Zyla Life Sciences - FORM 10-Q

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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 September 30, 2017

☐ 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 Global 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 November 8, 2017: 43,029,615

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TABLE OF CONTENTS

		Page

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of December 31, 2016 and September 30, 2017 (unaudited)	1
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2017	2
	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2016 and 2017	3
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2017	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

SIGNATURES		41

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 September 30, 2017.

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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, 2016		September 30, 2017
			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	44,355	$	37,750
Marketable securities, available for sale		42,471		64,308
Accounts receivable		1,108		5,607
Inventory		1,700		1,835
Prepaid expenses and other current assets		2,537		1,399
Other receivables		1,001		1,153
Total current assets		93,172		112,052
Intangible assets, net		8,350		7,076
Restricted cash		-		400
Property and equipment, net		12,709		10,607
Deposits and other assets		627		1,052
Total assets	$	114,858	$	131,187
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		2,392		5,626
Accrued expenses		18,147		17,972
Deferred revenue		3,975		8,759
Debt - current		381		547
Warrant liability		-		8,166
Total current liabilities		24,895		41,070
Debt - non-current portion, net		83,711		126,161
Deferred income tax liability		23		25
Derivative liability		12		-
Other liabilities		891		770
Total liabilities		109,532		168,026

Commitments and contingencies (Note 11)
Stockholders’ equity (deficit)
Common stock--$0.001 par value; 75,000,000 shares authorized at December 31, 2016 and September 30, 2017; 25,189,125 and 43,029,615 shares issued and outstanding at December 31, 2016 and September 30, 2017, respectively		25		43
Additional paid-in capital		230,379		258,989
Accumulated other comprehensive income		100		868
Accumulated deficit		(225,178)		(296,739)
Total stockholders' equity (deficit)		5,326		(36,839)
Total liabilities and stockholders’ equity (deficit)	$	114,858	$	131,187

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				Nine Months Ended
	September 30,				September 30,
	2016		2017		2016		2017
Revenues
Net product sales	$	4,711	$	6,651	$	10,724	$	18,333
Collaboration revenues		—		—		100		—
Total revenue		4,711		6,651		10,824		18,333

Cost and Expenses
Cost of sales (excluding amortization of product rights)		914		1,249		2,580		3,646
Amortization of product rights		502		528		1,506		1,554
General and administrative		7,950		6,849		22,802		27,811
Sales and marketing		6,973		8,803		19,455		27,402
Research and development		12,070		2,073		26,886		13,187
Restructuring charges		—		2,983		—		2,983
Total costs and expenses		28,409		22,485		73,229		76,583
Loss from operations		(23,698)		(15,834)		(62,405)		(58,250)

Other (income) expense:
Change in fair value of warrant and derivative liability		11		(1,500)		(642)		(1,513)
Interest expense, net		3,601		4,675		8,225		13,958
Other (gain) loss		(12)		(60)		54		106
Gain on foreign currency exchange		(3)		(1)		—		(1)
		3,597		3,114		7,637		12,550
Loss before provision (benefit) for income taxes		(27,295)		(18,948)		(70,042)		(70,800)
Provision (benefit) for income taxes		(358)		—		(780)		—
Net loss	$	(26,937)	$	(18,948)	$	(69,262)	$	(70,800)
Per share information:
Net loss per share of common stock, basic and diluted	$	(1.10)	$	(0.46)	$	(2.83)	$	(2.32)
Weighted-average shares outstanding, basic and diluted		24,565,554		41,149,838		24,480,494		30,525,158

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				Nine Months Ended
	September 30,				September 30,
	2016		2017		2016		2017
Net loss	$	(26,937)	$	(18,948)	$	(69,262)	$	(70,800)
Other comprehensive income (loss):
Unrealized (loss) gain on available for sale securities		(15)		19		150		(18)
Foreign currency translation adjustments		123		166		494		786
Comprehensive loss	$	(26,829)	$	(18,763)	$	(68,618)	$	(70,032)

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2016		2017
Operating activities:
Net loss	$	(69,262)	$	(70,800)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,747		3,818
Change in fair value of warrant and derivative liability		(642)		(1,513)
Stock-based compensation expense		4,677		5,056
Noncash interest and amortization of debt discount		4,019		4,589
Amortization of premium on marketable securities		549		45
Deferred income taxes		(780)		—
Loss on extinguishment of debt		800		—
Changes in assets and liabilities:
Related party receivable		59		—
Accounts receivable		(3,595)		(4,499)
Inventory		350		(135)
Prepaid expenses and other current assets		(572)		1,140
Other receivables		(208)		(50)
Deposits and other assets		2,176		(417)
Accounts payable		373		3,233
Accrued expenses		6,304		(280)
Deferred revenue		(5,220)		4,778
Other current liabilities		311		1
Other liabilities		836		(134)
Net cash used in operating activities		(57,078)		(55,168)
Investing activities:
Payments for purchase of property and equipment		(9,074)		(90)
Increase in restricted cash		—		(400)
Purchases of investments		(45,522)		(93,391)
Sales of investments		8,570		12,195
Maturity of investments		81,002		59,297
Net cash (used in) provided by investing activities		34,976		(22,389)
Financing activities:
Net proceeds from issuance of common stock and warrants		274		32,504
Payments on borrowings		(15,856)		—
Net proceeds from debt and royalty rights		37,231		38,304
Royalty payments in connection with the 13% Notes		—		(307)
Net cash provided by financing activities		21,649		70,501
Effect of foreign currency translation on cash and cash equivalents		410		451
Net decrease in cash and cash equivalents		(43)		(6,605)
Cash at beginning of period		46,665		44,355
Cash at end of period	$	46,622	$	37,750

Supplemental disclosures of cash flow information:
Fair value of warrants issued in connection with common stock	$	—	$	9,667
Cash interest payments	$	3,564	$	10,662

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 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 to patients and healthcare providers. The Company is currently marketing ARYMO® ER (morphine sulfate) extended-release (“ER”) tablets, for oral use CII (“ARYMO ER”), SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”), and OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”).

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. 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.

