product sales was estimated to be $5.0 million at the issuance of the 13% Notes using a probability-weighted present value analysis.

The following table summarizes how the issuance of the 13% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018:

	December 31, 2017		June 30, 2018
(in thousands)
Gross proceeds	$	80,000	$	80,000
Unamortized debt discount		(7,572)		(6,981)
Carrying value	$	72,428	$	73,019

The carrying value of the 13% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017 and June 30, 2018. The Royalty Rights issued in connection with the 13% Notes at December 31, 2017 and June 30, 2018 were $4.1 million and $3.7 million, respectively. 

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Stockholders' Equity

6 Months Ended

Jun. 30, 2018

Stockholders' equity

Stockholders' equity

8. Stockholders’ Equity

At the Market Offering

In July 2015, the Company entered into a Controlled Equity Offering Sales Agreement (“2015 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), under which the Company could, at its discretion, from time to time, sell shares of its Common Stock, for an aggregate offering price of up to $30.0 million. The Company provided Cantor with customary indemnification rights, and Cantor is entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold.  Sales of the shares of Common Stock under the 2015 Sales Agreement have been and, if there are additional sales under the 2015 Sales Agreement, will be, made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended. 

The Company has initiated sales of shares under the 2015 Sales Agreement at various times beginning in March 2017 and has sold an aggregate of 9,357,669 shares of Common Stock through June 30, 2018, resulting in gross proceeds of $9.4 million before deducting commissions of $281,000.  The Company has sold an aggregate of 428,953 shares under the Sales Agreement during the period subsequent to June 30, 2018, resulting in gross proceeds of $171,000 before deducting commissions of $5,000.

July 2017 Equity Offering

On July 6, 2017, the Company entered into an underwriting agreement with Cantor relating to an underwritten public offering (the “July 2017 Equity Offering”) of 16,666,667 shares of the Company’s Common Stock and accompanying warrants to purchase 16,666,667 shares of Common Stock, at a combined public offering price of $1.80 per share and accompanying warrant, for gross proceeds of $30.0 million.  The net offering proceeds were $28.6 million after deducting underwriting discounts and commissions and offering-related costs of $1.4 million. Each warrant had an initial exercise price of $2.70, subject to adjustment in certain circumstances.  As of June 30, 2018, the warrants had an exercise price of $1.92. The shares of Common Stock and warrants were issued separately. The warrants may be exercised at any time on or after the date of issuance and will expire five years from the date of issuance.

The Company accounted for the warrants using ASC 480 – Distinguishing Liabilities from Equity and determined that the warrants were a freestanding financial instrument that are subject to liability classification.  Pursuant to the terms of the agreement, the Company could be required to settle the warrants in cash in the event of an acquisition of the Company, and as a result the warrants are required to be measured at fair value and reported as a liability in the Company’s consolidated balance sheet.  The warrant exercise price is subject to adjustment upon the issuance of certain equity securities at a price less than the exercise price of the warrants then in effect. 

The fair value of the warrants to purchase shares of the Company’s Common Stock in connection with the July 2017 Equity Offering was $9.7 million on the date of issuance, which was determined using a lattice model that takes into account various future financing scenarios and the impact of those scenarios on the fair value of the warrants.  The fair value of the warrants of $9.7 million on the date of issuance was recorded as a liability which will be marked to its estimated fair value at each reporting period. Refer to Footnote 9- Fair Value Measurements for further details.

Reclassification of the Derivative Liability

 In February 2018, the Company received shareholder approval to increase the number of its authorized shares of common stock by 200,000,000 additional shares.  Prior to this approval, the embedded conversion options in the 6.50% Notes were required to be separately accounted for as a derivative liability. Upon the shareholder approval to increase the number of authorized shares, the Company had sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes. The fair value of the derivative liability of $12.5 million was reclassified from a liability into stockholders’ equity during the first quarter of 2018.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Fair Value Measurements

Fair Value Measurements

9. Fair Value Measurements

The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

· Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

· Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

· Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis:

(in thousands)	Fair Value Measurements as of December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds)	$	16,973	$	—	$	—	$	16,973
Marketable securities, available-for-sale		—		59,953		—		59,953
Total assets	$	16,973	$	59,953	$	—	$	76,926
Liabilities
Interest make-whole derivatives	$	—	$	—	$	2,589	$	2,589
Conversion feature, 6.50% Notes		—		—		14,034		14,034
Warrant liability		—		—		8,166		8,166
Total liabilities	$	—	$	—	$	24,789	$	24,789

(in thousands)	Fair Value Measurements as of June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds and commercial paper)	$	30,248	$	—	$	—	$	30,248
Marketable securities, available-for-sale		—		32,178		—		32,178
Total assets	$	30,248	$	32,178	$	—	$	62,426
Liabilities
Interest make-whole derivatives	$	—	$	—	$	1,153	$	1,153
Warrant liability		—		—		2,833		2,833
Total liabilities	$	—	$	—	$	3,986	$	3,986

The following tables set forth a summary of changes in the fair value as of  June 30, 2018:  

(in thousands)						Reclassification		Fair Value
		December 31,				to Additional		Change in		June 30,
		2017		Additions		Paid in Capital		2018		2018
Interest make-whole derivatives		2,589	$	—	$		$	(1,436)	$	1,153
Conversion feature, 6.50% Notes		14,034		—		(12,497)		(1,537)		—
Warrant liability		8,166		—				(5,333)		2,833
Total liabilities	$	24,789	$	—	$	(12,497)	$	(8,306)	$	3,986

The 6.50% Notes include an interest make-whole feature whereby if a noteholder converts any of the 6.50% Notes prior to July 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the notes to be converted had such notes remained outstanding from the conversion date through July 1, 2021  (6.50% Notes), computed using a discount rate equal to 2%. 

The embedded conversion options in the 6.50% Notes were required to be separately accounted for as derivatives as at December 31, 2017 as the Company did not have enough available authorized shares to cover the conversion obligation as of the date of issuance as of December 31, 2017.  In February 2018, the Company received stockholder approval for the Charter Amendment, which increased the Company’s authorized shares of Common Stock by 200,000,000.  As the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes, the conversion feature is considered indexed to their stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.

The Company has determined that the above features are embedded derivatives and has recognized the fair value of the derivatives as liabilities in the Company’s consolidated balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.  

The fair value of the Company’s warrant liability was estimated utilizing a lattice tree model both for the initial valuation and as of June 30, 2018.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value measurement was based on several factors including:

· Various future financing scenarios

· Volatility of the Company’s Common Stock and risk free rate

As of June 30, 2018, the fair value of the 6.50% Notes interest make whole features was calculated utilizing the binomial lattice tree model.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value measurement was based on several factors including:

· Credit spread at the valuation date

· Discount yield as of the valuation date

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2017 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	11,699	$	20,428	$	24,650
6.50% Notes due 2024	$	4,643	$	2,969	$	23,888

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at June 30, 2018 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	8,627	$	21,246	$	24,650
6.50% Notes due 2024	$	2,182	$	3,054	$	23,888

The fair value of the Company’s 13% Notes approximates its carrying value of $73.0 million as the interest rate is reflective of the interest rates on debt the Company could currently obtain with similar terms and conditions and thus represents a Level 2 measurement within the fair value hierarchy.

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Net Loss Per Common Share

6 Months Ended

Jun. 30, 2018

Net Loss Per Common Share

Net Loss Per Common Share

10. Net Loss Per Common Share

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

(in thousands, except share and per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
Basic and diluted net loss per common share calculation:
Net loss	$	(26,479)	$	(11,963)	$	(51,852)	$	(24,316)
Weighted average common stock outstanding		25,542,733		53,302,399		25,145,440		50,302,419
Net loss per share of common stock—basic and diluted	$	(1.04)	$	(0.22)	$	(2.06)	$	(0.48)

The following outstanding securities for the three and six months ended June 30, 2017 and 2018 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti-dilutive:

	Three and six months ended June 30,
	2017	2018
Stock options outstanding	4,788,917	4,640,696
Unvested restricted stock awards	72,448	2,120,495
Common shares issuable upon conversion of the 5.50% Notes	4,102,360	1,657,757
Common shares issuable upon conversion of the 6.50% Notes	—	17,907,047
Common shares issuable upon exercise of warrants	—	17,666,667
Total	8,963,725	43,992,662

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2018

Stock-Based Compensation

Stock-Based Compensation

11. Stock-Based Compensation

2013 Stock-Based Incentive Compensation Plan

In November 2013, the Company adopted its 2013 Stock-Based Incentive Compensation Plan (as subsequently amended from time to time, the “2013 Plan”).  Pursuant to the 2013 Plan, the compensation committee of the Company’s board of directors is authorized to grant equity-based incentive awards to its directors, executive officers and other employees and service providers, including officers, employees and service providers of its subsidiaries and affiliates. The number of shares of the Company’s Common Stock initially reserved for issuance under the 2013 Plan was 1,680,000 in the form of Common Stock, deferred stock, restricted stock, restricted stock units, stock options and stock appreciation rights.  Share increases of 2,000,000,  2,600,000 and 6,000,000, to the number of shares originally reserved for issuance under the 2013 Plan were authorized by the Company’s stockholders in June 2014, June 2016, and May 2018, respectively.  The amount, terms of grants and exercisability provisions are determined by the compensation committee, and in certain circumstances pursuant to delegated authority, the Company’s chief executive officer and chief financial officer, acting jointly. The term of the options may be up to 10 years, and options are exercisable in cash or as otherwise determined by the compensation committee.  All stock options vest over time as stipulated in the individual award agreements.  In September 2015, the compensation committee voted to amend the 2013 Plan to, among other things, allow for monthly vesting of stock options granted thereunder after the first annual vesting.

2017 Inducement Plan

In December 2016, the Company adopted its 2017 Inducement Plan (the “Inducement Plan”), which became effective in January 2017.  Pursuant to the Inducement Plan, the Company’s compensation committee is authorized to grant equity-based incentive awards to its employees, including employees of its subsidiaries, who were not previously employees or non-employee directors of the Company or any of its subsidiaries (or who have had a bona fide period of non-employment with the Company and its subsidiaries) in compliance with Rule 5635(c)(4) of the NASDAQ Global Market. The number of shares of the Company’s Common Stock initially reserved for issuance under the Plan was 300,000, in the form of Common Stock, deferred stock, restricted stock, restricted stock units, stock options and stock appreciation rights.  The amount, terms of grants and exercisability provisions are determined by the compensation committee of the Company’s board of directors. The term of stock options issued under the Inducement Plan may be up to 10 years, and stock options are exercisable in cash or as otherwise determined by the compensation committee of the Company’s board of directors. All stock options vest over time as stipulated in the individual award agreements. 

