Valeritas Holdings Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Valeritas Holdings Inc.	exhibit32211918.htm
EX-32.1 - EXHIBIT 32.1 - Valeritas Holdings Inc.	exhibit32111918.htm
EX-31.2 - EXHIBIT 31.2 - Valeritas Holdings Inc.	exhibit31211918.htm
EX-31.1 - EXHIBIT 31.1 - Valeritas Holdings Inc.	exhibit31111918.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2018



☐	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 001-38038

Valeritas Holdings, Inc.

(Exact name of Registrant as specified in its charter)



Delaware		46-5648907
(State or other jurisdiction of incorporation or organization)		(I. R. S. Employer Identification No.)

750 Route 202 South, Suite 600 Bridgewater, NJ		08807
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (908) 927-9920

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 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	☒	Smaller reporting company	☒
		Emerging growth company	☒
If an emerging growth company, indicate by checkmark 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 ☒

The number of shares outstanding of the registrant's common stock as of November 6, 2018 was 24,950,642.

VALERITAS HOLDINGS, INC.




Part I - Financial Information

Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statement of Stockholders' Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

Part II - Other Information

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	39

Signatures		40

CAUTIONARY NOTE

REGARDING FORWARD‑LOOKING STATEMENTS

Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Such forward-looking statements include, but are not limited to, statements about our:


•	expectations for increases or decreases in expenses;


•	expectations for the clinical and preclinical development, manufacturing, regulatory approval, and commercialization of our pharmaceutical product candidates or any other products that we may acquire or in-license;


•	estimates of the sufficiency of our existing capital resources combined with future anticipated cash flows to finance our operating requirements;


•	expectations for incurring capital expenditures to expand our research and development and manufacturing capabilities;


•	expectations for generating revenue or becoming profitable on a sustained basis;


•	expectations or ability to enter into marketing and other partnership agreements;


•	expectations or ability to enter into product acquisition and in-licensing transactions;


•	expectations or ability to build our own commercial infrastructure to manufacture, market and sell our product candidates;


•	expected losses;


•	ability to obtain and maintain intellectual property protection for our product candidates;


•	acceptance of our products by doctors, patients, or payors;


•	stock price and its volatility;


•	ability to attract and retain key personnel;


•	the performance of third-party manufacturers;


•	expectations for future capital requirements; and


•	our ability to successfully implement our strategy.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date that this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Part I - Financial Information

Item1. Financial Statements

Valeritas Holdings, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share amounts and per share amounts)



	September 30, 2018			December 31, 2017

Assets
Current assets:
Cash and cash equivalents	$	24,275		$	25,961
Accounts receivable, net	5,600			3,991
Inventories, net	6,707			8,105
Deferred cost of goods sold	—			539
Prepaid expense and other current assets	1,379			876
Total current assets	37,961			39,472
Property and equipment, net	6,026			5,469
Other assets	682			148
Total assets	$	44,669		$	45,089
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$	3,260		$	5,644
Accrued expense and other current liabilities	9,324			5,798
Current portion of capital lease obligation	91			—
Deferred revenue	—			1,638
Total current liabilities	12,675			13,080
Long-term debt, related parties	39,095			36,009
Capital lease obligation, less current portion	173			—
Other long-term liabilities	109			58
Total liabilities	52,052			49,147
Commitments and contingencies
Stockholders' deficit
Convertible preferred stock, $0.001 par value, 50,000,000 shares authorized at September 30, 2018; 2,750,000 shares issued and outstanding at September 30, 2018 and December 31, 2017. (aggregate liquidation value of $30,861 and $29,211 at September 30, 2018 and December 31, 2017, respectively)	3			3
Common stock, $0.001 par value, 300,000,000 shares authorized; 24,958,496 shares issued and 24,950,642 outstanding at September 30, 2018 and 7,015,636 shares issued and 7,007,782 shares outstanding at December 31, 2017.	25			7
Additional paid-in capital	500,620			469,877
Accumulated deficit	(508,007		)	(473,921		)
Treasury stock, at cost (7,854 shares)	(24		)	(24		)
Total stockholders' deficit	(7,383		)	(4,058		)
Total liabilities and stockholders' deficit	$	44,669		$	45,089

See accompanying notes to unaudited condensed consolidated financial statements.

Valeritas Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share and per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue, net	$	6,926		$	5,065		$	19,504		$	14,464
Cost of goods sold	3,749			3,048			10,338			8,911
Gross margin	3,177			2,017			9,166			5,553
Operating expense:
Research and development	1,763			1,861			5,687			5,099
Selling, general and administrative	12,025			10,020			34,718			31,698
Total operating expense	13,788			11,881			40,405			36,797
Operating loss	(10,611		)	(9,864		)	(31,239		)	(31,244		)
Other income (expense), net:
Interest expense, net	(926		)	(876		)	(2,804		)	(3,348		)
Other expense	—			—			(22		)	(187		)
Other income	6			162			—			413
Total other income (expense), net	(920		)	(714		)	(2,826		)	(3,122		)
Loss before income taxes	(11,531		)	(10,578		)	(34,065		)	(34,366		)
Provision for income taxes	—			—			—			—
Net loss	$	(11,531	)	$	(10,578	)	$	(34,065	)	$	(34,366	)
Preferred stock dividend	$	(550	)	$	(557	)	$	(1,650	)	$	(1,154	)
Net loss attributable to common stockholders	$	(12,081	)	$	(11,135	)	$	(35,715	)	$	(35,520	)
Net loss per share of common shares outstanding - basic and diluted	$	(0.49	)	$	(1.62	)	$	(2.12	)	$	(6.74	)
Weighted average common shares outstanding - basic and diluted	24,809,254			6,858,832			16,842,154			5,270,952

See accompanying notes to unaudited condensed consolidated financial statements.

Valeritas Holdings, Inc.

Condensed Consolidated Statements of Stockholders' Deficit

(Unaudited)

(Dollars in thousands, except share data)



	Preferred Stock			Common Stock			Treasury Stock				Additional					Total
	Shares	Amount		Shares	Amount		Shares	Amount			Paid-in Capital		Accumulated Deficit			Stockholders' Deficit
Balance-December 31, 2017	2,750,000	$	3	7,007,782	$	7	7,854	$	(24	)	$	469,877	$	(473,921	)	$	(4,058	)
Cumulative effect of change in accounting principle	—	—		—	—		—	—			—		(21		)	(21		)
Share-based compensation expense	—	—		—	—		—	—			3,060		—			3,060
Restricted stock vested	—	—		30,000	—		—	—			—		—			—
Issuance of common stock through Employee Stock Purchase Program	—	—		156,584	—		—	—			236		—			236
Issuance of common stock in a public offering, net of fees	—	—		15,300,000	16		—	—			24,343		—			24,359
Issuance of common stock through Purchase Agreements, net of fees	—	—		2,192,424	2		—	—			3,104		—			3,106
Commitment fee for Second Purchase Agreement	—	—		263,852	—		—	—			—		—			—
Net loss	—	—		—	—		—	—			—		(34,065		)	(34,065		)
Balance- September 30, 2018	2,750,000	$	3	24,950,642	$	25	7,854	$	(24	)	$	500,620	$	(508,007	)	$	(7,383	)

See accompanying notes to unaudited condensed consolidated financial statements.