The Company also has a pipeline of products developed using Guardian Technology that it may look to partner out. The Company plans to continue to grow through the revenues of its three commercial products, business development opportunities and leveraging its proprietary Guardian Technology.

Liquidity

The Company has incurred recurring operating losses since inception. As of September 30, 2017, the Company had an accumulated deficit of $296.7 million and will require substantial additional capital to fund its commercialization strategies for ARYMO ER, SPRIX Nasal Spray and OXAYDO. The Company reasonably expects that its cash and cash equivalents and marketable securities at September 30, 2017 and its corporate restructuring initiative announced in August 2017 will enable it to fund future cash requirements for at least the next 12 months from the date of the issuance of these unaudited consolidated financial statements. The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to its commercial organization. As the Company continues to incur losses, a transition to profitability is dependent upon the successful commercialization of its approved products and the achievement of a level of revenue adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through the sale of equity, debt financings or other sources, including potential additional collaborations, until profitability is achieved, if ever. There can be no assurance, however, that additional funding will be available on terms acceptable to the Company, or at all.

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.

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The accompanying consolidated financial information at September 30, 2017 and the three and nine months ended September 30, 2016 and 2017 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 September 30, 2017, the consolidated results of its operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2017, and consolidated cash flows for the nine months ended September 30, 2016 and 2017. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2016 and 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017, 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, 2016 filed on March 13, 2017 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, 2016. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 became effective for the Company in the first quarter of 2017 and was applied using a modified retrospective transition approach. Under ASU 2016-09, the Company has elected to no longer estimate forfeiture rates as part of its stock-based compensation expense and will true up forfeitures as they occur. As a result of the adoption of ASU 2016-09, the Company recorded a cumulative adjustment of $763,000, which increased its accumulated deficit as of January 1, 2017.

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 finance 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 into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

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 will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the balance sheet classification of deferred taxes and requires that all deferred taxes be presented as noncurrent. ASU 2015-17 was effective for fiscal years beginning after December 15, 2016 and early adoption was permitted. The adoption of the update did not have a material effect on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial

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doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued, and to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 was effective for the Company for annual reporting periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The adoption of this update did not have a material effect on the Company’s financial statements.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), 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. ASC 606 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 becomes effective in calendar year 2018 and early adoption in calendar year 2017 is permitted. 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 will be effective for the Company beginning in the first quarter of 2018. Early adoption is permitted.

The Company has formed a task force that is in the process of analyzing the Company’s customer contracts and the potential impacts the standard may have on previously reported revenues and future revenues. Under ASC 606, the Company expects to recognize net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the current policy of recognizing net product sales when prescriptions are dispensed to patients. As a result, the Company expects to recognize the majority of net product sales under such contracts earlier under ASC 606 than it would have recognized under current guidance. However, the Company is still evaluating the materiality of the impact on the consolidated financial statements and related disclosures.

The Company plans to adopt the new standard effective January 1, 2018 using the modified retrospective approach.

3. Investments

Marketable Securities

Marketable securities consisted of the following at December 31, 2016:


(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	42,481	$	4	$	(14)	$	42,471
Total	$	42,481	$	4	$	(14)	$	42,471

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Marketable securities consisted of the following as of September 30, 2017:


(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	64,336	$	—	$	(28)	$	64,308
Total	$	64,336	$	—	$	(28)	$	64,308

The fair value of marketable securities as of September 30, 2017 with a maturity of less than one year is $64.3 million. There were no marketable securities with a maturity of greater than one year as of September 30, 2017.

At September 30, 2017, the Company held 10 marketable securities that were in a continuous loss position for less than one year. 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 September 30, 2017.

4. 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, 2016 and September 30, 2017:


	December 31,		September 30,
(in thousands)	2016		2017
Raw materials	$	779	$	1,112
Finished goods		820		516
Deferred cost of sales		101		207
Total	$	1,700	$	1,835

The deferred costs of sales will be recognized upon release of the product to patients.

5. Intangible Assets

The following represents the balance of the intangible assets at December 31, 2016:


	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,520	$	(2,124)	$	5,396	5.00
SPRIX Nasal Spray product rights		4,620		(1,827)		2,793	3.00
IP R&D		161		—		161	Indefinite
Total	$	12,301	$	(3,951)	$	8,350

The following represents the balance of the intangible assets at September 30, 2017:


	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,671	$	(2,988)	$	4,683	4.25
SPRIX Nasal Spray product rights		4,928		(2,688)		2,240	2.25
IP R&D		180		(27)		153	4.25
Total	$	12,779	$	(5,703)	$	7,076

There was no impairment to intangible assets in the three and nine months ended September 30, 2016 and 2017.

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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 12 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and nine months ended September 30, 2016, the Company recognized amortization expense of $271,000, and $813,000, respectively, related to the OXAYDO product rights intangible asset. During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $274,000, and $813,000, 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 12 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and nine months ended September 30, 2016, the Company recognized amortization expense of $231,000 and $693,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset. During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $246,000 and $714,000, 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, 2016, 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 5 years.

During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $9,000 and $26,000, respectively, related to the IP R&D intangible asset.

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6. Long-Term Debt

Hercules Loan and Security Agreement

In January 2015, the Company entered into the Loan and Security Agreement, which was subsequently amended in December 2015 (as amended, the “Loan Agreement”), with Hercules Technology Growth Capital, Inc. (now known as Hercules Capital, Inc.) (“Hercules”) and certain other lenders, pursuant to which the Company borrowed $15.0 million under a term loan. The term loan bore an interest rate per annum equal to the greater of either (i) 9.40% plus the prime rate as reported in The Wall Street Journal minus 3.25% or (ii) 9.40%. Under the Loan Agreement, the Company made interest only payments through July 1, 2016, and was scheduled to repay the principal balance of the loan in 30 equal monthly payments of principal and interest through the scheduled maturity date of July 1, 2018. In connection with the Loan Agreement, the Company granted a security interest in substantially all of its assets, excluding intellectual property and certain new drug applications and related approvals, as collateral for the obligations under the Loan Agreement.

On August 31, 2016, the Company repaid all outstanding obligations under the Loan Agreement with the proceeds of the 13% Notes (as defined below).