Employee Stock Purchase Plan

In January 2016, the Company established an Employee Stock Purchase Plan (the “Purchase Plan”), which was approved by the Company’s stockholders in June 2016.  A total of 750,000 shares of Common Stock were originally approved for future issuance under the Purchase Plan pursuant to purchase rights granted to the Company’s employees.  Under the Company’s Purchase Plan, eligible employees can purchase the Company’s Common Stock through accumulated payroll deductions at such times as established by the administrator. The Purchase Plan is administered by the compensation committee. Under the Purchase Plan, eligible employees may purchase the Company’s Common Stock at 85% of the lower of the fair market value of a share of the Company’s Common Stock on the first day of an offering period or on the last day of the offering period. Eligible employees may contribute up to 10% of their eligible compensation. A participant may purchase a maximum of 1,500 shares of common stock per offering period. Under the Purchase Plan, a participant may not accrue rights to purchase more than $25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding.

At the end of each offering period, shares of the Company’s Common Stock may be purchased at 85% of the lower of the fair market value of the Company’s Common Stock on the first or last day of the respective offering period. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s Common Stock at the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the pricing date) represents a stock option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company recognized stock-based compensation expense of $7,000 and $15,000, respectively, during the three and six months ended June 30, 2018 and stock-based compensation expense of $35,000 and $70,000 for the three and six months ended June 30, 2017 related to the Purchase Plan.

Shares Available for Future Grant Under Equity Compensation Plans

As of June 30, 2018, the Company has reserved the following shares to be granted under its equity compensation plans:

Shares initially reserved under the 2013 Plan	1,680,000
Shares reserved under the Inducement Plan	300,000
Shares reserved under the Purchase Plan	750,000
Authorized increase to the 2013 Plan	10,600,000
Common stock options granted under the 2013 Plan	(6,127,188)
Common stock options granted under the Inducement Plan	(212,500)
Restricted stock awards granted under the 2013 Plan	(3,043,660)
Restricted stock units granted under the 2013 Plan	(600,000)
Common stock issued under the Purchase Plan	(146,314)
Stock options and restricted stock awards forfeited	1,724,615
Remaining shares available for future grant	4,924,953

The estimated grant-date fair value of the Company’s share-based awards is amortized ratably over the awards’ service periods. Stock-based compensation expense recognized was as follows:

		Three Months Ended June 30,				Six Months Ended  June 30,
(in thousands)		2017		2018		2017		2018
General and administrative	$	1,265	$	912	$	2,621	$	1,734
Sales and marketing		144		37		303		103
Research and development		159		53		438		117
Total stock based compensation expense	$	1,568	$	1,002	$	3,362	$	1,954

Stock Options Granted Under Equity Compensation Plans

	Stock Options Outstanding
				Weighted-average
				Remaining
	Number of	Weighted-Average		Contractual
	Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2017	4,110,612	$	6.41
Granted	936,250		0.72
Exercised	—		—
Forfeited	(229,585)		5.05
Cancelled	(176,581)		9.26
Outstanding at June 30, 2018	4,640,696	$	5.22	8.31
Vested or expected to vest at June 30, 2018	4,640,696	$	5.22	8.31
Exercisable at June 30, 2018	1,988,964	$	6.86	7.57

The intrinsic value of the 4,640,696  stock options outstanding as of June 30, 2018 was $0, based on a per share price of $0.42, the Company’s closing stock price on that date, and a weighted-average exercise price of $5.22 per share.

The Company uses the Black-Scholes valuation model in determining the fair value of equity awards.  For stock options granted to employees and directors with only service-based vesting conditions, the Company measures stock-based compensation expense at the grant date based on the estimated fair value of the award and recognizes it as expense over the requisite service period on a straight-line basis. The Company records the expense of equity compensation for non-employees based on the estimated fair value of the stock option as of the respective vesting date. Further, the Company expenses the fair value of non-employee stock options that contain only service-based vesting conditions over the requisite service period of the underlying stock options.  Following the adoption of ASU 2016-09, the Company no longer estimates forfeitures in calculating its stock-based compensation expense and adjusts each period to reflect actual forfeitures.

On June 8, 2017, the Company granted stock options for 630,000 shares of the Company’s Common Stock to nine senior executives (the “June 2017 Grant”).   The contractual term of each of the grants made in the June 2017 Grant is 10 years and the exercise price is $2.38 per share.   Provided that the grantee is still employed by the Company, the vesting terms of the June 2017 Grant include a combination of market and service-based conditions as follows:

(a)  25% of the award will vest on the later of (i) the six-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $3.33 for 30 consecutive trading days.

(b) 25% of the award will vest on the later of (i) the twelve-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $4.05 for 30 consecutive trading days.

(c) 50% of the award will vest on the later of (i) the twenty-four-month anniversary of the grant and (ii) the date on which the average closing price of the Company's Common Stock on Nasdaq is at least $4.76 for 30 consecutive trading days.

The Company used the binomial model to estimate the compensation cost for the June 2017 Grant.  Key assumptions used in calculating the total estimated compensation cost of $1,334,000 included (i) an estimated term of 5.6 years, (ii) expected volatility of 95.54%, (iii) expected dividends of $0.00 and (iv) a risk-free return of 1.80%.  Stock-based compensation expense related to the June 2017 Grant will be recognized ratably over the requisite service period of 5.6 years and amounted to $52,000 and $104,000 for the three and six months ended June 30, 2018.

The per-share weighted-average grant date fair value of the options granted to employees during the six months ended June 30, 2018 was estimated at $0.50 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Six months ended June 30, 2018
Risk-free interest rate	2.79	%
Expected term of options (in years)	5.83
Expected volatility	80.60	%
Dividend yield	—

The weighted-average valuation assumptions were determined as follows:

· Risk-free interest rate: The Company based the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

· Expected term of options: The Company estimated the expected life of its employee stock options using the “simplified” method, as prescribed in Staff Accounting Bulletin (“SAB”) No. 107, “Share Based Payments”, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data.

· Expected stock price volatility: The Company estimated the expected volatility based on its actual historical volatility of the Company’s stock price. The Company calculated the historical volatility by using daily closing prices over a period of the expected term of the associated award.  A decrease in the expected volatility would have decreased the fair value of the underlying instrument. 

· Expected annual dividend yield: The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed an expected dividend yield of 0.0%.

As of June 30, 2018, there was $6.0 million of total unrecognized stock-based compensation expense, related to unvested options granted under the 2013 Plan and the Inducement Plan, which will be recognized over the weighted-average remaining period of 2.22 years.

Restricted Stock

A summary of the status of the Company’s restricted stock awards and restricted stock units at June 30, 2018 and of changes in restricted stock awards and restricted stock units outstanding under the 2013 Plan for the six months ended June 30, 2018 is as follows:

		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2017	25,047	$	7.07
Granted	2,100,000	$	0.55
Forfeited	—	$	—
Vested restricted stock awards	(4,552)	$	7.07
Unvested at June 30, 2018	2,120,495	$	0.62

For restricted stock awards and restricted stock units that vest subject to the satisfaction of service requirements, stock-based compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period.  All of the restricted stock awards and restricted stock units reflected above vest based on performance conditions or over time as stipulated in the individual award agreements. In the event of a change in control, the unvested awards will be accelerated and fully vested immediately prior to the change in control.

As of June 30, 2018, there was $1.1 million of total unrecognized stock-based compensation expense, related to restricted stock awards and restricted stock units under the 2013 Plan, which will be recognized over the weighted-average remaining period of 1.05 years.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2018

Commitments and Contingencies

Commitments and Contingencies

12. Commitments and Contingencies

Legal Proceedings

On January 27, 2017 and February 10, 2017, respectively, two putative securities class actions were filed in the U.S. District Court for the Eastern District of Pennsylvania that named as defendants Egalet Corporation and current officers Robert S. Radie and Stanley J. Musial, and former officer Jeffrey M. Dayno (the “Officer Defendants” and together with Egalet Corporation, the “Defendants”). These two complaints, captioned Mineff v. Egalet Corp. et al., No. 2:17-cv-00390-MMB and Klein v. Egalet Corp. et al., No. 2:17-cv-00617-MMB, assert securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired Egalet Corporation securities between December 15, 2015 and January 9, 2017.  On May 1, 2017, the Court entered an order consolidating the two cases (the “Securities Class Action Litigation”) before it, appointing the Egalet Investor Group (consisting of Joseph Spizzirri, Abdul Rahiman and Kyle Kobold) as lead plaintiff and approving their selection of lead and liaison counsel.  On July 3, 2017, the plaintiffs filed their consolidated amended complaint, which named the same Defendants and also asserts claims for purported violations of Sections 10(b) and 20(a) of the Exchange Act.  Plaintiffs brought their claims individually and on behalf of a putative class of all persons who purchased or otherwise acquired shares of the Company between November 4, 2015 and January 9, 2017 inclusive.   The consolidated amended complaint based its claims on allegedly false and/or misleading statements and/or failures to disclose information about the likelihood that ARYMO ER would be approved for intranasal abuse-deterrent labeling.  The Defendants moved to dismiss the consolidated amended complaint on September 1, 2017 (the “Motion to Dismiss”), the plaintiffs filed their opposition on October 31, 2017, and the Defendants filed their reply on December 8, 2017.  The Court heard oral arguments on the Motion to Dismiss on February 20, 2018, and entered an order pursuant to which the plaintiffs filed a motion for leave to file a second amended complaint on March 6, 2018.  The Defendants responded on March 20, 2018 and the plaintiffs filed their reply on March 27, 2018.  The Court heard oral arguments on the plaintiffs’ motion for leave to file a second amended complaint on July 12, 2018.  On August 2, 2018, the Court granted the Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice.  Plaintiffs have 30 days to appeal the decision or 28 days to move under Rule 59 for reconsideration.

On March 15, 2018, a lawsuit was filed by the State of Arkansas and multiple local governments in Arkansas in the Circuit Court of Crittenden County, Arkansas, against the Company and other pharmaceutical manufacturers, distributors and retailers, and physicians.  The action alleges a variety of claims related to opioid marketing and distribution practices, including false advertising, deceptive trade practices, public nuisance, unjust enrichment, violations of state narcotics statutes and civil conspiracy.  The suit seeks monetary penalties.  The Company was served with the lawsuit on April 30, 2018 and filed its answer on May 30, 2018. The Company disputes the allegations in the lawsuit and intends to defend this action vigorously. The Company cannot determine the likelihood of, nor can it reasonably estimate the range of, any potential loss, if any, from this lawsuit.