Valeritas Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)



	Nine Months Ended September 30,
	2018			2017
Operating activities
Net loss	$	(34,065	)	$	(34,366	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	965			1,416
Amortization of financing costs	15			16
Noncash interest expense	3,071			3,464
Share-based compensation expense	3,060			4,581
Change in fair value of derivative liabilities	3			(220		)
Gain on sale of property and equipment	—			(193		)
Impairment of assets	20			—
Sales return provision	(214		)	—
Changes in:
Accounts receivable	(1,609		)	(383		)
Inventories	1,398			1,014
Deferred cost of goods sold	—			217
Prepaid expense and other current assets	(503		)	(231		)
Other assets	(170		)	(97		)
Accounts payable	(2,487		)	366
Accrued expense	2,211			623
Deferred revenue	—			(432		)
Deferred rent liability	51			(65		)
Net cash used in operating activities	(28,254		)	(24,290		)
Investing activities
Proceeds from sale of property and equipment	—			118
Acquisition of property and equipment	(1,166		)	(366		)
Net cash used in investing activities	(1,166		)	(248		)
Financing activities
Proceeds from issuance of common stock ($40,000 received from a related party in 2017), net of issuance costs	27,549			48,792
Payment of capital lease obligations	(51		)	—
Proceeds from issuance of common stock through ESPP	236			—
Payment of debt restructuring costs	—			(35		)
Net cash provided by financing activities	27,734			48,757
Net increase (decrease) in cash and cash equivalents	(1,686		)	24,219
Cash and cash equivalents-beginning of period	25,961			9,866
Cash and cash equivalents-end of period	$	24,275		34,085
Supplemental disclosures of cash flow information
Commitment fee for Second Purchase Agreement	$	429		$	411
Deferred revenue reduction (Note 3)	$	1,638		$	—
Sales return reserve (Note 3)	$	778		$	—
Deferred cost of goods sold reduction (Note 3)	$	539		$	—
Accrued distribution fees and managed care costs (Note 3)	$	343		$	—
Capital lease obligation	$	315		$	—
Accrued offering costs	$	84		$	—
Write off of debt issuance costs	$	—		$	107
Conversion of debt to Series A preferred stock	$	—		$	27,500
Receivables for property and equipment sales	$	—		$	75

See accompanying notes to unaudited condensed financial statements.

Valeritas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. NATURE OF OPERATIONS AND ORGANIZATION

Organization and Nature of Operations

Valeritas Holdings, Inc. (the “Company”) was incorporated in the state of Delaware on May 3, 2016. Prior to its incorporation in Delaware, the Company was incorporated in Florida on May 9, 2014 under the name “Cleaner Yoga Mat, Inc.” Valeritas, Inc., the Company’s wholly-owned subsidiary, was incorporated in the state of Delaware on December 27, 2007.

The Company is a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. The Company’s flagship product, V-Go® Wearable Insulin Delivery device, is a simple, wearable, basal-bolus insulin delivery device for adult patients with type 2 diabetes that enables patients to administer a continuous preset basal rate of insulin over 24 hours. It also provides discreet on-demand bolus dosing at mealtimes. It is the only non-electronic basal-bolus insulin delivery device on the market today specifically designed keeping in mind the needs of adult patients with Type 2 diabetes. V-Go is a small, discreet, easy-to-use wearable and completely disposable insulin delivery device that a patient adheres to his or her skin every 24 hours. V-Go enables patients to closely mimic the body’s normal physiologic pattern of insulin delivery throughout the day and to manage their diabetes with insulin without the need to plan a daily routine around multiple daily injections.

2. Uncertainties, Liquidity and Ability to Continue as a Going Concern

The Company is subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, competition from larger companies, other technology companies and other technologies.

Management has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. As of September 30, 2018, the Company had $24.3 million in cash and cash equivalents. The Company has incurred losses each year since inception, has experienced negative cash flows from operations in each year since inception and has an accumulated deficit of $508.0 million. The Company's restructured Term Loan includes a liquidity covenant whereby the Company must maintain a cash balance greater than $2.0 million. Based on its current business plan assumptions and expected cash burn rate, excluding potential share sales associated with its financing agreements discussed below, the Company believes that it has sufficient cash and cash equivalents to fund its current operations into the second quarter of 2019. These factors raise substantial doubt about the Company's ability to continue as a going concern.

On January 7, 2018, as a component of management's plan to pursue additional financing, the Company entered into a common stock purchase agreement (the "First Purchase Agreement") with Aspire Capital Fund, LLC ("Aspire Capital") for the sale of up to $20.0 million of its common stock, as described in further detail in Note 10. In 2017, the Company issued 125,000 shares of common stock issued to Aspire Capital as consideration for entering into the First Purchase Agreement. The Company sold 1,250,868 shares in 2018 and received net proceeds of $1.8 million. The First Purchase Agreement was terminated in June 2018.

On January 26, 2018, the Company entered into an At the Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. (“FBR”) with respect to an at the market offering program, under which the Company may, from time to time in its sole discretion, issue and sell through FBR, acting as agent, shares of the Company’s common stock (the “Placement Shares”). FBR has the option to decline any sales orders at its discretion. The issuance and sale, if any, of the Placement Shares by the Company under the Agreement will be made pursuant to a prospectus supplement to the Company’s registration statement on Form S-3, originally filed with the Securities and Exchange Commission (the “SEC”) on October 4, 2017, and declared effective by the SEC on December 15, 2017, for the sale of up to $2.8 million of shares of the Company's common stock. As of the date of this report the Company has not sold any shares pursuant to the Sales Agreement.

The Company completed a public offering on April 26, 2018, for net proceeds of approximately $21.8 million, after deducting underwriting discounts and commissions of $1.8 million and offering expenses of $0.4 million. On May 2, 2018, the underwriters in the public offering exercised a portion of their 30-day option to purchase additional shares of the Company's common stock for additional net proceeds of approximately $2.6 million, after deducting underwriting discounts of $0.2 million.