5.50% Convertible Senior 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.

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 will 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

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upon the occurrence of specified corporate events.

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 will pay or deliver, as the case may be, 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 will 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 will, 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 will 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.

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 September 30, 2017. Should the 5.50% Notes become convertible, management will determine whether the intent is to settle in cash, which would result in the liability

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component of the 5.50% 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 $4.1 million related to the issuance of the 5.50% Notes are 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.

The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s balance sheet at December 31, 2016 and September 30, 2017:


	December 31, 2016		September 30, 2017
(in thousands)
Gross proceeds	$	61,000	$	61,000
Unamortized debt discount		(15,091)		(11,608)
Carrying value	$	45,909	$	49,392

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 indenture guaranteeing the 5.50% Notes.

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, to support the development of Egalet-002 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 will 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, SPRIX Nasal Spray, 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 will be 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, will have the benefit of a security interest in the 13% Notes collateral and will be 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

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accordance with the 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 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 Indenture; provided that at least 65% of the aggregate principal amount of 13% Notes issued under the 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 Indenture and the 13% Notes are unconditionally guaranteed on a secured basis by the Guarantors. Under the terms of the 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 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 Indenture.

The Indenture governing the 13% Notes contains customary events of default with respect to the 13% Notes (including the Company’s failure to make any payment of principal or interest on the 13% Notes when due and payable), 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 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 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 Indenture), the 13% Notes will automatically become due and payable.

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.

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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 $4.7 million as of September 30, 2017, which are classified within current and non-current debt in the consolidated balance sheet.

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 consolidated balance sheets and are amortized using the effective interest method. The Company calculated an effective interest rate of 15.2% as of September 30, 2017 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 $4.9 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, 2016 and September 30, 2017:


	December 31, 2016		September 30, 2017
(in thousands)
Gross proceeds	$	40,000	$	80,000
Unamortized debt discount		(5,187)		(7,400)
Carrying value	$	34,813	$	72,600

Current and non-current debt on the Company’s consolidated balance sheets at December 31, 2016 and September 30, 2017 includes the carrying value of the 5.50% Notes and the 13% Notes, as well as $3.3 million and $4.7 million, respectively, for the Royalty Rights issued in connection with the 13% Notes.

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7. 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 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 initiated sales of shares under the 2015 Sales Agreement in March 2017 and sold an aggregate of 1,126,528 shares of Common Stock through September 30, 2017, resulting in net proceeds of $3.7 million after deducting commissions of $114,000. The Company has not sold any additional shares under the Sales Agreement during the period subsequent to September 30, 2017.

July 2017 Equity Offering

On July 6, 2017, the Company entered into an underwriting agreement with Cantor Fitzgerald & Co. 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 has an exercise price of $2.70, subject to adjustment in certain circumstances. 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 liabilitity 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.

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8. 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, 2016

	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds)	$	27,635	$	—	$	—	$	27,635
Marketable securities, available-for-sale		—		42,471		—		42,471
Total assets	$	27,635	$	42,471	$	—	$	70,106

Liabilities
Interest make-whole derivative	$	—	$	—	$	12	$	12
Total liabilities	$	—	$	—	$	12	$	12


(in thousands)	Fair Value Measurements as of September 30, 2017

	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds and commercial paper)	$	27,380	$	—	$	—	$	27,380
Marketable securities, available-for-sale		—		64,308		—		64,308
Total assets	$	27,380	$	64,308	$	—	$	91,688

Liabilities
Interest make-whole derivative	$	—	$	—	$	—	$	—
Warrant liability	$	—	$	—	$	8,166	$	8,166
Total liabilities	$	—	$	—	$	8,166	$	8,166

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The following tables set forth a summary of changes in the fair value during the nine months ended September 30, 2017:


(in thousands)						Fair Value
		December 31,				Change in		September 30, 2017
		2016		Additions		2017
Interest make-whole derivative		12	$	—	$	(12)	$	—
Warrant liability		—	$	9,667	$	(1,501)	$	8,166
Total liabilities	$	12	$	9,667	$	(1,513)	$	8,166

The 5.50% Notes include an interest make-whole feature whereby if a noteholder converts any of the 5.50% Notes prior to April 1, 2018, the Company will, 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 has determined that this feature is an embedded derivative and has recognized the fair value of this derivative as a liability in the Company’s consolidated balance sheet, 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 this embedded derivative was determined based on a binomial tree lattice model.

The fair value of the Company’s warrant liablity was estimated utilizing a lattice tree model both for the initial valuation and as of September 30, 2017. 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 September 30, 2017, the fair value of the 5.50% Notes was estimated 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 at September 30, 2017 was as follows:


(in thousands)	Fair Value		Carrying Value		Face Value

5.50% Notes due April 1, 2020	$	39,807	$	49,392	$	61,000

The fair value of the Company’s 13% Notes approximates its carrying value of $72.6 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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9. 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 September 30,				Nine Months Ended September 30,
	2016		2017		2016		2017
Basic and diluted net loss per common share calculation:
Net loss	$	(26,937)	$	(18,948)	$	(69,262)	$	(70,800)
Weighted average common stock outstanding		24,565,554		41,149,838		24,480,494		30,525,158
Net loss per share of common stock—basic and diluted	$	(1.10)	$	(0.46)	$	(2.83)	$	(2.32)

The following outstanding securities for the three and nine months ended September 30, 2016 and 2017 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti-dilutive:


	Three and nine months ended September 30,
	2016	2017
Stock options outstanding	2,141,072	4,452,314
Unvested restricted stock awards	574,191	32,683
Common shares issuable upon conversion of the 5.50% Notes	4,102,360	4,102,360
Common shares issuable upon exercise of warrants	—	16,666,667
Total	6,817,623	25,254,024

10. 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 and 2,600,000 to the number of shares originally reserved for issuance under the 2013 Plan were authorized by the Company’s stockholders in June 2014 and June 2016, 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 $19,000 and $89,000, respectively, during the three and nine months ended September 30, 2017, and stock-based compensation expense of $29,000 and $82,000, respectively, during the three and nine months ended September 30, 2016 related to the Purchase Plan.