On April 4, 2018, Egalet US, Inc. and Egalet Ltd., subsidiaries of the Company, filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Teva Pharmaceuticals USA, Inc. (“Teva”). The lawsuit was filed under the Hatch-Waxman Act for Teva’s infringement of one of the Company’s patents for ARYMO ER listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book— U.S. Patent No. 9,044,402. The lawsuit was filed in response to a paragraph IV certification that the Company received from Teva on February 23, 2018, stating that Teva had submitted an Abbreviated New Drug Application (“ANDA”) to the U.S. Food and Drug Administration (“FDA”) for a generic version of ARYMO ER.  Teva’s paragraph IV certification alleges that this U.S. patent is invalid and/or will not be infringed by Teva’s proposed product.  This patent for ARYMO ER was granted following review by the U.S. Patent and Trademark Office, is presumed to be valid under governing law, and can only be invalidated in federal court with clear and convincing evidence.  Under the Hatch-Waxman Act, the Company was permitted to file suit within 45 days from its receipt of the paragraph IV certification and thereby automatically stay or bar the FDA from approving Teva’s ANDA for 30 months or until a district court decision that is adverse to the asserted patent, whichever is earlier. On May 29, 2018, Teva filed its answer to the Company’s complaint and alleged certain counterclaims.  The Company intends to vigorously enforce its intellectual property rights relating to ARYMO ER.

Halo Manufacturing Agreement

In February 2017, the Company entered into a Drug Product Manufacturing Services Agreement (the “Manufacturing Agreement”) with Halo Pharmaceutical, Inc. (“Halo”) pursuant to which the Company engaged Halo to provide certain services related to the manufacture and supply of ARYMOER tablets for commercial use in the United States.  The Company is obligated to purchase all its requirements for ARYMO ER from Halo through 2019, and seventy-five percent of its requirements thereafter, subject to certain limited exceptions.  The Company is obligated to purchase ARYMO ER pursuant to binding purchase orders at a fixed price based on dosage strength, with specified percentage rebates for annual volumes of product ordered over a specified amount.   In addition, the Company has agreed to purchase certain minimum amounts of manufacturing and additional services per calendar quarter from Halo over the term of the Agreement (the “Quarterly Minimum”).  If the Company fails to meet the Quarterly Minimum, it will be required to pay to Halo the resulting shortfall.  Total commitments to Halo are $3.6 million and $3.6 million in 2018 and 2019, respectively and $7.2 million thereafter.

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Acquisitions and License and Collaboration Agreements

6 Months Ended

Jun. 30, 2018

Acquisitions and License and Collaboration Agreements

Acquisitions and License and Collaboration Agreements

13. Acquisitions and License and Collaboration Agreements

Collaboration and License Agreement with Acura

In January 2015, the Company entered into the OXAYDO License Agreement with Acura to commercialize OXAYDO tablets containing Acura’s Aversion Technology. OXAYDO (formerly known as Oxecta®) is currently approved by the FDA for marketing in the U.S. in 5 mg and 7.5 mg strengths, but was not actively marketed at the time of the OXAYDO License Agreement. Under the terms of the OXAYDO License Agreement, Acura transferred the approved New Drug Application (“NDA”) for OXAYDO to the Company and the Company was granted an exclusive license under Acura’s intellectual property rights for development and commercialization of OXAYDO worldwide in all strengths.

The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO.  In addition, Acura will be entitled to a one-time $12.5 million milestone payment when OXAYDO net sales reach a level of $150.0 million in a calendar year.

The Company has recorded a product rights intangible asset of $7.7 million related to the arrangement, which includes $172,000 of transaction costs related to the License Agreement.  The intangible asset is being amortized over a useful life of 7 years, which coincides with the patent protection of the product in the U.S. 

In addition, Acura receives from the Company, a tiered royalty percentage based on sales thresholds.  Based on the Company’s current level of net sales, the royalty percentage payable to Acura is in the mid-single digits; however, the percentage may increase in future years in the event we achieve the higher sales thresholds set forth in the License Agreement.   In addition, in any calendar year in which net sales exceed a specified threshold, Acura is entitled receive a double-digit royalty on all OXAYDO net sales in that year. The Company’s royalty payment obligations commence on the first commercial sale of OXAYDO and expire, on a country-by-country basis, upon the expiration of the last to expire valid patent claim covering OXAYDO in such country (or if there are no patent claims in such country, then upon the expiration of the last valid claim in the U.S.).  Royalties will be reduced upon the entry of generic equivalents, as well for payments required to be made by the Company to acquire intellectual property rights to commercialize OXAYDO, with an aggregate minimum floor.  The term of the Acura license agreement expires, in its entirety, upon the final expiration of any such patent claim in any country. OXAYDO is currently sold in the United States and is covered by six U.S. patents that expire between 2023 and 2025. Patents covering OXAYDO in foreign jurisdictions expire in 2024.  Either the Company or Acura may terminate the license agreement for certain customary reasons, including cause, insolvency or patent challenge. The Company may terminate the license agreement upon 90 days prior written notice.

Purchase Agreement with Luitpold

In January 2015, the Company entered into and consummated the transactions contemplated by the SPRIX Nasal Spray Purchase Agreement with Luitpold (the “SPRIX Purchase Agreement”).  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX Nasal Spray for a purchase price of $7.0 million.  The Company concurrently purchased an additional $1.1 million of glassware, equipment and active pharmaceutical ingredient (“API”) from Luitpold and agreed to purchase an additional $340,000 of API after closing.

Under the purchase agreement with Luitpold pursuant to which the Company acquired certain assets and liabilities associated with SPRIX Nasal Spray, the Company was assigned an exclusive license with Recordati Ireland Ltd. (“Recordati”) for intranasal formulations of ketorolac tromethamine (the “Licensed Product”), the active ingredient in SPRIX Nasal Spray.  The Company was required to pay a fixed, single-digit royalty to Recordati on net sales of the Licensed Product.  The exclusive term of the license agreement expires, on a country-by-country basis, on the later of the final expiration of any patent right in such country that contains a valid claim covering the Licensed Product, or ten years from the date of the first commercial sale of the Licensed Product in such country, and thereafter the Company will retain a non-exclusive, perpetual license in such country. In addition, during the exclusivity period with respect to the United States, Canada and Latin America, the royalty payable to Recordati is decreased if no patent containing a valid claim is in force in the country at the time of sale.  SPRIX Nasal Spray is currently sold in the United States and is covered by a patent that expires in December 2018 and the first commercial sale of SPRIX Nasal Spray in the United States occurred in May 2011.

The Company accounted for the arrangement as a business combination.

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Income Taxes

6 Months Ended

Jun. 30, 2018

Income Taxes

Income Taxes

14. Income Taxes

In accordance with ASC Topic No. 270 “Interim Reporting” and ASC Topic No. 740 “Income Taxes” (Topic No. 740) at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. For the three and six months ended June 30, 2017 and 2018, the Company had no tax provision since it had a full valuation allowance for federal, foreign and state purposes.

The Company recorded a deferred tax liability of $61,000 and $981,000, with an offsetting decrease to additional paid in capital during the three and six months ended June 30, 2018, respectively, due to the state tax impact of the embedded conversion liability derivative being reclassified as an equity instrument during the three and six months ended June 30, 2018. Refer to Note 8 – Stockholders Equity for further details.   The Company had no deferred tax liability for the three and six months ended June 30, 2017.  The Company maintains a full valuation against all net deferred tax assets for federal and foreign purposes as management has determined that it is not more likely than not that the Company will realize these future tax benefits.

The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, became effective January 1, 2018. The Tax Act had significant changes to U.S. tax law, lowering U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modified the taxation of other income and expense items.  Due to the valuation allowance on the Company’s deferred tax assets, these provisions do not have any material impact on the Company. 

The Tax Act contains additional international provisions which may impact the Company prospectively, including the tax on Global Intangible Low-Taxed Income.   The Company does not believe the impact will be material given the historical losses in its international subsidiary and projected future losses.

Upon further analyses of certain aspects of the Tax Act and refinement of the Company’s calculations during the three and six months ended June 30, 2018, the Company determined that an adjustment to the provisional amount is not necessary at this time.  The Company will continue to monitor for future updates to guidance or interpretations issued from the Internal Revenue Service.

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Subsequent Events

6 Months Ended

Jun. 30, 2018

Subsequent Events.

Subsequent Events

15. Subsequent Events

On July 9, 2018, the Company received notice from Nasdaq that the Nasdaq Hearings Panel has approved the transfer of the listing of the Company’s Common Stock from The Nasdaq Global Market to The Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Transfer”). The continued listing on The Nasdaq Capital Market is subject to (i) the fulfillment of certain conditions and milestones and (ii) the Company’s evidencing a market value of the Company’s Common Stock of over $35.0 million for at least 10 consecutive trading days not later than November 20, 2018. The Company is working to meet such conditions and milestones and to demonstrate compliance with the requirements for continued listing on The Nasdaq Capital Market.

Under the 5.50% Notes Indenture, the Company’s Common Stock ceasing to be listed on the Nasdaq Global Market as a result of the Transfer constituted a “Fundamental Change.” In accordance with the Indenture, on July 31, 2018, the Company delivered to the holders of the 5.50% Notes, with $24.7 million of principal currently outstanding, a Fundamental Change Company Notice, Make-Whole Fundamental Change notice and Offer to Repurchase “the “Fundamental Change Company Notice”) pursuant to which, as a result of the Transfer and pursuant to the terms of the 5.50% Notes Indenture, the Company offered to repurchase, at the option of each holder, all 5.50% Notes that are validly tendered for repurchase, and not properly withdrawn, at any time prior to 5:00pm New York City time, on September 18, 2018 (the “Expiration Time”), which is the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date. Pursuant to Section 15.02(a) of the 5.50% Notes Indenture, the Fundamental Change Repurchase Date must be a date not less than 20 nor more than 35 business days after the date of the Fundament Change Company Notice. Accordingly, the Fundamental Change Repurchase Date is scheduled for September 19, 2018.

Pursuant to the terms of the 5.50% Notes Indenture, the Company is obligated, on the Fundamental Change Repurchase Date, to pay the Fundamental Change Repurchase Price, payable in cash, equal to 100% of the principal amount of the 5.50% Notes being repurchased. As the Fundamental Change Repurchase Date falls after the next Regular Record Date (as defined in the 5.50% Notes Indenture) of September 15, 2018 but prior to the next Interest Payment Date (as defined in the 5.50% Notes Indenture) to which such Regular Record Date relates of October 1, 2018, the Company is obligated to pay  the full amount of accrued and unpaid interest to 5.50% Note holders of record as of such Regular Record Date on such Interest Payment Date in accordance with  the 5.50% Notes Indenture. As of June 30, 2018, the Company had cash and cash equivalents, restricted cash and marketable securities of $70.4 million. 

On August 2, 2018, the Court in the Company’s Securities Class Action Litigation granted the Company’s and Officer Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice.  Plaintiffs have 30 days to appeal the Court’s decision or 28 days to move under Rule 59 for reconsideration.

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Summary of Significant Accounting Policies and Basis of Accounting (Policies)

6 Months Ended

Jun. 30, 2018

Summary of Significant Accounting Policies and Basis of Accounting

Basis of Accounting

Basis of Presentation

The unaudited consolidated financial statements are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial information at June 30, 2018 and the three and six months ended June 30, 2017 and 2018 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of June 30, 2018, the consolidated results of its operations and comprehensive loss for the three and six months ended June 30, 2017 and 2018, and consolidated cash flows for the six months ended June 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2017 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018 with the SEC.