On June 11, 2018, the Company entered into a purchase agreement (the "Second Purchase Agreement") with Aspire Capital, pursuant to which, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 150,000 shares of the Company’s common stock per business day, in an aggregate amount of up to $21.0 million of the Company's common stock (the "Purchase Shares") over the term of the Second Purchase Agreement at a per share price equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date; or the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The Company may sell an aggregate of 4,726,383 shares of its common stock (which represented 19.99% of the Company’s outstanding shares of common stock on June 11, 2018) without stockholder approval. The Company may sell additional shares of its common stock above the 19.99% limit provided that (i) it obtains stockholder approval or (ii) shareholder approval has not been obtained at any time the 4,726,383 share limitation is reached and at all times thereafter the average price paid for all shares issued under the Second Purchase Agreement, is equal to or greater than $1.62 (the “Minimum Price”), which was the consolidated closing bid price of the Company’s common stock on June 11, 2018. Through September 30, 2018, the Company has issued 1,205,409 shares of common stock including the Initial Purchase Shares, for net proceeds of approximately $1.3 million. There is market uncertainty regarding the utilization of financing associated from the Sales Agreement and the Second Purchase Agreement.

In addition to the activities noted above, the Company continues to actively pursue additional sources of financing to fund its operations. However, the Company can provide no assurance that additional financing will be consummated on acceptable terms, or at all. If the Company is unable to effect a sufficient financing or capital raise, there could be a material adverse effect on the Company.

3. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the Company's annual consolidated financial statements included within the Company's Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC on February 28, 2018.

The preparation of the unaudited condensed consolidated financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of expenses during the reported period. Ultimate results could differ from the estimates of management.

In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company's financial position and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2018 may not be indicative of results for the full year.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Change in Accounting Principle

On January 1, 2018, the Company adopted ASU 2014-09: Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company elected to use the modified retrospective approach for adoption. The Company had previously deferred recognition of revenue and the related cost of goods sold on shipments of V-Go until a customer's right of return no longer exists, which was once the Company received evidence that the product had been distributed to patients based on analysis of third-party information. Management has determined that the variable consideration associated with rebates, chargebacks and other discounts can continue to be estimated and that there are no return estimate constraints for which it is considered probable that a subsequent change in the estimate would result in a significant revenue reversal. Accordingly, the Company is no longer using the “sell through” approach to recognition and has accelerated the recognition of revenue upon sale to the distributor. The variable consideration associated

with sales returns was estimated based on the probability weighted expected value approach. In connection with its adoption of ASC 606, the Company recorded a cumulative-effect adjustment to reduce retained earnings by a de minimis amount. The reported results for 2018 reflect the application of ASC 606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as "previous guidance".

The cumulative effect of applying the new guidance of ASC 606 to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the Condensed Consolidated Balance Sheet as of January 1, 2018:



	As Reported						Adjusted
	December 31, 2017			New Revenue Standard Adjustment			January 1, 2018
Assets
Current assets:
Deferred cost of goods sold	$	539		$	(539	)	$	—

Liabilities
Current liabilities:
Deferred revenue	1,638			(1,638		)	—
Sales return provision	—			778			778
Accrued distribution fees and managed care costs	1,330			342			1,672

Stockholders' deficit
Accumulated deficit	$	(473,921	)	$	(21	)	$	(473,942	)

Under the modified retrospective method of adoption, the Company is required to disclose the impact on its statement of operations , had it continued to follow the accounting policies under the previous revenue guidance. The Company estimates that the impact to revenues for the three and nine months ended September 30, 2018 would have been a decrease of approximately $0.2 million and $0.5 million, respectively, and the impact to gross profit for the three and nine months ended September 30, 2018 would have been a decrease of $0.1 million and $0.2 million, respectively, had there been no adoption of ASC 606. The impact to net loss for the three and nine months ended would have been a decrease of $0.1 million and $0.3 million, respectively and a decrease in the net loss per share by $0.00 and $0.02, respectively.

Significant Accounting Policies

Aside from the adoption of ASU 2014-09, as described below, there have been no other material changes to the significant accounting policies or recent accounting pronouncements previously disclosed in Valeritas Holdings, Inc.'s 2017 annual consolidated financial statements included in the Company's Form 10-K for the fiscal year ended December 31, 2017.

Revenue Recognition

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:

(i) identification of the promised goods or services in the contract;


(ii)	determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and


(v)	recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606.

Revenue from product sales is recorded net of adjustments for managed care rebates, wholesale distributions fees, cash discounts, prompt pay discounts, and co-pay card redemptions, all of which are established at the time of sale. Accruals for these provisions are presented in the Consolidated Financial Statements as reductions in determining net revenues and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). No significant revisions were made to the methodology used in determining these provisions. The following briefly summarizes the nature of our significant provisions:


•	managed care and medicare rebates, which are based on the estimated end user payor mix and related contractual rebates


•	distribution fees, prompt pay and other discounts, which are recorded based on specified payment terms, and which vary by customer; and


•	Co-pay card redemption charges which are based on the net transaction costs of prescriptions filled via a Company-subsidized card program and other incentive programs.

The Company believes that its estimates related to managed care and medicare rebates, distribution fees, prompt pay and other discounts, and co-pay card redemption costs do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a relatively short period of time.

Return Reserve

The Company records allowances for product returns as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required, including the customers’ return rights and the Company’s historical experience with returns and the amount of product in the distribution channel not consumed by patients and subject to return. The Company relies on historical return rates to estimate returns. In the future, if any of these factors and/or the history of product returns change, adjustments to the allowance for product returns may be required.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-2 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease effectively finances a purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (finance lease) or on a straight line basis over the term of the lease (operating lease). A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the existing guidance on accounting for leases in "Leases (Topic 840)." The provisions of ASU 2016-02 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted and the provisions are to be applied using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 amends the FASB Accounting Standards Codification (“ASC”) to expand the scope of FASB ASC Topic 718, Compensation-Stock Compensation, to include accounting for share-based payment transactions for acquiring goods and services from non-employees. The amendments in ASU 2018-07 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

4. Inventory

Inventory, net consists of:



(Dollars in thousands)	September 30, 2018		December 31, 2017
Raw materials	$	1,210	$	1,368
Work in process	3,065		1,972
Finished goods	2,432		4,765
Total	$	6,707	$	8,105

Cost is determined on a FIFO basis and includes material costs, labor and applicable overhead. The Company reviews its inventory for excess or obsolescence and writes down inventory that has no alternative uses to its net realizable value. The inventory reserves for excess and obsolete inventory at September 30, 2018 and December 31, 2017 were $0.3 million and $0.3 million, respectively.

5. Property and Equipment

Property and equipment consisted of the following:



(Dollars in thousands)	Useful lives	September 30, 2018			December 31, 2017
Machinery and equipment	5-10	$	10,629		$	10,552
Computers and software	3	1,879			1,382
Leasehold improvements	6-10	408			425
Office equipment	5	89			89
Furniture and fixtures	5	187			187
Construction in process		1,100			135
Total		14,292			12,770
Accumulated depreciation		(8,266		)	(7,301		)
Property and equipment, net		$	6,026		$	5,469

Depreciation expense for the three months ended September 30, 2018 and 2017 were $0.3 million and $0.5 million, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 were $1.0 million and $1.4 million, respectively.