Shares Available for Future Grant Under Equity Compensation Plans

As of September 30, 2017, 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		4,600,000
Common stock options granted under the 2013 Plan		(5,079,938)
Common stock options granted under the Inducement Plan		(212,500)
Restricted stock awards granted under the 2013 Plan		(1,543,660)
Common stock issued under the Purchase Plan		(98,548)
Stock options and restricted stock awards forfeited		849,226
Remaining shares available for future grant		1,244,580

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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 September 30,				Nine months ended September 30,
(in thousands)		2016		2017		2016		2017
General and administrative	$	1,448	$	1,162	$	3,854	$	3,783
Sales and marketing		115		83		250		386
Research and development		246		85		573		523
Restructuring charges		—		364		—		364
Total stock based compensation expense	$	1,809	$	1,694	$	4,677	$	5,056

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, 2016	2,952,572	$	8.63
Granted	1,987,581		3.76
Exercised	—		—
Forfeited	(460,250)		7.14
Cancelled	(27,589)		9.43
Outstanding at September 30, 2017	4,452,314	$	6.61	8.57
Vested or expected to vest at September 30, 2017	4,452,314	$	6.61	8.57
Exercisable at September 30, 2017	1,080,537	$	8.77	7.12

The intrinsic value of the 4,452,314 stock options outstanding as of September 30, 2017 was $4,000, based on a per share price of $1.28, the Company’s closing stock price on that date, and a weighted-average exercise price of $6.61 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.

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(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 $60,000 and $76,000 for the three and nine months ended September 30, 2017, respectively.

The per-share weighted-average grant date fair value of the options granted to employees during the nine months ended September 30, 2017 was estimated at $2.64 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2017
Risk-free interest rate	1.92	%
Expected term of options (in years)	6.14
Expected volatility	80.57	%
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.

Prior to January 1, 2017, the Company estimated the expected volatility based on actual historical volatility of the stock price of similar companies with publicly-traded equity securities. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The impact of this change had an immaterial effect on the Company’s financial results for the three and nine months ended September 30, 2017.

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 September 30, 2017, there was $10.2 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 2.71 years.

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Restricted Stock

A summary of the status of the Company’s restricted stock awards at September 30, 2017 and of changes in restricted stock awards outstanding under the 2013 Plan for the nine months ended September 30, 2017 is as follows:


		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2016	543,577	$	10.77
Granted	—	$	—
Forfeited	(28,750)	$	6.92
Vested restricted stock awards	(482,144)	$	11.21
Unvested at September 30, 2017	32,683	$	7.80

For stock awards 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 reflected above vest 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 September 30, 2017, there was $255,000 of total unrecognized stock-based compensation expense, related to restricted stock awards under the 2013 Plan, which will be recognized over the weighted-average remaining period of 2.52 years.

11. 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, Stanley J. Musial, and Jeffrey M. Dayno. 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 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 bring 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 bases 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 Company disputes these allegations and intends to defend these actions vigorously. The defendants’ filed a motion to dismiss the consolidated amended complaint on September 1, 2017. The plaintiffs filed their opposition to the motion to dismiss on October 31, 2017. The Company cannot determine the likelihood of, nor can it reasonably estimate the range of, any potential loss, if any, from these lawsuits.

12. 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

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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 will 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.

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 SPRIX Purchase Agreement the Company was assigned the license for SPRIX Nasal Spray from Recordati. S.p.A. Under the agreement with Recordati S.p.A., the Company is obligated to use best commercial efforts to market and sell SPRIX Nasal Spray and pay a fixed, single-digit royalty to Recordati S.p.A. based on net sales.

The Company accounted for the arrangement as a business combination.

13. 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 nine months ended September 30, 2016, the Company recorded a tax benefit of $358,000 and $780,000, respectively. For the three and nine months ended September 30, 2017, the Company had no tax provision since it is now in a full valuation allowance for federal, foreign and state purposes. The Company maintains a full valuation allowance against all deferred tax assets as management has determined that it is not more likely than not that the Company will realize these future tax benefits. The Company will continue to monitor and determine whether valuation allowances are appropriate.

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14. Restructuring

In August 2017, the Company announced a corporate restructuring initiative intended to streamline operations and achieve operating efficiencies. The initiative included a reduction-in-force and the elimination of certain other expenditures and other non-recurring costs. For the three months ended September 30, 2017 the Company recorded restructuring charges of $3.0 million, which included non-cash stock compensation costs of $364,000, all related to terminated employee compensation costs. During the three months ended September 30, 2017 the Company paid out $566,000 to severed employees and at September 30, 2017, has $2.0 million recorded in accrued expenses related to restructuring charges.

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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 2016 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 estimates regarding expenses, future revenues, capital requirements and needs for additional financing; our current and future indebtedness; our ability to obtain additional financing; our current inability to issue additional equity securities due to the limited number of authorized shares available for issuance under our certificate of incorporation; 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, payers and other constituencies; the continued development of our currently limited commercialization capabilities, including sales and marketing capabilities and the outcome of the internalization of our previously external sales force; 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 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 performance of third parties, including contract research organizations, manufacturers and collaborators; our success with regard to any business development initiatives; 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; obtaining and maintaining intellectual property protection for our 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 integrate and grow any businesses or products that we may acquire; our stock price and ability to meet the continued listing requirements of the NASDAQ Global Market; the impact of the anti-dilution features in our warrant agreements on our ability to raise additional capital; and changes in tax laws or our effective tax rate.

You should refer to the “Risk Factors” section of our most recent Annual Report on Form 10-K as filed with the SEC,as amended and supplemented by our subsequent Quarterly Reports on From 10-Q (including this Quarterly Report), 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 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.

Our Business

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”) opioid formulations to patients

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and physicians. We are currently marketing ARYMO® ER (morphine sulfate) extended-release (“ER”) tablets, for oral use CII (“ARYMO ER”), SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”), and OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”).

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. We acquired, and became obligated to pay royalty payments under a preexisting license of, 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.