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies, except as described in Note 3 – Revenue from contracts with customers.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line on the Company’s consolidated balance sheets, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the Company’s consolidated balance sheet. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU increased the beginning and ending cash balances in the Company’s statement of cash flows. . The Company has adopted the standard in the first quarter of 2018. The adoption had no material impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated balances sheet or statement of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has defined a process to meet the accounting and reporting requirements of the guidance and is assessing lease arrangements in order to determine the impact ASU 842 adoption will have on the financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company has adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the three and six months ended June 30, 2018.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance became effective in calendar year 2018. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.

In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers:  Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers:  Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition (collectively “ASC 606”). These standards are effective for the Company beginning in the first quarter of 2018.

The Company formed a task force that analyzed the Company’s customer contracts and the impacts the standard had on previously reported revenues and future revenues. Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients.  As a result, the Company now recognizes net product sales under such contracts earlier under ASC 606 than it would have recognized under the historic guidance.

The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. Refer to Note 3 — Revenue From Contracts with Customers for further details.

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Revenue from Contract with Customers(Tables)

6 Months Ended

Jun. 30, 2018

Revenue from Contract with Customers

Schedule of financial statement impact of adopting ASU 606

	December 31, 2017		Adjustments due to ASU 2014-09		January 1, 2018
Accounts receivable		4,120		(371)		3,749
Inventory		3,225		(157)		3,068
Accrued expenses		16,104		5,028		21,132
Deferred revenue		7,456		(7,456)		-
Accumulated deficit		(295,300)		1,900		(293,400)

Schedule of disaggregation of revenue

(in thousands)	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Product lines
SPRIX Nasal Spray	$	5,404	$	10,218
OXAYDO		1,688		2,948
ARYMO ER		351		538
Total	$	7,443	$	13,704

Schedule of net product sales allowance and reserve

(in thousands)	Fees and distribution costs		Co-pay assistance		Rebates		Returns		Total
Balances at December 31, 2017	$	595	$	3,644	$	579	$	—	$	4,818
Adjustment for ASU 2014-09		—		4,221		656		—		4,877
Allowances for current period sales		4,052		36,335		3,908		510		44,805
Adjustment related to prior period sales		—		—		180		—		180
Credits or payments made for prior period sales		(555)		(7,840)		(1,214)		—		(9,609)
Credits or payments made for current period sales		(3,463)		(22,965)		(1,633)		(394)		(28,455)
Balance at June 30, 2018	$	629	$	13,395	$	2,476	$	116	$	16,616
Total gross product sales									$	58,690
Total provision for product sales allowances and accruals as a percentage of total gross sales										76%

Impact of new revenue guidance on financial statement line items

			Adjustments Due to		Pro Forma if the previous
	As reported		ASU 2014-09		accounting was in effect
Accounts receivable		9,083		371		9,454
Inventory		3,183		423		3,606
Accrued expenses		27,949		(9,850)		18,099
Deferred revenue		-		14,022		14,022
Accumulated deficit		(317,715)		(3,372)		(321,087)

Schedule of disclosure of reported consolidated statement of operations for the period to the pro-forma amounts had the previous guidance been in effect

			Adjustments Due to		Three Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	7,443	$	(391)	$	7,052
Cost of sales (excluding amortization of product rights)		1,565		(144)		1,421
Net loss	$	(11,963)	$	(247)	$	(12,210)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.22)	$	(0.01)	$	(0.23)
Weighted-average shares outstanding, basic and diluted		53,302,399		53,302,399		53,302,399
			Adjustments Due to		Six Months Ended
	As reported		ASU 2014-09		June 30, 2018
Revenues
Net product sales	$	13,704	$	(1,867)	$	11,837
Cost of sales (excluding amortization of product rights)		3,780		(395)		3,385
Net loss	$	(24,316)	$	(1,472)	$	(25,788)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.48)	$	(0.03)	$	(0.51)
Weighted-average shares outstanding, basic and diluted		50,302,419		50,302,419		50,302,419

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Investments (Tables)

6 Months Ended

Jun. 30, 2018

Investments

Schedule of marketable securities

Marketable securities consisted of the following at December 31, 2017: 

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	60,000	$	—	$	(47)	$	59,953
Total	$	60,000	$	—	$	(47)	$	59,953

Marketable securities consisted of the following as of June 30, 2018:

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	32,195	$	—	$	(17)	$	32,178
Total	$	32,195	$	—	$	(17)	$	32,178

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Inventory (Tables)

6 Months Ended

Jun. 30, 2018

Inventory

Schedule of components of inventory

	December 31,		June 30,
(in thousands)	2017		2018
Raw materials	$	850	$	841
Work in process		772		863
Finished goods		1,446		1,479
Deferred cost of sales		157		—
Total	$	3,225	$	3,183

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Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2018

Intangible Assets

Schedule of indefinite-lived intangible assets

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,695	$	(3,273)	$	4,422	4.00
SPRIX Nasal Spray product rights		4,978		(2,964)		2,014	2.00
IP R&D		183		(36)		147	4.00
Total	$	12,856	$	(6,273)	$	6,583

The following represents the balance of the intangible assets at June 30, 2018:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,653	$	(3,801)	$	3,852	3.60
SPRIX Nasal Spray product rights		4,891		(3,401)		1,490	1.60
IP R&D		177		(53)		124	3.50
Total	$	12,721	$	(7,255)	$	5,466

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Debt (Tables)

6 Months Ended

Jun. 30, 2018

5.50% Notes

Summary of debt reflected in the balance sheet

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	24,650	$	24,650
Unamortized debt discount		(4,222)		(3,404)
Carrying value	$	20,428	$	21,246

6.50% Notes

Summary of debt reflected in the balance sheet

	December 31, 2017		June 30, 2018
(in thousands)
Principal	$	23,888	$	23,888
Unamortized debt discount		(20,919)		(20,834)
Carrying value	$	2,969	$	3,054

13% Notes

Summary of debt reflected in the balance sheet

	December 31, 2017		June 30, 2018
(in thousands)
Gross proceeds	$	80,000	$	80,000
Unamortized debt discount		(7,572)		(6,981)
Carrying value	$	72,428	$	73,019

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2018

Fair Value Measurements

Schedule of information about each major category of financial assets and liabilities measured at fair value on a recurring basis

(in thousands)	Fair Value Measurements as of December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds)	$	16,973	$	—	$	—	$	16,973
Marketable securities, available-for-sale		—		59,953		—		59,953
Total assets	$	16,973	$	59,953	$	—	$	76,926
Liabilities
Interest make-whole derivatives	$	—	$	—	$	2,589	$	2,589
Conversion feature, 6.50% Notes		—		—		14,034		14,034
Warrant liability		—		—		8,166		8,166
Total liabilities	$	—	$	—	$	24,789	$	24,789

(in thousands)	Fair Value Measurements as of June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds and commercial paper)	$	30,248	$	—	$	—	$	30,248
Marketable securities, available-for-sale		—		32,178		—		32,178
Total assets	$	30,248	$	32,178	$	—	$	62,426
Liabilities
Interest make-whole derivatives	$	—	$	—	$	1,153	$	1,153
Warrant liability		—		—		2,833		2,833
Total liabilities	$	—	$	—	$	3,986	$	3,986

Summary of changes in the fair value of Level 3 liabilities

(in thousands)						Reclassification		Fair Value
		December 31,				to Additional		Change in		June 30,
		2017		Additions		Paid in Capital		2018		2018
Interest make-whole derivatives		2,589	$	—	$		$	(1,436)	$	1,153
Conversion feature, 6.50% Notes		14,034		—		(12,497)		(1,537)		—
Warrant liability		8,166		—				(5,333)		2,833
Total liabilities	$	24,789	$	—	$	(12,497)	$	(8,306)	$	3,986

Schedule of fair value and carrying value of convertible debt

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2017 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	11,699	$	20,428	$	24,650
6.50% Notes due 2024	$	4,643	$	2,969	$	23,888

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at June 30, 2018 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due 2020	$	8,627	$	21,246	$	24,650
6.50% Notes due 2024	$	2,182	$	3,054	$	23,888

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Net Loss Per Common Share (Tables)

6 Months Ended

Jun. 30, 2018

Net Loss Per Common Share

Schedule of computation of basic and diluted net loss per share

(in thousands, except share and per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
Basic and diluted net loss per common share calculation:
Net loss	$	(26,479)	$	(11,963)	$	(51,852)	$	(24,316)
Weighted average common stock outstanding		25,542,733		53,302,399		25,145,440		50,302,419
Net loss per share of common stock—basic and diluted	$	(1.04)	$	(0.22)	$	(2.06)	$	(0.48)

Schedule of outstanding securities excluded from the computation of diluted weighted shares outstanding

	Three and six months ended June 30,
	2017	2018
Stock options outstanding	4,788,917	4,640,696
Unvested restricted stock awards	72,448	2,120,495
Common shares issuable upon conversion of the 5.50% Notes	4,102,360	1,657,757
Common shares issuable upon conversion of the 6.50% Notes	—	17,907,047
Common shares issuable upon exercise of warrants	—	17,666,667
Total	8,963,725	43,992,662

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2018

Stock-Based Compensation

Schedule of shares available for future grant

Shares initially reserved under the 2013 Plan	1,680,000
Shares reserved under the Inducement Plan	300,000
Shares reserved under the Purchase Plan	750,000
Authorized increase to the 2013 Plan	10,600,000
Common stock options granted under the 2013 Plan	(6,127,188)
Common stock options granted under the Inducement Plan	(212,500)
Restricted stock awards granted under the 2013 Plan	(3,043,660)
Restricted stock units granted under the 2013 Plan	(600,000)
Common stock issued under the Purchase Plan	(146,314)
Stock options and restricted stock awards forfeited	1,724,615
Remaining shares available for future grant	4,924,953

Schedule of stock-based compensation expense recognized

		Three Months Ended June 30,				Six Months Ended  June 30,
(in thousands)		2017		2018		2017		2018
General and administrative	$	1,265	$	912	$	2,621	$	1,734
Sales and marketing		144		37		303		103
Research and development		159		53		438		117
Total stock based compensation expense	$	1,568	$	1,002	$	3,362	$	1,954

Schedule of stock options outstanding under the 2013 stock-based incentive plan

	Stock Options Outstanding
				Weighted-average
				Remaining
	Number of	Weighted-Average		Contractual
	Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2017	4,110,612	$	6.41
Granted	936,250		0.72
Exercised	—		—
Forfeited	(229,585)		5.05
Cancelled	(176,581)		9.26
Outstanding at June 30, 2018	4,640,696	$	5.22	8.31
Vested or expected to vest at June 30, 2018	4,640,696	$	5.22	8.31
Exercisable at June 30, 2018	1,988,964	$	6.86	7.57

Schedule of weighted-average assumptions

	Six months ended June 30, 2018
Risk-free interest rate	2.79	%
Expected term of options (in years)	5.83
Expected volatility	80.60	%
Dividend yield	—