6. Accrued Expenses and Other Current Liabilities

The Company's accrued expenses and other current liabilities consisted of the following:



(Dollars in thousands)	September 30, 2018		December 31, 2017
Compensation	$	4,222	$	2,830
Returns reserve	565		—
Marketing services	348		109
Distribution agreements and managed care costs	2,856		1,330
Professional fees	899		926
Franchise taxes	27		53
Travel expenses	128		157
Manufacturing overhead	103		260
Other accruals	176		133
Total accrued expenses and other current liabilities	$	9,324	$	5,798

7. Debt

The Company had the following debt outstanding:



(Dollars in thousands)	September 30, 2018			December 31, 2017
Senior Secured Debt, net	$	25,000		$	25,000
Issuance costs	(110		)	(125		)
Payment-in-kind (PIK) interest	10,752			7,929
Total Senior Secured Debt, net	35,642			32,804
Other Note Payable, net	2,500			2,500
Payment-in-kind (PIK) interest	953			705
Total Other Note Payable, net	3,453			3,205
Total	$	39,095		$	36,009

On May 23, 2013, the Company entered into the Term Loan of $50.0 million with Capital Royalty Group ("CRG"), structured as a senior secured loan with a six-year term (the "Term Loan" or the "Senior Secured Debt").

On May 3, 2016, the Company entered into the Second Amended and Restated Term Loan Agreement to restructure its Term Loan and WCAS Note, which extended the payment terms of the respective principal balances of $50.0 million and $5.0 million to March 31, 2021 and September 21, 2021, respectively. On February 9, 2017, the CRG payment terms were further amended to extend the repayments to March 31, 2022.

On February 9, 2017, the Company entered into Amendment No. 1 to the Second Amended and Restated Term Loan Agreement, dated as of May 3, 2016 (the “Loan Agreement”). The Loan Agreement (i) extends the interest only-period of the Loan Agreement by one year to March 31, 2022 from March 31, 2021; (ii) extends the time until the initial required cash interest payments by one year to June 30, 2019 from June 30, 2018; (iii) extends the deadline for full payment under the Loan Agreement to March 31, 2022 from March 31, 2021, and (iv) reduces the Company’s minimum cash and cash equivalent requirements to $2.0 million from the previous requirement of $5.0 million.

On March 28, 2017, $25.0 million and $2.5 million of the Term Loan and WCAS Note, respectively, were converted to preferred shares upon completion of the public offering at a conversion rate of $10 per share. CRG and WCAS received 2,500,000 and 250,000 preferred shares, respectively. At the time of the debt restructuring, $0.1 million of remaining debt issuance costs were extinguished and recorded against equity as the lender is also a shareholder of the Company.

During the three and nine months ended September 30, 2018, the Company incurred non-cash interest expense of $1.1 million and $3.1 million, respectively. During the three and nine months ended September 30, 2017, the Company incurred non-cash interest expense of $1.0 million and $3.5 million, respectively.

Senior Secured Debt

The Term Loan is secured by substantially all of the Company’s assets, including its material intellectual property. The Term Loan originally bore interest at 11% per annum and compounds annually. Until the third anniversary of the Term Loan, the Company had the option to pay quarterly interest of 7.5% in cash and 3.5% paid-in-kind, or PIK, interest which is added to the aggregate principal amount of the Term Loan on the last day of each quarter. Thereafter, interest on the Term Loan was payable only in cash.

On May 3, 2016, the Company restructured the Term Loan. The principal balance was restated as $50.0 million with interest rate charged at 11% per annum, which is PIK interest through June 30, 2018 and then both PIK and cash interest thereafter. The provisions of the restructured Term Loan require quarterly interest payments during the term of the loan, which were set to commence on June 30, 2018 but have been adjusted to commence on June 30, 2019 as a result of the February 9, 2017 amendment. The amended repayment of principal on amounts borrowed under the Term Loan was modified to March 31, 2022.

On March 28, 2017, upon completion of the public offering, CRG converted $25.0 million of the principal balance of the Term Loan into 2,500,000 shares of the Company's newly designated Series A Preferred Stock at a conversion rate of $10 per share. The principal balance of the Term Loan was restated as $25.0 million.

The restructured Term Loan agreement contained a financial covenant, which required the Company to maintain a minimum cash balance of $5.0 million. In February 2017, this covenant was amended to require the Company to maintain a minimum cash balance of $2.0 million. As of September 30, 2018, the Company was in compliance with this financial covenant, as the Company held cash and cash equivalents of $24.3 million, which includes $0.5 million of restricted cash.

Other Note Payable

In 2011, the Company issued a $5.0 million senior subordinated note, or the WCAS Note or the Other Note Payable, to WCAS Capital Partners IV, L.P., or WCAS. Amounts due under the WCAS Note originally bore interest at 10% per annum, payable semi-annually. On May 23, 2013, the WCAS Note was amended such that the note then bore interest at 12% per annum, and all interest accrues as compounded PIK interest and is added to the aggregate principal amount of the loan semi-annually. Upon a change in control, the WCAS note must be prepaid in an amount equal to the outstanding principal balance plus accrued and unpaid interest. The outstanding principal amount of the note, including accrued PIK interest, is due in full in September 2021. The Company may pay off the WCAS Note at any time without penalty.

On March 28, 2017, $2.5 million of the WCAS Note was converted to preferred shares upon completion of the public offering at a conversion rate of $10 per share. WCAS received 250,000 preferred shares. The remaining principal balance of $2.5 million was amended to decrease the interest rate back to 10% per annum payable entirely as PIK interest with a debt maturity date of September 21, 2021. No interest payments are required during the term of the loan.

8. Fair Value Measurements

The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, debt instruments and derivative liabilities. For accounts receivable, accounts payable and accrued liabilities, the carrying amounts of these financial instruments as of September 30, 2018 and December 31, 2017 were considered representative of their fair values due to their short term to maturity. Cash equivalents are carried at cost which approximates their fair value. Debt is carried at its principal balance, plus accrued interest, which approximates its fair value. Debt would be considered a level 2 measurement.

The following tables set forth the Company's financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.



	Fair Value as of September 30, 2018
(Dollars in thousands)	Total		Level 1	Level 2	Level 3
Derivative Liability - Warrant	$	4	—	—	$	4



	Fair Value as of December 31, 2017
(Dollars in thousands)	Total		Level 1	Level 2	Level 3
Derivative Liability - Warrant	$	1	—	—	$	1

9. Commitments and Contingencies

Litigation

The Company from time to time, is party to pending or threatened legal proceedings. The Company recognizes a liability for contingencies, including an estimate of legal costs to be incurred, when information available indicates both a loss is probable and the amount of the loss can be reasonably estimated. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of the Company.

Operating Leases

The Company leases buildings in Bridgewater, New Jersey and Marlborough, Massachusetts, expiring in June 2023 and February 2024, respectively. In addition to rent expense, the Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the building leases. The rental payments include the minimum rentals plus common area maintenance charges. The leases include renewal options.