In September 2017, our partner Ascend Therapeutics ("Ascend"), began to promote SPRIX Nasal Spray to approximately 11,000 women's healthcare practitioners. This was part of an agreement signed in June 2017, which enables us to expand our commercial reach through promotion of SPRIX Nasal Spray to healthcare practitioners outside of those healthcare practitioners we typically target. Also in September 2017, we announced an educational partnership around SPRIX with the National Lacrosse League.

Based upon a dialogue that we have had with the Food and Drug Administration (“FDA”) regarding our supplemental new drug application (“sNDA”) for OXAYDO to support an abuse-deterrent label claim for the intravenous route of abuse, which sNDA includes data from Category 1 in vitro abuse-deterrent studies that was presented at the PAINWeek conference in September 2016, we are contemplating undertaking a contemporary intranasal human abuse potential (“HAP”) study with the 7.5 mg formulation to bring the label up to current standards. We do not expect action on this sNDA in the near term. In addition, we are working to determine next steps to respond to a complete response letter from the FDA regarding a prior approval supplement for OXAYDO® 10 mg and 15 mg dosage strengths.

Beyond our commercial programs, we have a pipeline of products developed using our Guardian Technology. Egalet-002, an AD, ER, oral oxycodone formulation, is currently in Phase 3 studies and in development for the same indication as ARYMO ER. We expect to have results from the Phase 3 program on Egalet-002 in the fourth quarter. We also have Egalet-003, an AD stimulant, and Egalet-004, an AD, ER hydrocodone, which were developed using our Guardian Technology. We are seeking partners for all of our product candidates.

We continue to focus our business development to augment our product portfolio through potential in-licenses and product acquisitions; enhancing 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 developing partnerships to leverage our Guardian Technology by collaborating on our current product candidates or exploring new product opportunities.

Financial Operations

Our net losses for the three months ended September 30, 2016 and 2017 were $26.9 million and $18.9 million, respectively, and $69.3 million and $70.8 million for the nine months ended September 30, 2016 and 2017, respectively. We recognized revenues in the three months ended September 30, 2016 and 2017 of $4.7 million and $6.7 million, respectively, and $10.8 million and $18.3 million for the nine months ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $296.7 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 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

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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, 2016 filed on March 13, 2017.

Results of Operations

Comparison of the three months ended September 30, 2016 and 2017


(in thousands)	Three Months Ended
	September 30,
	2016		2017		Change
Revenues
Net product sales	$	4,711	$	6,651	$	1,940
Collaboration revenues		—		—		—
Total revenue		4,711		6,651		1,940

Cost and Expenses
Cost of sales (excluding amortization of product rights)		914		1,249		335
Amortization of product rights		502		528		26
General and administrative		7,950		6,849		(1,101)
Sales and marketing		6,973		8,803		1,830
Research and development		12,070		2,073		(9,997)
Restructuring charges		—		2,983		2,983
Total costs and expenses		28,409		22,485		(5,924)
Loss from operations		(23,698)		(15,834)		7,864

Other (income) expense:
Change in fair value of warrant and derivative liability		11		(1,500)		(1,511)
Interest expense, net		3,601		4,675		1,074
Other gain		(12)		(60)		(48)
Gain on foreign currency exchange		(3)		(1)		2
		3,597		3,114		(483)
Loss before provision (benefit) for income taxes		(27,295)		(18,948)		8,347
Provision (benefit) for income taxes		(358)		—		358
Net loss	$	(26,937)	$	(18,948)	$	7,989

Net Product Sales

Net product sales increased from $4.7 million for the three months ended September 30, 2016 to $6.7 million for the three months ended September 30, 2017. Net product sales for the three months ended September 30, 2016 consisted of $3.8 million for SPRIX Nasal Spray and $959,000 for OXAYDO. Net product sales for the three months ended September 30, 2017 consisted of $5.0 million for SPRIX Nasal Spray, $1.4 million for OXAYDO and $208,000 for ARYMO ER.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding amortization of product rights) increased from $914,000 for the three months ended September 30, 2016 to $1.2 million for the three months ended September 30, 2017.

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Cost of sales for SPRIX Nasal Spray and OXYADO for the three months ended September 30, 2016 and 2017 reflects the average cost of inventory produced and dispensed to patients for both periods.

Cost of sales for ARYMO ER for the three months ended September 30, 2017 includes a portion of inventory produced prior to the FDA approval of ARYMO ER in January 2017, and as result had previously been recorded in research and development expense in prior periods.

Amortization of Product Rights

Amortization of product rights increased from $502,000 for the three months ended September 30, 2016 to $528,000 for the three months ended September 30, 2017. Amortization of product rights was comprised of $271,000 for the OXAYDO and $231,000 for the SPRIX Nasal Spray intangible assets in the three months ended September 30, 2016, and $274,000 for the OXAYDO, $246,000 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 September 30, 2017.

General and Administrative Expenses

General and administrative expenses decreased by $1.2 million, or 13.8%, from $8.0 million for the three months ended September 30, 2016 to $6.8 million for the three months ended September 30, 2017. The decrease is due in part to professional fees of $1.4 million incurred in the three months ended in September 30, 2016 that were related to the preparation for the ARYMO ER FDA Advisory Committee meeting held in August 2016. In addition there was also an increase in costs of $706,000 related to FDA-mandated post-marketing studies in the three months ended September 30, 2017.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.8 million, or 26.2%, from $7.0 million for the three months ended September 30, 2016 to $8.8 million for the three months ended September 30, 2017. The increase was primarily attributable to the sales and marketing related expenses related to ARYMO ER of $1.2 million in the three months ended September 30, 2017.

Research and Development Expenses

Research and development expenses decreased by $10.0 million, or 82.6%, from $12.1 million for the three months ended September 30, 2016 to $2.1 million for the three months ended September 30, 2017. This decrease was driven primarily by decreases in development costs for Egalet-002 of $5.9 million, decreases in development costs for ARYMO ER of $1.4 million and decreases in development costs for OXAYDO of $2.1 million.

Restructuring Expenses

Restructuring expenses of $3.0 million for the three months ended September 30, 2017 reflect costs related to the expense reduction plan announced in August 2017 to decrease the operating expenses that do not directly support the growth of our commercial business.