Summary of status and change in restricted stock awards

		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2017	25,047	$	7.07
Granted	2,100,000	$	0.55
Forfeited	—	$	—
Vested restricted stock awards	(4,552)	$	7.07
Unvested at June 30, 2018	2,120,495	$	0.62

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Organization and Description of the Business (Details) $ in Thousands	Jul. 09, 2018 USD ($)	Jul. 31, 2018 USD ($)	Jun. 30, 2018 USD ($) product	Jan. 01, 2018 USD ($)	Dec. 31, 2017 USD ($)
Liquidity [Abstract]
Number of Products | product			3
Accumulated deficit			$ (317,715)	$ (293,400)	$ (295,300)
Comon Stock to be continued listing on The Nasdaq Capital Market | Subsequent Events | Minimum
Liquidity [Abstract]
Standard market value as per listing rule	$ 35,000
Minimum consecutive trading days before a certain date required in which the market value has to maintain at the standard	10 days
5.50% Notes
Liquidity [Abstract]
Interest rate (as a percent)			5.50%
Convertible debt outstanding			$ 24,700
5.50% Notes | Subsequent Events
Liquidity [Abstract]
Convertible debt outstanding		$ 24,700
5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market
Liquidity [Abstract]
Interest rate (as a percent)			5.50%
Convertible debt outstanding			$ 24,700
5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market | Subsequent Events
Liquidity [Abstract]
Interest rate (as a percent)	5.50%
6.50% Notes
Liquidity [Abstract]
Interest rate (as a percent)			6.50%		6.50%
6.50% Notes | Not in compliance with Nasdaq's Listing Rule 5450(b)(2)(A)
Liquidity [Abstract]
Interest rate (as a percent)			6.50%
Convertible debt outstanding			$ 23,900
13% Notes
Liquidity [Abstract]
Interest rate (as a percent)			13.00%

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Revenue from Contract with Customers (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Accounts receivable	$ 9,083	$ 3,749	$ 4,120
Inventory	3,183	3,068	3,225
Accrued expenses	27,949	21,132	16,104
Deferred revenue	0	0	7,456
Accumulated deficit	(317,715)	$ (293,400)	(295,300)
ASU 2014-09 | Adjustments
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Accounts receivable	371		(371)
Inventory	423		(157)
Accrued expenses	(9,850)		5,028
Deferred revenue	14,022		(7,456)
Accumulated deficit	$ (3,372)		$ 1,900

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Revenue from Contract with Customers - Disaggregation of Revenue (Details) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2018 USD ($)	Jun. 30, 2018 USD ($)
Disaggregation of Revenue [Line Items]
Total	$ 7,443	$ 13,704
Cash discounts		2
Period in which payments for invoices are due		30 days
SPRIX Nasal Spray
Disaggregation of Revenue [Line Items]
Total	5,404	$ 10,218
OXAYDO tablets
Disaggregation of Revenue [Line Items]
Total	1,688	2,948
ARYMO ER
Disaggregation of Revenue [Line Items]
Total	$ 351	$ 538

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Revenue from Contract with Customers - Reserves for Variable Consideration (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($)
Movement in Valuation Allowances and Reserves [Roll Forward]
Balances at beginning of period	$ 4,818
Allowances for current period sales	44,805
Adjustments	180
Credits or payments made for current period sales	(28,455)
Credits or payments mad for prior period sales	(9,609)
Balances at end of period	16,616
Total gross product sales	$ 58,690
Total provision for product sales allowances and accruals as a percentage of total gross sales	76
Fees and distribution costs
Movement in Valuation Allowances and Reserves [Roll Forward]
Balances at beginning of period	$ 595
Allowances for current period sales	4,052
Credits or payments made for current period sales	(3,463)
Credits or payments mad for prior period sales	(555)
Balances at end of period	629
Co-pay assistance
Movement in Valuation Allowances and Reserves [Roll Forward]
Balances at beginning of period	3,644
Allowances for current period sales	36,335
Credits or payments made for current period sales	(22,965)
Credits or payments mad for prior period sales	(7,840)
Balances at end of period	13,395
Rebates
Movement in Valuation Allowances and Reserves [Roll Forward]
Balances at beginning of period	579
Allowances for current period sales	3,908
Adjustments	180
Credits or payments made for current period sales	(1,633)
Credits or payments mad for prior period sales	(1,214)
Balances at end of period	2,476
Returns
Movement in Valuation Allowances and Reserves [Roll Forward]
Allowances for current period sales	510
Credits or payments made for current period sales	(394)
Balances at end of period	116
ASU 2014-09
Movement in Valuation Allowances and Reserves [Roll Forward]
Adjustments	4,877
ASU 2014-09 | Co-pay assistance
Movement in Valuation Allowances and Reserves [Roll Forward]
Adjustments	4,221
ASU 2014-09 | Rebates
Movement in Valuation Allowances and Reserves [Roll Forward]
Adjustments	$ 656

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Revenue from Contract with Customers - Impact of New Revenue Guidance on Financial Statement (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Accounts receivable	$ 9,083		$ 9,083		$ 3,749	$ 4,120
Inventory	3,183		3,183		3,068	3,225
Accrued expenses	27,949		27,949		21,132	16,104
Deferred revenue	0		0		0	7,456
Accumulated deficit	(317,715)		(317,715)		$ (293,400)	(295,300)
Revenues [Abstract]
Net product sales	7,443		13,704
Net loss	$ (11,963)	$ (26,479)	$ (24,316)	$ (51,852)
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (0.22)	$ (1.04)	$ (0.48)	$ (2.06)
Weighted-average shares outstanding, basic and diluted (in shares)	53,302,399	25,542,733	50,302,419	25,145,440
Pro Forma if the previous accounting was in effect
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Accounts receivable	$ 9,454		$ 9,454
Inventory	3,606		3,606
Accrued expenses	18,099		18,099
Deferred revenue	14,022		14,022
Accumulated deficit	(321,087)		(321,087)
Revenues [Abstract]
Net loss	$ (12,210)		$ (25,788)
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (0.23)		$ (0.51)
Weighted-average shares outstanding, basic and diluted (in shares)	53,302,399		50,302,419
Product
Revenues [Abstract]
Net product sales	$ 7,443		$ 13,704
Cost of sales (excluding amortization of product rights)	1,565	$ 1,072	3,780	$ 2,397
Product | Pro Forma if the previous accounting was in effect
Revenues [Abstract]
Net product sales	7,052		11,837
Cost of sales (excluding amortization of product rights)	1,421		3,385
ASU 2014-09 | Adjustments
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Accounts receivable	371		371			(371)
Inventory	423		423			(157)
Accrued expenses	(9,850)		(9,850)			5,028
Deferred revenue	14,022		14,022			(7,456)
Accumulated deficit	(3,372)		(3,372)			$ 1,900
Revenues [Abstract]
Net loss	$ (247)		$ (1,472)
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (0.01)		$ (0.03)
Weighted-average shares outstanding, basic and diluted (in shares)	53,302,399		50,302,419
ASU 2014-09 | Product | Adjustments
Revenues [Abstract]
Net product sales	$ (391)		$ (1,867)
Cost of sales (excluding amortization of product rights)	$ (144)		$ (395)

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Revenue from Contract with Customers - Transaction Price Allocated to Future Performance Obligations (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Costs to Obtain and Fulfill a Contract
Practical expedient performance obligation	true
Deferred revenue	$ 0	$ 0	$ 7,456
Contract assets	$ 0	$ 0

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Revenue from Contract with Customers - Costs to Obtain and Fulfill a Contract (Details)	6 Months Ended
	Jun. 30, 2018
Costs to Obtain and Fulfill a Contract
Practical expedient, incremental costs of obtaining contracts as an expense when incurred as the period of benefit is less than one year	true

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Investments (Details)	6 Months Ended
	Jun. 30, 2018 USD ($) security	Dec. 31, 2017 USD ($)
Marketable Securities
Cost Basis	$ 32,195,000	$ 60,000,000
Unrealized Losses	(17,000)	(47,000)
Fair Value	32,178,000	59,953,000
Fair value of marketable securities with a maturity of less than one year	32,200,000
Fair value of marketable securities with a maturity greater than one year	$ 0
Number of marketable securities which were in a continuous loss position for less than one year | security	16
Number of marketable securities which were in a continuous loss position for greater than one year | security	1
Other than temporary impairment	$ 0
Corporate notes and bonds
Marketable Securities
Cost Basis	32,195,000	60,000,000
Unrealized Losses	(17,000)	(47,000)
Fair Value	$ 32,178,000	$ 59,953,000

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Inventory (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Inventory
Raw materials	$ 841		$ 850
Work in process	863		772
Finished goods	1,479		1,446
Deferred cost of sales			157
Total	$ 3,183	$ 3,068	$ 3,225

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Intangible Assets - Balance of Intangible Assets and Impairment (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Finite-lived intangible assets
Accumulated Amortization	$ (7,255)		$ (7,255)		$ (6,273)
Gross Intangible Assets	12,721		12,721		12,856
Net Intangible Assets	5,466		5,466		6,583
Impairment of intangible assets	0	$ 0	0	$ 0
OXAYDO product rights
Finite-lived intangible assets
Gross Intangible Assets	7,653		7,653		7,695
Accumulated Amortization	(3,801)		(3,801)		(3,273)
Net Intangible Assets	3,852		$ 3,852		$ 4,422
Remaining Useful Life			3 years 7 months 6 days		4 years
SPRIX Nasal Spray product rights
Finite-lived intangible assets
Gross Intangible Assets	4,891		$ 4,891		$ 4,978
Accumulated Amortization	(3,401)		(3,401)		(2,964)
Net Intangible Assets	1,490		$ 1,490		$ 2,014
Remaining Useful Life			1 year 7 months 6 days		2 years
IP R&D
Finite-lived intangible assets
Accumulated Amortization	(53)		$ (53)		$ (36)
Remaining Useful Life			3 years 6 months		4 years
Gross Intangible Assets	177		$ 177		$ 183
Net Intangible Assets	$ 124		$ 124		$ 147

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Intangible Assets - Collaboration and License Agreement, Purchase Agreement and IP R&D (Details) - USD ($)	1 Months Ended		3 Months Ended		6 Months Ended
	Jan. 31, 2017	Jan. 31, 2015	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Oct. 31, 2015
OXAYDO tablets | Acura | Collaboration and License Agreement
Collaboration and License Agreement with Acura
Upfront payment paid		$ 5,000,000
Milestone payment payable							$ 2,500,000
Transaction costs		$ 172,000
Amortization expense
Amortization expense			$ 274,000	$ 270,000	$ 550,000	$ 539,000
Useful life of intangible asset		7 years
IP R&D
Amortization expense
Amortization expense			9,000	17,000	18,000	17,000
Useful life of intangible asset	5 years
Luitpold
Acquisition
Purchase price		$ 7,000,000
Intangible asset		$ 4,600,000
SPRIX Nasal Spray product rights | Luitpold
Amortization expense
Amortization expense			$ 248,000	$ 235,000	$ 500,000	$ 469,000