Rental expense under all operating leases amounted to $0.2 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively. Rental expense under all operating leases amounted to $0.5 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively.

Capital Lease

In January 2018, the Company executed a capital lease with Winthrop Resources Corporation ("Winthrop") for laptops and other electronic equipment. The initial term of the lease expires in January 2021, then continues year to year until terminated. At the end of the initial term, the Company has the option to purchase the leased equipment in whole for a mutually agreed upon price.

The assets under this capital lease were recorded at the present value of the minimum lease payments, which amounted to $0.3 million upon commencement and is depreciated over the term of the lease. The Company is obligated to pay $0.1 million of interest expense under the capital lease.

Depreciation expense for assets under the capital lease amounted to a de minimis amount and $0.1 million for the three and nine months ended September 30, 2018. There was no depreciation expense related to capital leases in 2017. The carrying value of the asset at September 30, 2018 was $0.3 million.

At September 30, 2018, the Company had the following minimum lease commitments:



(Dollars in thousands)
Year ending December 31:
2018	$	119
2019	531
2020	541
2021	434
2022	436
Thereafter	389
Total	$	2,450

The Company is obligated to pay $0.1 million of interest expense under the capital lease.

Development Agreement

On April 16, 2018, the Company entered into an agreement with Glooko, a leader in diabetes data management. With this agreement, the Company will provide future V-Go SIM (Simple Insulin Management) users with Glooko’s cloud-based mobile and web diabetes data management platform to help track and analyze their diabetes care plan. Users can also share their data with their providers. Pursuant to the agreement, the Company was obligated to pay a one-time integration fee of $0.1 million, as well as an annual maintenance fee of $0.1 million as well as a monthly fee per user. The initial term of the agreement is for 3 years, with renewal options available in yearly increments thereafter.

Licensing Agreement

Pursuant to a formation agreement, dated as of August 22, 2006 (the "Formation Agreement"), BioValve and BTI Technologies Inc. ("BTI"), a wholly owned subsidiary of BioValve, contributed to Valeritas, Inc. (formerly Valeritas, LLC) all of their right, title and interest in and to all of the assets, properties and rights of BioValve and BTI to the extent related to BioValve's drug delivery/medical device initiative, consisting of patents and equipment, hereafter referred to as the Device Assets.

On August 26, 2008, the Formation Agreement was amended and the Company agreed to pay BioValve an amount equal to 9% of any cash received from upfront license or signing fees and any cash development milestone payments received by the Company in connection with licenses or grants of third party rights to the use in development or commercialization of the Company's Rapid Infuser Technology. In certain circumstances the Company would owe 10% of such payments received. As of September 30, 2018 and December 31, 2017, no amounts were owed under this agreement. Although the Company believes the intellectual property

rights around this technology have value, the technology licensed under this agreement is not used in V-Go or any current products under development.

10. Stockholders' Equity (Deficit)

The Company's capital structure consisted of 300,000,000 shares of common stock, par value $0.001 per share and 50,000,000 shares of blank check preferred stock.

On March 28, 2017, the Company closed its initial public offering of 5,250,000 shares of common stock at a purchase price of

$10.00 per share, for proceeds of approximately $48.8 million, net of financing costs. Existing investors of the Company

invested $40.0 million in the public offering. On March 28, 2017, $25.0 million and $2.5 million of the Term Loan and WCAS

Note, respectively, were converted to preferred shares. CRG and WCAS received 2,500,000 and 250,000 of the Company's

Series A Preferred Stock, respectively.

On January 7, 2018, the Company entered into the First Purchase Agreement with Aspire Capital, pursuant to which, the Company had the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of the Company’s common stock per business day, in an aggregate amount of up to $20.0 million of the Company’s common stock (the "Purchase Shares") over the 30-month term of the Purchase Agreement at a per share price equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date; or the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The Company sold an aggregate of 1,250,868 shares of its common stock (which represented 19.99% of the Company’s outstanding shares of common stock on the date it entered into the First Purchase Agreement). In 2017, the Company issued 125,000 shares of common stock issued to Aspire Capital as consideration for entering into the First Purchase Agreement. The Company sold 1,250,868 shares pursuant to the First Purchase Agreement in 2018 and received net proceeds of $1.8 million. The First Purchase Agreement was terminated in June 2018.

On January 26, 2018, the Company entered into the Sales Agreement with FBR with respect to an at the market offering program, under which the Company may, from time to time in its sole discretion, issue and sell through FBR, acting as agent, the Placement Shares. FBR has the option to decline any sales orders at its discretion. The issuance and sale, if any, of the Placement Shares by the Company under the Agreement will be made pursuant to a prospectus supplement to the Company’s registration statement on Form S-3, originally filed with SEC on October 4, 2017, and declared effective by the SEC on December 15, 2017. As of September 30, 2018, the Company has not sold any shares under this Sales Agreement.

The Company completed a public offering on April 26, 2018 in which it sold 13,700,000 shares and received aggregate net proceeds of approximately $21.8 million, after deducting underwriting discounts and commissions of $1.8 million and offering expenses of $0.4 million. On May 2, 2018, the underwriters in the public offering exercised a portion of their 30-day option to purchase additional shares of the Company's common stock, as a result of which the Company sold 1,600,000 shares and received additional net proceeds of approximately $2.6 million, after deducting underwriting discounts of $0.2 million.

In June 2018, the Company entered into a purchase agreement (the "Second Purchase Agreement") with Aspire Capital, pursuant to which, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 150,000 shares of the Company’s common stock per business day, in an aggregate amount of up to $21.0 million of the Company’s common stock (the "Purchase Shares") over the thirty month term of the Second Purchase Agreement at a per share price equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date; or the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The Company may sell an aggregate of 4,726,383 shares of its common stock (which represented 19.99% of the Company’s outstanding shares of common stock on June 11, 2018) without stockholder approval. The Company may sell additional shares of its common stock above the 19.99% limit provided that (i) it obtains stockholder approval or (ii) shareholder approval has not been obtained at any time the 4,726,383 share limitation is reached and at all times thereafter the average price paid for all shares issued under the Purchase Agreement, including the 263,852 shares of common stock issued to Aspire Capital as consideration for entering into the Purchase Agreement (the “Commitment Shares”) and the 791,557 shares purchased on the date of the agreement (the "Initial Purchase Shares"), is equal to or greater than $1.62 (the “Minimum Price”), which was the consolidated closing bid price of the Company’s common stock on the date it entered into the Second Purchase Agreement. In addition to these restrictions, the Company is prohibited from selling shares to Aspire under the Purchase Agreement at a price per share less than $1.00.

As of September 30, 2018, the Company has issued 1,205,409 shares of common stock under the Second Purchase Agreement, including the Initial Purchase Shares for net proceeds of approximately $1.3 million.

Preferred Stock

Shares of preferred stock may be issued from time to time in one or more series, each of which will have such distinctive designation or title as shall be determined by the Company's Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the Company's capital stock entitled to vote.