Change in Fair Value of Warrant and Derivative Liability

Our derivative liabilities include the interest make-whole provision of our 5.50% convertible senior notes due April 1, 2020 (the “5.50% Notes”) and the warrants associated with the July 2017 underwritten public equity offering. Each of the liability instruments are subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability. During the three months ended September 30, 2016, we had a gain of $11,000 as a result of the change in the fair value of our derivative liability associated with the 5.50% Notes. During the three months ended September 30, 2017, we recognized a gain due to the change in the fair value of the warrants $1.5 million. The change

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in fair value is due primarily to changes in the value of our Common Stock, during the three months ended September 30, 2016 and 2017.

Interest expense

Interest expense was $3.6 million for the three months ended September 30, 2016, and $4.7 million for the three months ended September 30, 2017. The increase was driven primarily by the increase in interest expense of $2.3 million related to the issuance of the 13% Notes (as defined below) in August 2016 and January 2017, partially offset by a decrease in interest expense of $1.1 million related term loan with Hercules Technology Growth Capital Inc. (now known as Hercules Capital, Inc.) that was extinguished in September 2016.

The interest expense of $3.6 million for the three months ended September 30, 2016 includes non-cash interest and amortization of debt discount totaling $1.7 million. The interest expense of $4.7 million for the three months ended September 30, 2017 includes non-cash interest and amortization of debt discount totaling $1.6 million.

Gain on Foreign Currency Exchange

For the three months ended September 30, 2016 and 2017 we recognized a gain on foreign currency exchange of $3,000 and $1,000, respectively. This difference is primarily attributable the change in the average rates of currency in which we transacted during 2016 when compared to 2017.

Provision (benefit) for Income Taxes

We had a benefit for income taxes of $358,000 for the three months ended September 30, 2016 related to a state tax benefit associated with the 5.50% Notes. We had no tax provision for the three months ended September 30, 2017 since we are now in a full valuation allowance for federal and state purposes.

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Results of Operations

Comparison of the nine months ended September 30, 2016 and 2017


(in thousands)	Nine Months Ended
	September 30,
	2016		2017		Change
Revenues
Net product sales	$	10,724	$	18,333	$	7,609
Collaboration revenues		100		—		(100)
Total revenue		10,824		18,333		7,509

Cost and Expenses
Cost of sales (excluding amortization of product rights)		2,580		3,646		1,066
Amortization of product rights		1,506		1,554		48
General and administrative		22,802		27,811		5,009
Sales and marketing		19,455		27,402		7,947
Research and development		26,886		13,187		(13,699)
Restructuring charges		—		2,983		2,983
Total costs and expenses		73,229		76,583		3,354
Loss from operations		(62,405)		(58,250)		4,155

Other (income) expense:
Change in fair value of derivative liability		(642)		(1,513)		(871)
Interest expense, net		8,225		13,958		5,733
Other loss		54		106		52
Gain on foreign currency exchange		—		(1)		(1)
		7,637		12,550		4,913
Loss before provision (benefit) for income taxes		(70,042)		(70,800)		(758)
Provision (benefit) for income taxes		(780)		—		780
Net loss	$	(69,262)	$	(70,800)	$	(1,538)

Net Product Sales

Net product sales increased from $10.7 million for the nine months ended September 30, 2016 to $18.3 million for the nine months ended September 30, 2017. Net product sales for the nine months ended September 30, 2016 consisted of $8.6 million for SPRIX Nasal Spray and $2.1 million for OXAYDO. Net product sales for the nine months ended September 30, 2017 consisted of $14.1 million for SPRIX Nasal Spray, $4.0 million for OXAYDO and $240,000 for ARYMO ER.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding amortization of product rights) increased from $2.6 million for the nine months ended September 30, 2016 to $3.6 million for the nine months ended September 30, 2017.

Cost of sales for SPRIX Nasal Spray and OXYADO for the three months ended September 30, 2016 and 2017 reflects the average cost of inventory produced and dispensed to patients for both periods.

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Amortization of Product Rights

Amortization of product rights was $1.0 million for both the nine months ended September 30, 2016 and 2017. Amortization of product rights was composed of $813,000 for the OXAYDO and $693,000 for the SPRIX Nasal Spray intangible assets in the nine months ended September 30, 2016, and $813,000 for the OXAYDO and $714,000 for the SPRIX Nasal Spray intangible assets and $26,000 for the IP R&D intangible asset related to our Guardian Technology in the nine months ended September 30, 2017.

General and Administrative Expenses

General and administrative expenses increased by $5.0 million, or 22.0%, from $22.8 million for the nine months ended September 30, 2016 to $27.8 million for the nine months ended September 30, 2017. The increase was primarily attributable to costs incurred for FDA-mandated post-marketing studies of $5.4 million in the three months ended September 30, 2017 offset by a decrease in professional fees. General and administrative expenses in the three months ended in September 30, 2016 included the professional fees of $1.1 million related to the preparation for the ARYMO ER FDA Advisory Committee meeting held in August 2016.

Sales and Marketing Expenses

Sales and marketing expenses increased $7.9 million, or 40.5%, from $19.5 million for the nine months ended September 30, 2016 to $27.4 million for the nine months ended September 30, 2017. Approximately $4.0 million of the increase was attributable to the expansion of our commercial organization. There were also increases of $2.8 million in sales and marketing expenses related to the launch of ARYMO ER and $1.1 million related to promotional-related expenses.

Research and Development Expenses

Research and development expenses decreased by $13.7 million, or 50.9%, from $26.9 million for the nine months ended September 30, 2016 to $13.2 million for the nine months ended September 30, 2017. This decrease was driven primarily by decreases in development costs for Egalet-002 of $6.4 million, decreases in development costs for ARYMO ER of $3.2 million and decreases in development costs for OXAYDO of $3.4 million.

Restructuring Expenses

Restructuring expenses of $3.0 million for the nine months ended September 30, 2017 reflect costs related to the expense reduction plan announced in August 2017 to decrease the operating expenses that do not directly support the growth of our commercial business.