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Debt (Details)			1 Months Ended			2 Months Ended	3 Months Ended		6 Months Ended
	Jul. 09, 2018 D	Aug. 31, 2016 USD ($) item	Feb. 28, 2018 shares	Dec. 31, 2017 USD ($) $ / shares shares	Jan. 31, 2017 USD ($)	May 31, 2015 USD ($) item $ / shares	Jun. 30, 2018 USD ($) $ / shares shares	Mar. 31, 2018 USD ($)	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Jul. 31, 2018 USD ($)	Jan. 31, 2018 shares	Dec. 27, 2017 USD ($)
Long-term Debt
Common stock, par value (in dollars per share) | $ / shares				$ 0.001			$ 0.001		$ 0.001
Aggregate principal amount of debt issued				$ 23,888,000			$ 23,888,000		$ 23,888,000
Unamortized debt discount				(20,919,000)			(20,834,000)		(20,834,000)
Carrying value				$ 2,969,000			$ 3,054,000		$ 3,054,000
Repurchase price (as a percent)									101.00%
common stock shares authorized | shares				75,000,000			275,000,000		275,000,000
Change In Fair Value Of Derivative Liability							$ 3,181,000		$ 8,306,000	$ 12,000
Current and non-current debt | Royalty rights agreements
Long-term Debt
Royalty rights obligations				$ 4,100,000			$ 3,700,000		$ 3,700,000
5.50% Notes
Long-term Debt
Interest rate (as a percent)							5.50%		5.50%
Common stock, par value (in dollars per share) | $ / shares						$ 0.001
Convertible debt outstanding							$ 24,700,000		$ 24,700,000
Aggregate principal amount of debt issued				24,650,000			$ 24,650,000		$ 24,650,000
Initial conversion rate						0.0672518
Conversion price (in dollar per share) | $ / shares						$ 14.87
Period after the last date of original issuance of the notes to apply conversion terms						6 months
Principal amount denomination for conversion						$ 1,000
Number of threshold trading days within the 30 consecutive trading days during which the conversion terms will apply | item						20
Number of consecutive trading days not later than November 20, 2018 | item						30
Number of trading days immediately preceding a conversion date within which the threshold consecutive trading days apply						5 days
Discount rate used to calculate the present value of the remaining scheduled payments of interest for an interest make-whole payment (as a percent)						2.00%
Percentage of stock value of the simple average of the daily volume weighted average price for the specified period used to calculate the interest make-whole payment (as a percent)						95.00%
Period ending on and including the trading day immediately preceding the conversion date within which the simple average of the daily volume weighted average price is used to calculate the interest make-whole payment						10 days
Fair value						$ 41,600,000
Percentage price of original principal amount of debt at which debt has to be repurchased by the issuer as the request from the holder							100.00%		100.00%
Interest make-whole derivative						900,000
Carrying amount						40,600,000
Value of equity component						$ 19,400,000
Percentage of debt instrument holders (as a percent)						25.00%
Threshold period after event of default the company should comply with certain reporting covenants in the Indenture will						180 days
Transaction costs									$ 4,100,000
Transaction costs allocated to debt discount									2,800,000
Transaction costs allocated to equity									1,300,000
Principal amount of debt converted				36,400,000
Gain (loss) on extinguishment of debt				13,200,000
Unamortized debt discount				(4,222,000)			$ (3,404,000)		(3,404,000)
Carrying value				$ 20,428,000			$ 21,246,000		21,246,000
Warrant exercisable (in shares) | shares				3,500,000
Fair value of the derivative liability at issuance						$ 41,600,000
Transaction costs									$ 4,100,000
Threshold limit for default in payment of any other indebtedness of money borrowed						$ 5,000,000
Period to waive default in payment of any other indebtness of money borrowed						30 days
5.50% Notes | Long-term Debt
Long-term Debt
Interest rate (as a percent)				5.50%
5.50% Notes | Short-term Debt
Long-term Debt
Interest rate (as a percent)							5.50%		5.50%
5.50% Notes | Private placement
Long-term Debt
Interest rate (as a percent)						5.50%
Aggregate principal amount of debt issued						$ 61,000,000
Frequency of interest payment						semi-annually
5.50% Notes | Maximum
Long-term Debt
Initial conversion rate						0.0773395
5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market
Long-term Debt
Interest rate (as a percent)							5.50%		5.50%
Convertible debt outstanding							$ 24,700,000		$ 24,700,000
5.50% Notes | Conversion prior to January 1, 2020
Long-term Debt
Period after the last date of original issuance of the notes to apply conversion terms						6 months
Number of threshold trading days within the 30 consecutive trading days during which the conversion terms will apply | item						20
Number of consecutive trading days not later than November 20, 2018 | item						30
Number of trading days immediately preceding a conversion date within which the threshold consecutive trading days apply						5 days
Period after any five consecutive trading days of the note measurement period						5 days
Number of consecutive trading days during the five business day period the conversion terms were measured						5 days
Maximum percentage of the trading price to the product of the sale price of the entity's common stock and the conversion rate (as a percent)						98.00%
5.50% Notes | Conversion on or after January 1, 2020
Long-term Debt
Principal amount denomination for conversion						$ 1,000
Observation period to determine the amount due upon conversion based on a daily conversion value calculated on a proportionate basis for each trading day						50 days
6.50% Notes
Long-term Debt
Interest rate (as a percent)				6.50%			6.50%		6.50%
Initial conversion rate				0.7496252
Conversion price (in dollar per share) | $ / shares				$ 1.33
Principal amount denomination for conversion				$ 1,000
Discount rate used to calculate the present value of the remaining scheduled payments of interest for an interest make-whole payment (as a percent)				2.00%					2.00%
Percentage price of original principal amount of debt at which debt has to be repurchased by the issuer as the request from the holder							100.00%		100.00%
Percentage of debt instrument holders (as a percent)				25.00%
Threshold period after event of default the company should comply with certain reporting covenants in the Indenture will				180 days
Transaction costs									$ 1,700,000
Warrant exercisable (in shares) | shares				3,500,000
Exercise price (in dollars per share) | $ / shares				$ 0.01
Number of shares callable by warrants | shares				2,500,000								1,000,000
Frequency of interest payment				semi-annually
Additional number of common stock shares authorized | shares			200,000,000
Transaction costs									$ 1,700,000
Threshold limit for default in payment of any other indebtedness of money borrowed				$ 5,000,000
Period to waive default in payment of any other indebtness of money borrowed				30 days
Conversion feature, 6.50% Notes													$ 15,000,000
Fair value of derivative liability was reclassified from a liability into a stockholders' equity								$ 12,500,000
6.50% Notes | Long-term Debt
Long-term Debt
Interest rate (as a percent)				6.50%			6.50%		6.50%
6.50% Notes | Not in compliance with Nasdaq's Listing Rule 5450(b)(2)(A)
Long-term Debt
Interest rate (as a percent)							6.50%		6.50%
Convertible debt outstanding							$ 23,900,000		$ 23,900,000
13% Notes
Long-term Debt
Interest rate (as a percent)							13.00%		13.00%
Aggregate principal amount of debt issued				$ 80,000,000			$ 80,000,000		$ 80,000,000
Unamortized debt discount				(7,572,000)			(6,981,000)		(6,981,000)
Carrying value				$ 72,428,000			73,019,000		73,019,000
Threshold limit for default in payment of any other indebtedness of money borrowed		$ 2,000,000
13% Notes | Royalty rights agreements
Long-term Debt
Royalty rights obligations							$ 5,000,000		$ 5,000,000
13% Notes | Prior to August 31, 2018
Long-term Debt
Spread on treasury rate		1.00
13% Notes | Long-term Debt
Long-term Debt
Interest rate (as a percent)				13.00%			13.00%		13.00%
Senior notes | 13% Notes
Long-term Debt
Transaction costs		$ 4,500,000
Accrual interest rate (as a percent)		13.00%
Frequency of interest payment		semi-annually
Percentage of payment of principal to aggregate net sales (as a percent)		15.00%
Percentage of payment of principal to aggregate net sales, if sales targets not met (as a percent)		17.00%
Number of consecutive quarters | item		2
Redemption price of debt (as a percent)		113.50%
Number of days for the redemption of principal, after equity offering		90 days
Sinking fund		$ 0
Percentage of amount due and payable (as a percent)		100.00%
Transaction costs		$ 4,500,000
Effective interest rate (as a percent)		15.20%
Senior notes | 13% Notes | Prior to August 31, 2018
Long-term Debt
Redemption price of debt (as a percent)		100.00%
Senior notes | 13% Notes | On or after August 31, 2018, till August 30, 2019
Long-term Debt
Redemption price of debt (as a percent)		109.00%
Senior notes | 13% Notes | From August 31, 2019, till August 30, 2020
Long-term Debt
Redemption price of debt (as a percent)		104.50%
Senior notes | 13% Notes | August 31, 2020 and thereafter
Long-term Debt
Redemption price of debt (as a percent)		100.00%
Senior notes | 13% Notes | Current and non-current debt | Royalty rights agreements
Long-term Debt
Royalty rights obligations				$ 4,100,000			$ 3,700,000		$ 3,700,000
Senior notes | 13% Notes | Initial closing
Long-term Debt
Interest rate (as a percent)		13.00%
Aggregate principal amount of debt issued		$ 40,000,000
Conditional aggregate principal amount		40,000,000
Net proceeds from the issuance of secured notes		$ 37,200,000
Senior notes | 13% Notes | Second closing
Long-term Debt
Net proceeds from the issuance of secured notes					$ 38,300,000
Senior notes | 13% Notes | Maximum
Long-term Debt
Percentage of principal amount of debt redeemed or to be redeemed (as a percent)		35.00%
Senior notes | 13% Notes | Maximum | Initial closing
Long-term Debt
Maximum borrowings		$ 80,000,000
Senior notes | 13% Notes | Minimum
Long-term Debt
Percentage of debt instrument holders (as a percent)		25.00%
Percentage of aggregate principal amount remains outstandings		65.00%
OXAYDO and SPRIX Nasal Spray | Senior notes | 13% Notes | Royalty rights agreements
Long-term Debt
Percentage of royalty right payment to aggregate net sale		$ 1.5
Subsequent Events | 5.50% Notes
Long-term Debt
Convertible debt outstanding											$ 24,700,000
Subsequent Events | 5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market
Long-term Debt
Interest rate (as a percent)	5.50%
Percentage price of original principal amount of debt at which debt has to be repurchased by the issuer as the request from the holder	100.00%
Subsequent Events | 5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market | Maximum
Long-term Debt
Number of business days at which debt to be repurchased since the date of the Fundament Change Company Notice | D	35
Subsequent Events | 5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market | Minimum
Long-term Debt
Number of business days at which debt to be repurchased since the date of the Fundament Change Company Notice | D	20