On February 14, 2017, the Company entered into an agreement with CRG and WCAS to convert a total of $27.5 million of the outstanding principal amount of the Company's debt, including the Term Loan, into shares of Series A Convertible Preferred Stock at the public offering price. The shares of Series A Preferred Stock are convertible at the option of the holder at any time into shares of the Company's common stock at a conversion rate determined by dividing the Series A Original Issue Price by the Series A Conversion Price (both as defined in the Certificate of Designation) in effect at the time of conversion. This formula initially results in a one-to-one conversion ratio, but may change in the future. The Series A Conversion Price is subject to adjustment for stock splits and the like subsequent to the date of issuance of the Series A Preferred Stock. On or after January 1, 2021, at the Company's option, if the Company has achieved an average market capitalization of at least $300 million for the Company's most recent fiscal quarter, the Company may elect to automatically convert all of the outstanding shares of Series A Preferred Stock into shares of the Company's common stock.

The holders of shares of Series A Preferred Stock are entitled to receive cumulative annual dividends at a rate of $8 per every $100 of Series A Preferred Stock, payable either in cash or in shares of the Company's common stock, at each holder’s election; provided, that to the extent any holder elects to receive cash dividends, such dividends shall accrue from day to day and be payable only upon a Deemed Liquidation Event (as defined in the Certificate of Designation). The shares of Series A Preferred Stock have no voting rights. The Company has the right to redeem all or less than all of the Series A Preferred Stock, at any time, at a price equal to the Series A Conversion Price, as adjusted, plus any accrued but unpaid dividends. In the event of a Deemed Liquidation Event the holders of Series A Preferred Stock are eligible to receive the greater of (i) $27.5 million, plus accrued but unpaid dividends or (ii) what they would have received as a holder of common stock had they converted their shares of Series A Preferred Stock into shares of the Company's common stock immediately prior to the Deemed Liquidation Event. To the extent permitted under Delaware law, the holders of shares of Series A Preferred Stock have the right to prevent the Company from liquidating, dissolving, amending the Company's governing documents in a manner that affects the rights of the Series A Preferred Stock, authorizing shares of capital stock on parity or senior to the Series A Preferred Stock, or issuing any shares of Series A Preferred Stock to any individual, entity or person other than CRG or WCAS.

Equity Compensation Plans

Total stock-based compensation expense related to stock options and restricted stock was $1.0 million and $1.6 million for the three months ended September 30, 2018 and 2017, respectively. Total stock-based compensation expense related to stock options and restricted stock was $3.0 million and $4.6 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (the “ESPP”), which was established in 2017, the Company is authorized to issue up to 2% of the shares of its capital stock outstanding as of May 3, 2017. The purchase price of the stock will not be less than 85% of the lower of (i) the fair market value per share of the Company's common stock on the start date of the offering period or (ii) the fair market value on the purchase date. The fair market value per share of the Company’s common stock on any particular date under the ESPP will be the closing selling price per share on such date on the national stock exchange serving as the primary market for the Company’s common stock at that time (or if there is no closing price on such date, then the closing selling price per share on the last preceding date for which such quotation exists). Shares of the Company's common stock will be offered for purchase under the ESPP through a series of successive offering periods. Each offering period will be comprised of one or more successive 6-month purchase intervals, unless determined otherwise by the plan administrator. On the start date of each offering period, each participant will be granted a purchase right to acquire shares of the Company's common stock on the last day of each purchase period interval during the offering period. Fair value is determined based on two factors: (i) the 15% discount amount on the underlying stock’s market value on the first day of the applicable offering period, and (ii) the fair value of the look-back feature determined by using the Black-Scholes model.

The Company recognized a de minimis amount and zero compensation expense for the three months ended September 30, 2018 and September 30, 2017, respectively. The Company recognized $0.1 million and no compensation expense for the nine months ended September 30, 2018 and September 30, 2017, respectively. As of September 30, 2018, purchase rights for 156,584 shares have been requested and 156,584 shares have been granted under the ESPP. The Company has accrued a de minimis amount for common stock to be offered in the current offering period.

2016 Employee Equity Compensation Plan

The Company's 2016 Equity Incentive Compensation plan (the “2016 Plan”) was established on May 3, 2016. The 2016 Plan permits the Company to grant cash, stock and stock-based awards to its employees, consultants and directors. The 2016 Plan includes (i) the discretionary grant program under which eligible persons may be granted options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, or stock appreciation rights, or SARs; (ii) the stock issuance program under which eligible persons may be issued direct stock, restricted stock awards, restricted stock units, performance shares or other stock-based awards; and (iii) the incentive bonus program under which eligible persons may be issued performance unit awards, dividend equivalent rights or cash incentive awards. The Company initially had 2,396,315 shares available for issuance under the 2016 plan.

In July 2018, the Company's shareholders approved an amendment to the 2016 Plan and as a result, there are 8,000,000 shares available for issuance under the 2016 Plan.

At September 30, 2018, an aggregate of 5,830,798 shares of the Company's common stock were available for issuance under the 2016 Plan.

The options generally vest over a period of three or four years, and options that lapse or are forfeited are available to be granted again. The contractual life of all options is ten years from the date the option was granted. The restricted stock awards vest on the first, second and third anniversaries of the original grant date. The Company recognizes compensation expense on all of these awards on a straight-line basis over the vesting period. The fair value of the awards was determined based on the market value of the underlying stock price at the grant date.

Stock Options

2016 Employee Equity Compensation Plan Stock option activity for the nine months ended September 30, 2018 was as follows:



(Dollars in thousands, except per share amounts)	Shares		Weighted- Average Exercise Price (in dollars per share)		Weighted- Average Contractual Life (in years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2017	1,661,750		$	11.96	9.12	$	75
Granted	581,315		2.77		9.48	—
Forfeited / Canceled	(61,521	)	7.97		—	—
Options outstanding at September 30, 2018	2,181,544		$	9.63	8.65	$	—
Vested and exercisable	922,902		$	13.7	8.31	$	—

Share based compensation expense related to options issued under the 2016 Plan was $1.0 million and $3.0 million for the three and nine months ended September 30, 2018. Share based compensation expense related to options issued under the 2016 Plan was $1.2 million and $3.3 million for the three and nine months ended September 30, 2017 respectively. The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2018 was $1.02 and $2.12, respectively. The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2017 was $3.59 and $4.40, respectively. There have been no option exercises under the 2016 Plan. As of September 30, 2018 there remained $5.0 million of unrecognized share-based compensation expense related to unvested stock options issued to be recognized as expense over a weighted average period of 1.74 years.