Change in Fair Value of Warrant and Derivative Liability

Our derivative liabilities include the interest make-whole provision of the 5.50% Notes and the warrants associated with our July 2017 underwritten public equity offering. Each of the liability instruments are subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability. During the nine months ended September 30, 2016, we had a gain of $11,000 as a result of the change in the fair value of our derivative liability associated with the 5.50% Notes. During the nine months ended September 30, 2017, we recognized a gain due to the change in the fair value of the warrants of $1.5 million. The change in fair value is due primarily to changes in the value of our Common Stock during the nine months ended September 30, 2016 and 2017.

Interest Expense

Interest expense was $8.2 million for the nine months ended September 30, 2016 and $14.0 million for the nine months ended September 30, 2017. The increase was driven primarily by the increase in interest expense of $8.2 million related to the issuance of the 13% Notes (as defined below) in August 2016 and January 2017, partially offset by a

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decrease in interest expense of $2.1 million related term loan with Hercules Technology Growth Capital Inc. (now known as Hercules Capital, Inc.) that was extinguished in September 2016.

The interest expense of $8.2 million for the nine months ended September 30, 2016 includes non-cash interest and amortization of debt discount totaling $4.6 million. The interest expense of $14.0 million for the nine months ended September 30, 2017 includes non-cash interest and amortization of debt discount totaling $4.6 million.

Gain on Foreign Currency Exchange

For the nine months ended September 30, 2016, there was no financial impact of foreign currency exchange. For the nine months ended September 30, 2017, we recognized a gain on foreign currency exchange of $1,000. This difference is primarily attributable the change in the average rates of currency in which we transacted during 2016 when compared to 2017.

Provision (benefit) for Income Taxes

We had a benefit for income taxes of $780,000 for the nine months ended September 30, 2016 related to a state tax benefit associated with the 5.50% Notes. We had no tax provision for the nine months ended September 30, 2017 since we are now 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 $69.3 million and $70.8 million for the nine months ended September 30, 2016 and 2017, respectively. Our operating activities used $57.1 million of cash and $55.2 million of cash during the nine months ended September 30, 2016 and 2017. At September 30, 2017, we had an accumulated deficit of $296.7 million, a working capital surplus of $71.0 million and cash, restricted cash, cash equivalents and marketable securities totaling $102.5 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 6 — Long-term Debt in the Notes to our Unaudited Consolidated Financial Statements 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 6 — Long-term Debt for additional information.

In July 2015, we completed an underwritten public offering of 7,666,667 shares of 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.

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 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, we will also pay an installment of principal on the 13% Notes in an

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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 1,126,528 shares of Common Stock through September 30, 2017, resulting in net proceeds of $3.7 million after deducting commissions of $114,000. 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.

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.

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2016 and 2017:


(in thousands)	Nine Months Ended
	September 30,
	2016		2017
Net cash provided by (used in):
Operating activities	$	(57,078)	$	(55,168)
Investing activities		34,976		(22,389)
Financing activities		21,649		70,501
Effect of foreign currency translation on cash		410		451
Net decrease in cash	$	(43)	$	(6,605)

Cash Flows from Operating Activities

Net cash used in operating activities was $57.1 million for the nine months ended September 30, 2016 and consisted primarily of a net loss of $69.3 million. The net loss was partially offset by $11.4 million net non-cash adjustments to reconcile net loss to net cash used in operations, which included stock-based compensation expense of $4.7 million, non-cash interest and amortization of debt discount of $4.0 million and depreciation and amortization expense of $2.7 million. Net cash inflows from changes in operating assets and liabilities of $814,000 consisted of an increase in accrued expenses of $6.3 million, a decrease in deposits and other assets of $2.2 million and an increase in other liabilities of $836,000 offset by a decrease in deferred revenue of $5.2 million and an increase in accounts receivable of $3.6 million.

Net cash used in operating activities for the nine months ended September 30, 2017 was $55.2 million and consisted primarily of a net loss of $70.8 million. The net loss was partially offset by $12.0 million of net non-cash adjustments to reconcile net loss to net cash used in operations, which included stock-based compensation expense of $5.1 million, non-cash interest and amortization of debt discount of $4.6 million and depreciation and amortization expense of $3.8 million and the change in fair value of our derivative liability of $1.5 million. Net cash inflows from changes in operating assets and liabilities of $3.6 million consisted of an increase in deferred revenues of $4.8 million and an increase in accounts payable of $3.2 million, offset by an increase in accounts receivable of $4.5 million.

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Cash Flows from Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2016 was $35.0 million and consisted of $81.0 million from maturity of investments, $8.6 million from the sale of investments, offset by $45.5 million for the purchase of investments and $9.1 million for the purchase of property and equipment.

Net cash used in investing activities for the nine months ended September 30, 2017 was $22.4 million and consisted primarily of purchases of investments for $93.4 million, offset by cash inflows of $59.3 million and $12.2 million for the maturity and sale of investments, respectively.

Cash Flows from Financing Activities

Net cash provided by financing activities was $21.6 million for the nine months ended September 30, 2016 and consisted of $37.2 million in net proceeds from the issuance of the 13% Notes and Royalty Rights and $274,000 from the issuance of common stock under the 2013 Plan, offset by $15.9 million in payments on borrowings under the Loan Agreement with Hercules.

Net cash provided by financing activities was $70.5 million for the nine months ended September 30, 2017 and consisted of $38.3 million in net proceeds from the issuance of the 13% Notes and Royalty Rights and $32.5 million in net proceeds from the issuance of Common Stock and warrants pursuant to our July 2017 underwritten public offering and 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 increase in the near term as we continue to grow our commercialization activities around SPRIX Nasal Spray, OXAYDO and ARYMO ER.

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 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.

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We believe that our cash and cash equivalents and marketable securities at September 30, 2017, and our corporate restructuring initiative announced in August 2017 will enable us to fund our operating expenses and capital expenditure requirements into 2020. However, 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 costs, timing and outcome of regulatory review;

the results of our clinical trials;

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

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

our ability to raise additional capital, which is currently limited by the covenants and other restrictions contained in the agreements governing our existing indebtedness, as well as the limited number of authorized shares available for issuance under our certificate of incorporation.