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Stockholders Equity (Details) - USD ($)		1 Months Ended		3 Months Ended		6 Months Ended	13 Months Ended
	Jul. 06, 2017	Feb. 28, 2018	Mar. 31, 2017	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2018	Mar. 31, 2018	Jan. 31, 2018	Dec. 31, 2017	Jul. 31, 2015
Sale of stocks
Fair value of warrants				$ 2,833,000		$ 2,833,000			$ 8,166,000
6.50% Notes
Sale of stocks
Number of shares callable by warrants								1,000,000	2,500,000
Exercise price of warrants (in dollars per share)									$ 0.01
Additional number of common stock shares authorized		200,000,000
Interest rate (as a percent)				6.50%		6.50%			6.50%
Fair value of derivative liability was reclassified from a liability into a stockholders' equity					$ 12,500,000
Controlled Equity Offering Sales Agreement As 2015 Sales Agreement | Cantor Fitzgerald And Co.
Sale of stocks
Aggregate offering price										$ 30,000,000
Fixed Commission rate on sale of common stock (as a percent)										3.00%
Issuance of common stock, net of costs (in shares)			9,357,669	428,953		9,357,669
Net proceeds from sale of common stock			$ 9,400,000	$ 171,000		$ 9,400,000
Commissions paid on sale of common stock				$ 5,000			$ 281,000
Public offering under the July 2017 Equity Offering
Sale of stocks
Issuance of common stock, net of costs (in shares)	16,666,667
Number of shares callable by warrants	16,666,667
Stock price (in dollars per share)	$ 1.80
Exercise price of warrants (in dollars per share)	$ 2.70			$ 1.92		$ 1.92
Expiration term of warrants (in years)	5 years
Proceeds from issuance of warrants	$ 30,000,000
Net cash inflow from issuance of warrants after deduct the discounts and commissions	28,600,000
Fair value of warrants	9,700,000
Public offering under the July 2017 Equity Offering | Cantor Fitzgerald And Co.
Sale of stocks
Underwriting discounts and commissions	$ 1,400,000

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Fair Value Measurements (Details) - USD ($)	1 Months Ended		2 Months Ended	3 Months Ended	6 Months Ended
	Feb. 28, 2018	Dec. 31, 2017	May 31, 2015	Mar. 31, 2018	Jun. 30, 2018	Dec. 27, 2017
Fair Value Measurements
Marketable securities, available for sale		$ 59,953,000			$ 32,178,000
Warrant liability		8,166,000			2,833,000
Changes in the fair value of Level 3 liabilities
Carrying Value		2,969,000			3,054,000
Face Value		23,888,000			$ 23,888,000
5.50% Notes
Fair Value Measurements
Interest make-whole derivative			$ 900,000
Interest rate (as a percent)					5.50%
Discount rate used to calculate the present value of the remaining scheduled payments of interest for an interest make-whole payment (as a percent)			2.00%
Changes in the fair value of Level 3 liabilities
Fair value			$ 41,600,000
Carrying Value		20,428,000			$ 21,246,000
Face Value		$ 24,650,000			$ 24,650,000
6.50% Notes
Fair Value Measurements
Conversion feature, 6.50% Notes						$ 15,000,000
Interest rate (as a percent)		6.50%			6.50%
Discount rate used to calculate the present value of the remaining scheduled payments of interest for an interest make-whole payment (as a percent)		2.00%			2.00%
Additional number of common stock shares authorized	200,000,000
Fair value of derivative liability was reclassified from a liability into a stockholders' equity				$ 12,500,000
13% Notes
Fair Value Measurements
Interest rate (as a percent)					13.00%
Changes in the fair value of Level 3 liabilities
Carrying Value		$ 72,428,000			$ 73,019,000
Face Value		$ 80,000,000			$ 80,000,000
Level 2 | 13% Notes
Fair Value Measurements
Interest rate (as a percent)					13.00%
Changes in the fair value of Level 3 liabilities
Carrying Value					$ 73,000,000
Level 3 | 5.50% Notes
Fair Value Measurements
Interest rate (as a percent)		5.50%			5.50%
Changes in the fair value of Level 3 liabilities
Fair value		$ 11,699,000			$ 8,627,000
Carrying Value		20,428,000			21,246,000
Face Value		$ 24,650,000			$ 24,650,000
Level 3 | 6.50% Notes
Fair Value Measurements
Interest rate (as a percent)		6.50%			6.50%
Changes in the fair value of Level 3 liabilities
Fair value		$ 4,643,000			$ 2,182,000
Carrying Value		2,969,000			3,054,000
Face Value		23,888,000			23,888,000
Recurring basis
Fair Value Measurements
Cash equivalents (money market funds and commercial paper)		16,973,000			30,248,000
Marketable securities, available for sale		59,953,000			32,178,000
Total assets		76,926,000			62,426,000
Interest make-whole derivative		2,589,000			1,153,000
Conversion feature, 6.50% Notes		14,034,000
Warrant liability		8,166,000			2,833,000
Total liabilities		24,789,000			3,986,000
Changes in the fair value of Level 3 liabilities
Beginning balance				24,789,000	24,789,000
Reclassification to Additional Paid in Capital					(12,497,000)
Fair Value Change during the period					(8,306,000)
Ending balance		24,789,000			3,986,000
Recurring basis | Interest make-whole derivative
Changes in the fair value of Level 3 liabilities
Beginning balance				2,589,000	2,589,000
Fair Value Change during the period					(1,436,000)
Ending balance		2,589,000			1,153,000
Recurring basis | Conversion feature, 6.50% Notes
Changes in the fair value of Level 3 liabilities
Beginning balance				14,034,000	14,034,000
Reclassification to Additional Paid in Capital					(12,497,000)
Fair Value Change during the period					(1,537,000)
Ending balance		14,034,000
Recurring basis | Warrants
Changes in the fair value of Level 3 liabilities
Beginning balance				$ 8,166,000	8,166,000
Fair Value Change during the period					(5,333,000)
Ending balance		8,166,000			2,833,000
Recurring basis | Level 1
Fair Value Measurements
Cash equivalents (money market funds and commercial paper)		16,973,000			30,248,000
Total assets		16,973,000			30,248,000
Recurring basis | Level 2
Fair Value Measurements
Marketable securities, available for sale		59,953,000			32,178,000
Total assets		59,953,000			32,178,000
Recurring basis | Level 3
Fair Value Measurements
Interest make-whole derivative		2,589,000			1,153,000
Conversion feature, 6.50% Notes		14,034,000
Warrant liability		8,166,000			2,833,000
Total liabilities		$ 24,789,000			$ 3,986,000

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Net Loss Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Basic and diluted net loss per common share calculation:
Net loss	$ (11,963)	$ (26,479)	$ (24,316)	$ (51,852)
Weighted-average common stock outstanding	53,302,399	25,542,733	50,302,419	25,145,440
Net loss per share of common stock, basic and diluted	$ (0.22)	$ (1.04)	$ (0.48)	$ (2.06)
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	43,992,662	8,963,725	43,992,662	8,963,725
5.50% Notes
Basic and diluted net loss per common share calculation:
Interest rate (as a percent)	5.50%		5.50%
6.50% Notes
Basic and diluted net loss per common share calculation:
Interest rate (as a percent)	6.50%		6.50%		6.50%
Stock options
Basic and diluted net loss per common share calculation:
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	4,640,696	4,788,917	4,640,696	4,788,917
Restricted stock awards
Basic and diluted net loss per common share calculation:
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	2,120,495	72,448	2,120,495	72,448
Common shares issuable upon conversion of the 5.50% notes | 5.50% Notes
Basic and diluted net loss per common share calculation:
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	1,657,757	4,102,360	1,657,757	4,102,360
Common shares issuable upon conversion of the 5.50% notes | 6.50% Notes
Basic and diluted net loss per common share calculation:
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	17,907,047		17,907,047
Warrants
Basic and diluted net loss per common share calculation:
Shares excluded from the calculation of diluted weighted average shares outstanding, as they would be anti-dilutive	17,666,667		17,666,667