The fair value of the options at the date of issuance was estimated based on the Black-Scholes option pricing model. Previously, the Company used a peer group of companies to calculate volatility. In 2018, the Company began to use a blended rate, which included the Company and the peer group of companies to calculate volatility. Key assumptions used to apply this model upon issuance were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Dividend yield	—			—			—			—
Expected volatility	90.57		%	69.2		%	93.11		%	69.0		%
Risk-free rate of return	2.81		%	1.96		%	2.66		%	2.05		%
Expected term (years)	5.80			6.18			5.93			5.81
Fair Value per share	$	1.02		$	3.59		$	2.12		$	4.40

Restricted Stock

Shares of restricted stock were issued to third party consultants during 2017 as compensation for services rendered to the Company. The shares vested upon completion of seven months in service to the Company.

Restricted stock award activity for the nine months ended September 30, 2018 is as follows:



	Time-Based Restricted Stock Awards
Non-vested awards outstanding at December 31, 2017	30,000
Awards granted	—
Awards vested	(30,000	)
Awards forfeited	—
Non-vested awards outstanding at September 30, 2018	—

Share based compensation related to restricted stock issued under the 2016 Plan was zero and a de minimis amount for the three and nine months ended September 30, 2018, respectively. Share based compensation related to restricted stock issued under the 2016 Plan was $0.4 million and $1.3 million for the three and nine months ended September 30, 2017, respectively. There is no remaining amount in unrecognized compensation related to these awards at September 30, 2018.

11. Related Party Transactions

On September 8, 2011, the Company issued the WCAS Note. Certain affiliates of WCAS are also common stock shareholders as of September 30, 2018.

During the nine months ended September 30, 2017, CRG and WCAS converted debt balances of $25.0 million and $2.5 million, respectively, into shares of 2,500,000 and 250,000 shares of the Company's Series A Preferred Stock, respectively. At the time of the debt restructuring, $0.1 million of remaining debt issuance costs was extinguished and recorded against equity as the lender is also a shareholder of the Company.

On March 28, 2017, CRG participated in an offering of common shares and acquired 4,000,000 shares for $40.0 million.

12. Net Loss Per Share

Basic net loss per share excludes the effect of dilution and is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding.

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including convertible preferred stock, stock options and warrants to the extent dilutive. Basic net loss per share was the same as diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.

During the year ended December 31, 2017, the Company issued shares of its Series A Convertible Preferred Stock. Holders of the Series A Convertible Preferred Stock do not have voting rights and receive cumulative annual dividends of $8 for every $100. Cumulative dividends are presented as a loss attributable to the common shareholders.

The following awards outstanding at September 30, 2018 and 2017 were not included in the computation of common shares:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Stock options	2,181,544	1,734,274	2,181,544	1,734,274
Warrants	10,390	10,390	10,390	10,390
Restricted stock	—	30,000	—	30,000
Preferred Stock	2,750,000	2,750,000	2,750,000	2,750,000
Employee Stock Purchase Program	24,607	—	24,607	—
Total	4,966,541	4,524,664	4,966,541	4,524,664

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes thereto contained in this report and in connection with management's discussion and analysis and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission, or SEC on February 28, 2018. The following discussion contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors" in this Quarterly Report and those included in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our subsequent public filings, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. See also the "Cautionary Note Regarding Forward-Looking Statements" set forth at the beginning of this report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

We are a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. Our flagship product, the V-Go® Wearable Insulin Delivery device, is a simple, affordable, all-in-one, basal-bolus insulin delivery option for patients with type 2 diabetes is worn like a patch and can eliminate the need for taking multiple daily shots. V-Go administers a continuous preset basal rate of insulin over 24 hours and it provides discreet on-demand bolus dosing at mealtimes. It is the only basal-bolus insulin delivery device on the market today specifically designed keeping in mind the needs of type 2 diabetes patients. V- Go enables patients to closely mimic the body’s normal physiologic pattern of insulin delivery throughout the day and to manage their diabetes with insulin without the need to plan a daily routine around multiple daily injections.

We currently focus on the treatment of patients with type 2 diabetes-a pervasive and costly disease that, according to the 2017 National Diabetes Statistics Report released by the U.S. Centers for Disease Control and Prevention, or CDC, currently affects 90% to 95% of the approximately 23 million U.S. adults diagnosed with diabetes. The CDC estimates that the combined direct medical and drug costs and indirect lost productivity costs of diabetes in the United States in 2012 were approximately $245 billion annually. We believe the majority of the 12.6 million U.S. adults treating their type 2 diabetes with more than one daily oral anti-diabetic drug, or OAD, or an injectable diabetes medicine can benefit from the innovative approach of V-Go to manage type 2 diabetes.

Our primary target market consists of the approximately 5.6 million patients with type 2 diabetes who currently take injectable insulin, of which up to 4.5 million may not be achieving their target blood glucose goal. This patient population represents a $16.5 billion annual U.S. market when applying the annual wholesale acquisition cost, or WAC, of V-Go to the 4.5 million patients not achieving glycemic control. WAC is the gross price paid by wholesalers and does not take into account fees, discounts, and rebates from us. If we were able to capture even 15% of this 4.5 million patient population, that would represent $1.6 billion in annual revenue. The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis is based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. You should read the discussion and analysis together with such financial statements and the related notes thereto included elsewhere in this Quarterly Report.

Corporate Information

We currently operate the existing business of Valeritas as a publicly traded company under the name Valeritas Holdings, Inc. We were incorporated as Cleaner Yoga Mat, Inc. in Florida on May 9, 2014. Pursuant to the 2016 Merger, we discontinued our prior business of engaging in the sale of sanitizing solutions for Yoga and Pilates studios as well as conventional gyms and acquired the business of Valeritas, Inc. a Delaware corporation, referred to as Valeritas or the private company, which is a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies.

On May 3, 2016, our wholly owned subsidiary, Valeritas Acquisition Corp., a corporation formed in the State of Delaware on April 27, 2016, or the Acquisition Sub, merged with and into Valeritas, which we refer to as the 2016 Merger. Valeritas was the surviving corporation in the 2016 Merger and became our wholly owned subsidiary. All of the outstanding stock of Valeritas was converted into shares of our common stock or canceled upon closing of the 2016 Merger.

Also on May 3, 2016, we adopted an amended and restated certificate of incorporation and filed it with the Secretary of State of the State of Delaware and adopted amended and restated bylaws.

Following the 2016 Merger, the shareholders of Valeritas effectively control the combined companies, and, accordingly, Valeritas is deemed to be the accounting acquirer in the 2016 Merger.

Financial Overview

Revenue

We generate revenue from sales of V-Go to third-party wholesalers and medical supply distributors that take delivery and ownership of V-Go and, in turn, sell it to retail pharmacies or directly to patients with type 2 diabetes. V-Go 30-day packages are sold to wholesalers and distributors at WAC and we report net revenue after taking into consideration sales deductions as described in our financial statements and the related notes thereto. To date, the majority of our revenue is generated in the United States and we view our operations as one operating segment. Financial information is reviewed on a consolidated basis to allow management to make decisions regarding resource allocations and assess performance.