Please see the “Risk Factors” section of this Quarterly Report, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 and our most recent Annual Report on Form 10-K filed with the SEC on March 13, 2017 for additional risks associated with our substantial capital requirements.

Purchase Commitments

Other than as described in our Quarterly Report as filed with SEC on May 10, 2017, with respect to the purchase of ARYMO ER, 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, and chief scientific officer, that provide for, among other things, salary, bonus and severance payments.

Legal Proceedings

Please refer to Note 11 - “Commitments and Contingencies—Legal Proceedings” 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.

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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, 2016, and September 30, 2017, we had cash and cash equivalents, restricted cash and marketable securities of $86.8 million and $102.5 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.

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 September 30, 2017 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

During the nine months ended September 30, 2017, we implemented a new enterprise resource planning (“ERP”) system. As appropriate, we are modifying the design and documentation of internal control processes and procedures relating to the new system and interfaces to simplify and synchronize our existing internal control over financial reporting.

With the exception of the ERP implementation described above, there were no changes in our internal control over financial reporting during the nine months ended September 30, 2017, 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 11 - Commitments and Contingencies—Legal Proceedings 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.

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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, 2016, was updated in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, and is further updated for the following:

If we fail to obtain the necessary regulatory approvals, or if such approvals are limited, we will not be able to commercialize our product candidates or face limited commercialization of our products, and we will generate limited or no product revenues related to those products or product candidates.

Even if we comply with all FDA pre‑approval regulatory requirements, the FDA may not determine that some or all of our product candidates are safe and effective, and we may never obtain regulatory approval for some or all of our product candidates. If we fail to obtain regulatory approval for some or all of our product candidates, we will have fewer commercial products, and correspondingly lower product revenues. Even if our product candidates receive regulatory approval, such approval may involve limitations on the indications and conditions of use or marketing claims for our products. In addition, if we do not receive regulatory approval for supplements or supplemental applications for expanded dosage strengths or labeling claims for our products, our revenues related to those products may be limited.

Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us to perform lengthy Phase 4 post‑approval clinical efficacy or safety trials. These trials could be very expensive. Based on outcomes of on-going Phase 4 commitment for OXAYDO, the FDA may also require us to amend our label, or if the intranasal HAP study that we are contemplating is not acceptable to the FDA, our ability to market OXAYDO as an abuse discouraging drug may be adversely affected. In addition, the FDA may not approve the labeling claims, including claims regarding abuse deterrence, that we believe are necessary or desirable for the successful commercialization of our products and product candidates. For example, the FDA approved label for ARYMO ER contains abuse-deterrent claims for the intravenous route of abuse, but the FDA did not approve the inclusion of abuse-deterrent claims for the oral and intranasal routes of abuse. The intranasal abuse-deterrent claim was blocked by another company’s exclusivity.

In jurisdictions outside the United States, we must receive marketing authorizations from the appropriate regulatory authorities before commercializing our product candidates. Regulatory approval processes outside the United States generally include requirements and risks similar to, and in many cases in excess of, the risks associated with FDA approval.

Our ability to market and promote our products in the United States by describing their abuse‑deterrent features will be determined by the FDA‑approved labeling for them.

The commercial success of our products and product candidates, if approved, will depend upon our ability to obtain FDA approved labeling describing their abuse‑deterrent features or benefits. Our failure to achieve FDA approval of product labeling containing such information, or containing such information for all potential routes of abuse, will prevent or substantially limit our advertising and promotion of the abuse‑deterrent features of our products and product candidates, if approved, to differentiate them from other opioid products containing the same active ingredients. This may make our products and if approved, our product candidates, less competitive in the market.

The FDA has publicly stated that explicit claims that a product is expected to result in a meaningful reduction of abuse must be supported by randomized, double‑blind, controlled clinical studies of the abuse potential of the drug and that explicit claims that a product has demonstrated reduced abuse in the community will be required to be supported by post‑marketing data, including formal post‑marketing studies evaluating the effect of abuse‑deterrent formulations. Although we intend to conduct such studies, there can be no assurance that our product candidates in development or our existing products will receive FDA‑approved labeling that describes the any or all of the abuse‑deterrent features of such products. If the FDA does not approve labeling containing such information, we will not be able to promote such products based on some or all of their abuse‑deterrent features, may not be able to differentiate such products from other opioid products containing the same active ingredients. For example, the FDA approved abuse-deterrent labeling for

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ARYMO ER for the intravenous route of abuse, but did not approve the inclusion of abuse-deterrent claims for the oral and intranasal routes of abuse. The intranasal abuse-deterrent claim was blocked by another company’s exclusivity.

In addition, recent public comments from FDA and members of Congress have highlighted the importance of addressing the opioid abuse epidemic. Given the changing legislative and regulatory environment, it is difficult to predict how existing laws and regulations may affect the future approval and continued marketing of opioids, including those that fulfill current abuse-deterrent FDA guidance. It is also difficult to predict how the FDA’s requirements with regard to approving abuse-deterrent labelling for opioids will evolve and how that will impact existing or future drug applications.

Because the FDA closely regulates promotional materials and other promotional activities, even if the FDA initially approves product labeling that includes a description of the abuse‑deterrent characteristics of our product, the FDA may object to our marketing claims and product advertising campaigns. This could lead to the issuance of warning letters or untitled letters, suspension or withdrawal of our products from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution. Any of these consequences would harm the commercial success of our products.

If we are not able to comply with the applicable continued listing requirements or standards of NASDAQ, NASDAQ could delist our common stock.

Our common stock is currently listed on NASDAQ. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

In the event that our common stock is delisted from NASDAQ and is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the 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. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange

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 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).

4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on July 11, 2017).

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).

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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).

4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on July 11, 2017).

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).

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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: November 8, 2017

	EGALET CORPORATION

	By:	/s/ STANLEY J. MUSIAL
		Stanley J. Musial
		Chief Financial Officer

Zyla Life Sciences - FORM 10-Q - November 8, 2017

Attached files

Zyla Life Sciences Reports