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Stock-based Compensation - Stock Plans (Details)		1 Months Ended				3 Months Ended		6 Months Ended
	Jun. 08, 2017 item $ / shares shares	May 31, 2018 shares	Dec. 31, 2016 shares	Jun. 30, 2016 shares	Jun. 30, 2014 shares	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Dec. 31, 2017 shares	Jan. 31, 2016 shares	Nov. 30, 2013 shares
Shares of common stock reserved for issuance:
Common stock shares issued						(56,298,373)		(56,298,373)		(45,939,663)
Shares Available for Future Grant Under Equity Compensation Plans						4,924,953		4,924,953
Total stock-based compensation expense | $						$ 1,002,000	$ 1,568,000	$ 1,954,000	$ 3,362,000
Share-based Compensation | $								1,954,000	3,362,000
General and administrative
Shares of common stock reserved for issuance:
Total stock-based compensation expense | $						912,000	1,265,000	1,734,000	2,621,000
Sales and marketing
Shares of common stock reserved for issuance:
Total stock-based compensation expense | $						37,000	144,000	103,000	303,000
Research and development
Shares of common stock reserved for issuance:
Total stock-based compensation expense | $						$ 53,000	159,000	$ 117,000	438,000
Stock options
Shares of common stock reserved for issuance:
Expected term of options								5 years 9 months 29 days
Options, additional disclosures
Weighted average grant date fair value of the options granted (in dollars per share) | $ / shares								$ 0.50
Weighted average assumptions:
Risk free interest rate (as a percent)								2.79%
Expected term of options								5 years 9 months 29 days
Expected volatility (as a percent)								80.60%
Dividend yield (as a percent)								0.00%
Restricted stock awards
Shares of common stock reserved for issuance:
Granted (in shares)								2,100,000
Granted (in dollars per share) | $ / shares								$ 0.55
Stock options and restricted stock
Shares of common stock reserved for issuance:
Stock options and restricted stock awards forfeited						1,724,615		1,724,615
Employee stock purchase plan
Stock-based Compensation
Common stock initially reserved for issuance (in shares)						750,000		750,000
Shares of common stock reserved for issuance:
Shares initially reserved under the Plan						750,000		750,000
Common stock shares issued						(146,314)		(146,314)
Shares Available for Future Grant Under Equity Compensation Plans											750,000
Total stock-based compensation expense | $						$ 7,000	$ 35,000	$ 15,000	$ 70,000
2013 Stock-Based Incentive Plan
Stock-based Compensation
Common stock initially reserved for issuance (in shares)						1,680,000		1,680,000				1,680,000
Authorized increase to the Plan		6,000,000		2,600,000	2,000,000			10,600,000
Shares of common stock reserved for issuance:
Shares initially reserved under the Plan						1,680,000		1,680,000				1,680,000
Authorized increase to the Plan		6,000,000		2,600,000	2,000,000			10,600,000
Common stock options granted						(6,127,188)		(6,127,188)
2013 Stock-Based Incentive Plan | Stock options
Shares of common stock reserved for issuance:
Weighted average remaining period over which unrecognized compensation expense will be recognized								2 years 2 months 19 days
Options Outstanding, Number of Shares
Balance at beginning of the period (in shares)								4,110,612
Granted (in shares)								936,250
Forfeited (in shares)								(229,585)
Cancelled (in shares)								(176,581)
Balance at end of the period (in shares)						4,640,696		4,640,696
Vested or expected to vest at the end of the period (in shares)						4,640,696		4,640,696
Exercisable at the end of the period (in shares)						1,988,964		1,988,964
Options Outstanding, Weighted-Average Exercise Price
Outstanding at the beginning of the period (in dollars per share) | $ / shares								$ 6.41
Granted (in dollars per share) | $ / shares								0.72
Forfeited (in dollars per share) | $ / shares								5.05
Cancelled ( in dollars per share) | $ / shares								9.26
Outstanding at end of the period (in dollars per share) | $ / shares						$ 5.22		5.22
Vested or expected to vest at the end of the period (in dollars per share) | $ / shares						5.22		5.22
Exercisable at the end of the period (in dollars per share) | $ / shares						$ 6.86		$ 6.86
Options, additional disclosures
Balance at the end of the period, Weighted-average remaining contractual term								8 years 3 months 22 days
Vested or expected to vest at the end of the period, Weighted-average remaining contractual term								8 years 3 months 22 days
Exercisable at the end of the period, Weighted-average remaining contractual term								7 years 6 months 26 days
Unvested options (in shares)						4,640,696		4,640,696
Intrinsic value of unvested options (in dollars) | $						$ 0		$ 0
Stock price (in dollars per share) | $ / shares						$ 0.42		$ 0.42
Unvested options, Weighted Average Exercise Price (in dollars per share) | $ / shares						$ 5.22		$ 5.22
Unrecognized compensation expense and recognition period disclosure
Unrecognized compensation expense | $						$ 6,000,000		$ 6,000,000
Weighted average remaining period over which unrecognized compensation expense will be recognized								2 years 2 months 19 days
2013 Stock-Based Incentive Plan | Stock options | Maximum
Shares of common stock reserved for issuance:
Expected term of options								10 years
Weighted average assumptions:
Expected term of options								10 years
2013 Stock-Based Incentive Plan | Restricted stock awards
Shares of common stock reserved for issuance:
Restricted stock awards granted						(3,043,660)		(3,043,660)
Total stock-based compensation expense | $								$ 1,100,000
Weighted average remaining period over which unrecognized compensation expense will be recognized								1 year 18 days
Unrecognized compensation expense and recognition period disclosure
Weighted average remaining period over which unrecognized compensation expense will be recognized								1 year 18 days
2013 Stock-Based Incentive Plan | Restricted stock units
Shares of common stock reserved for issuance:
Restricted stock awards granted						(600,000)		(600,000)
2017 Inducement Plan
Stock-based Compensation
Common stock initially reserved for issuance (in shares)						300,000		300,000
Shares of common stock reserved for issuance:
Shares initially reserved under the Plan						300,000		300,000
Shares reserved under Plan for future issuance			300,000
Common stock options granted						(212,500)		(212,500)
Term of the awards			P10Y
June 2017 Grant | Stock options
Shares of common stock reserved for issuance:
Expected term of options	10 years							5 years 7 months 6 days
Total stock-based compensation expense | $						$ 52,000		$ 104,000
Granted (in shares)	630,000
Number of senior executives | item	9
Granted (in dollars per share) | $ / shares	$ 2.38
Share-based Compensation | $								$ 1,334,000
Weighted average remaining period over which unrecognized compensation expense will be recognized						5 years 7 months 6 days		5 years 7 months 6 days
Weighted average assumptions:
Risk free interest rate (as a percent)								1.80%
Expected term of options	10 years							5 years 7 months 6 days
Expected volatility (as a percent)								95.54%
Dividend yield (as a percent)								0.00%
Unrecognized compensation expense and recognition period disclosure
Weighted average remaining period over which unrecognized compensation expense will be recognized						5 years 7 months 6 days		5 years 7 months 6 days
June 2017 Grant | Stock options | Tranche one
Shares of common stock reserved for issuance:
Vesting percentage	25.00%
Average closing price | $ / shares	$ 3.33
Consecutive trading days for average closing price	30 days
June 2017 Grant | Stock options | Tranche one | Minimum
Stock-based Compensation
Number of months of anniversary of the grant for which the grant starts vesting	6 months
June 2017 Grant | Stock options | Tranche two
Stock-based Compensation
Number of months of anniversary of the grant for which the grant starts vesting	12 months
Shares of common stock reserved for issuance:
Vesting percentage	25.00%
Average closing price | $ / shares	$ 4.05
Consecutive trading days for average closing price	30 days
June 2017 Grant | Stock options | Tranche three
Stock-based Compensation
Number of months of anniversary of the grant for which the grant starts vesting	24 months
Shares of common stock reserved for issuance:
Vesting percentage	50.00%
Average closing price | $ / shares	$ 4.76
Consecutive trading days for average closing price	30 days

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Stock-based Compensation - Restricted Stock (Details)	6 Months Ended
	Jun. 30, 2018 $ / shares shares
Restricted stock awards
Shares
Unvested balance at the beginning of the period (in shares) | shares	25,047
Granted (in shares) | shares	2,100,000
Vested restricted stock awards (in shares) | shares	(4,552)
Unvested balance at the end of the period (in shares) | shares	2,120,495
Weighted-average Grant Date Fair Value per Share
Outstanding balance at the beginning of the period (in dollars per share) | $ / shares	$ 7.07
Granted (in dollars per share) | $ / shares	0.55
Vested restricted stock awards (in dollars per share) | $ / shares	7.07
Outstanding balance at the end of the period (in dollars per share) | $ / shares	$ 0.62
2013 Stock-Based Incentive Plan | Restricted stock awards
Weighted-average Grant Date Fair Value per Share
Weighted average remaining period over which unrecognized compensation expense will be recognized	1 year 18 days
2013 Stock-Based Incentive Plan | Stock options
Weighted-average Grant Date Fair Value per Share
Weighted average remaining period over which unrecognized compensation expense will be recognized	2 years 2 months 19 days

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Stock-based Compensation - Employee Stock Purchase Plans (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Stock-based Compensation
The maximum value of shares an employee can accrue to purchase under the plan per calendar year			$ 25,000
Share-based compensation expense recognized	$ 1,002,000	$ 1,568,000	$ 1,954,000	$ 3,362,000
Employee stock purchase plan
Stock-based Compensation
Purchase price of common stock expressed as a percentage of its fair value			85.00%
Maximum employee contribution rate	10.00%		10.00%
Maximum number of shares to purchase per employee per period			1,500
Share-based compensation expense recognized	$ 7,000	$ 35,000	$ 15,000	$ 70,000

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Commitments and Contingencies (Detail) $ in Millions				1 Months Ended
	Aug. 02, 2018	Feb. 10, 2017 security	Jan. 27, 2017 security	Feb. 28, 2017 USD ($)
Loss Contingencies [Line Items]
Number of putative securities | security		2	2
Drug Product Manufacturing Agreement | Halo Pharmaceutical, Inc
Loss Contingencies [Line Items]
Percentage of requirements to be purchased after second financial year.				75.00%
2018				$ 3.6
2019				3.6
Thereafter				$ 7.2
Subsequent Events
Loss Contingencies [Line Items]
Number of days to appeal the Court's decision	30 days
Number of days to move under Rule 59 for reconsideration	28 days

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Acquisitions and License and Collaboration Agreements - Shionogi and Acura (Details) - OXAYDO tablets	1 Months Ended
	Jan. 31, 2015 USD ($)	Jun. 30, 2018 item	Oct. 31, 2015 USD ($)
License and collaboration agreement
Number of U.S. patents that expire between 2023 and 2025 | item		6
Collaboration and License Agreement | Acura
License and collaboration agreement
Upfront payment paid	$ 5,000,000
Milestone payment payable			$ 2,500,000
Milestone payment payable upon achievement of net product sales in calendar year threshold	12,500,000
Net product sales threshold in calendar year to be met for one-time milestone payment	150,000,000
Intangible assets	7,700,000
Transaction costs	$ 172,000
Useful life	7 years

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Acquisitions and License and Collaboration Agreements - Luitpold Agreement (Details)	1 Months Ended
	Jan. 31, 2015 USD ($)
SPRIX Nasal Spray product rights
Acquisition
Purchase agreement term from date of first commercial sale	10 years
Luitpold
Acquisition
Purchase price	$ 7,000,000
Additional glassware, equipment and active pharmaceutical ingredient purchased	1,100,000
Additional pharmaceutical ingredient to be purchased after closing	$ 340,000

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Income Taxes (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Income tax expense (benefit)	$ 0	$ 0	$ 0	$ 0
State
Deferred tax liabilty	$ 61,000	$ 0	$ 981,000	$ 0

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Subsequent Events (Details) $ in Millions	Aug. 02, 2018	Jul. 09, 2018 USD ($) D	Jul. 31, 2018 USD ($)	Jun. 30, 2018 USD ($)
Subsequent Events
Cash and cash equivalents, restricted cash and marketable securities				$ 70.4
5.50% Notes
Subsequent Events
Convertible debt outstanding				$ 24.7
Interest rate (as a percent)				5.50%
Percentage price of original principal amount of debt at which debt has to be repurchased by the issuer as the request from the holder				100.00%
5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market
Subsequent Events
Convertible debt outstanding				$ 24.7
Interest rate (as a percent)				5.50%
Subsequent Events
Subsequent Events
Number of days to appeal the Court's decision	30 days
Number of days to move under Rule 59 for reconsideration	28 days
Subsequent Events | Minimum | Comon Stock to be continued listing on The Nasdaq Capital Market
Subsequent Events
Standard market value as per listing rule		$ 35.0
Minimum consecutive trading days before a certain date required in which the market value has to maintain at the standard		10 days
Subsequent Events | 5.50% Notes
Subsequent Events
Convertible debt outstanding			$ 24.7
Subsequent Events | 5.50% Notes | Comon Stock to be continued listing on The Nasdaq Capital Market
Subsequent Events
Interest rate (as a percent)		5.50%
Percentage price of original principal amount of debt at which debt has to be repurchased by the issuer as the request from the holder		100.00%
Subsequent Events | 5.50% Notes | Minimum | Comon Stock to be continued listing on The Nasdaq Capital Market
Subsequent Events
Number of business days at which debt to be repurchased since the date of the Fundament Change Company Notice | D		20
Subsequent Events | 5.50% Notes | Maximum | Comon Stock to be continued listing on The Nasdaq Capital Market
Subsequent Events
Number of business days at which debt to be repurchased since the date of the Fundament Change Company Notice | D		35