Within the past year, we have expanded our distribution network to include certain international distributors. Although we have entered into distribution agreements with distributors in several international countries, V-Go is currently only available for distribution in Australia, New Zealand and Italy. We do not expect to see meaningful revenue from these distribution agreements until 2020 as each of the international distributors will need time to secure third party payor reimbursement in their local markets. Additionally, we recently entered into an agreement with an international contract research organization to begin the medical device registration process for V-Go in China and expect the number of countries in which V-Go is available to increase as we continue to grow and expand our network of international agreements.

Cost of Goods Sold and Gross Margin

Cost of goods sold includes raw materials, labor costs, manufacturing overhead expenses and reserves for anticipated scrap and inventory obsolescence.

We currently manufacture V-Go and the EZ Fill accessory in cleanrooms at a contract manufacturing organization, or CMO, in Southern China. We also have a relationship with a separate CMO that performs our final inspection and packaging functions. Any single-source components and suppliers are managed through our global supply chain operation. We continually work with our manufacturing CMO's to refine our manufacturing processes and production lines to improve efficiencies, reduce labor cost and leverage our overhead expenses. These improvements represent the primary drivers in the current year reduction in cost of goods sold per unit.

We expect our overall gross margin, which is calculated as revenue less cost of goods sold for a given period, to fluctuate in future periods as a result of varying manufacturing output as we strive to reduce near-term inventory levels. In the future, planned changes in and improvements to our manufacturing processes and expenses, as well as increases in production volume up to our current capacity are expected to further improve our gross margins.

Research and Development Expense

Our research and development activities primarily consist of activities associated with our core technologies and process engineering as well as research programs associated with products under development. These expenses are primarily related to employee compensation, including salary, fringe benefits, share-based compensation and contract employee expenses.

We expect our research, development and engineering expenses to increase from current levels as we initiate and advance our development projects, including both the V-Go SIM™ (Simple Insulin Management) and V-Go Prefill devices.

Selling, General and Administrative Expense

Selling, general and administrative expenses consist primarily of salary, fringe benefits and share-based compensation for our executive, financial, marketing, sales, business development, regulatory affairs and administrative functions. Other significant expenses include product demonstration samples, trade show expenses, professional fees for our contracted customer support center, external legal counsel, independent auditors and other consultants, insurance, facilities and information technologies expenses. We expect our selling, general and administrative expenses to increase as our business expands.

Additionally, we increased our investment in sales and marketing programs and materials used to drive our capital-efficient marketing initiatives, as well as the volume of sample products provided to patients. This overall growth in commercial spending is part of our strategic plan to expand our business operations.

Other Income (Expense)

Other income (expense), net primarily consists of interest expense and amortization of debt discount associated with our loan agreements with Capital Royalty Group, or CRG, and WCAS Capital Partners IV, L.P., or WCAS. The decrease in interest is expense is due to the restructuring and subsequent conversion of a significant portion of the debt. See "Indebtedness" below for more information.

Results of Operations

Results of Operations for the Three Months Ended September 30, 2018 and 2017

The following is a comparison of revenue and expense categories for the three months ended September 30, 2018 and 2017:



(Dollars in thousands)	Three Months Ended September 30,						Change
(Dollars in thousands)	2018			2017			$		%
Revenue, net	$	6,926		$	5,065		1,861		36.7
Cost of goods sold	3,749			3,048			701		23.0
Gross margin	3,177			2,017			1,160		57.5
Operating expense:
Research and development	1,763			1,861			(98	)	(5.3	)
Selling, general and administrative	12,025			10,020			2,005		20.0
Total operating expense	13,788			11,881			1,907		16.1
Operating loss	(10,611		)	(9,864		)	(747	)	7.6
Other income (expense), net:
Other income	6			162			(156	)	(96.3	)
Interest expense, net	(926		)	(876		)	(50	)	5.7
Total other income (expense), net	(920		)	(714		)	(206	)	28.9
Net loss	$	(11,531	)	$	(10,578	)	(953	)	9.0

Results of Operations for the Nine Months Ended September 30, 2018 and 2017

The following is a comparison of revenue and expense categories for the nine months ended September 30, 2018 and 2017:



(Dollars in thousands)	Nine Months Ended September 30,						Change
(Dollars in thousands)	2018			2017			$		%
Revenue, net	$	19,504		$	14,464		5,040		34.8
Cost of goods sold	10,338			8,911			1,427		16.0
Gross margin	9,166			5,553			3,613		65.1
Operating expense:
Research and development	5,687			5,099			588		11.5
Selling, general and administrative	34,718			31,698			3,020		9.5
Total operating expense	40,405			36,797			3,608		9.8
Operating loss	(31,239		)	(31,244		)	5		—
Other income (expense), net:
Other expense	(22		)	(187		)	165		(88.2	)
Other income	—			413			(413	)	(100.0	)
Interest expense, net	(2,804		)	(3,348		)	544		(16.2	)
Total other income (expense), net	(2,826		)	(3,122		)	296		(9.5	)
Net loss	$	(34,065	)	$	(34,366	)	301		(0.9	)

Comparison of the Three Months Ended September 30, 2018 and 2017

Revenue, net

Revenue was $6.9 million for the three months ended September 30, 2018, compared to $5.1 million for the three months ended September 30, 2017, an increase of $1.9 million or 36.7%. The increase was driven by a 32.5% increase in volume, which was primarily due to our transition in 2017 to a new high-touch and high-service capital-efficient market strategy, which involves our sales force focusing on and servicing a smaller, more targeted number of high insulin volume prescribing physicians as well as some initial shipments to our international distributors. During the third quarter and on a year-over-year basis, total prescriptions grew 14% for the three months ended September 30, 2018, and new prescriptions increased by 13%. In our targeted accounts, total and new prescriptions grew 26% and 27% year-over-year, respectively. In our non-targeted accounts, total and new prescriptions decreased by 5%, and 8% year-over-year. We also realized a net selling price increase of 4.2% for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The net selling price increase was driven by an 8.0% WAC price increase implemented during the second half of 2017. During the three months ended September 30, 2018, we implemented a V-Go initiation program in territories covered by our direct sales force. As part of this program, we allotted each of the physicians interested in the program the ability to identify and prescribe V-Go for up to 10 of their patients with type 2 diabetes. Under this program, new patients received V-Go units. The WAC price increase was partially offset by this program and international distribution, which realized lower net pricing.

Cost of Goods Sold and Gross Margin

Cost of goods sold was $3.7 million for the three months ended September 30, 2018, compared to $3.0 million for the three months ended September 30, 2017, an increase of $0.7 million. As a percentage of revenue, cost of goods sold decreased during the three months ended September 30, 2018 to approximately 54.1% from approximately 60.2% during the three months ended September 30, 2017.

Our gross profit as a percentage of revenues, or gross margin, for the three months ended September 30, 2018 was 45.9%, compared to 39.8% for the three months ended September 30, 2017. The increase in our gross margin was due to manufacturing efficiencies, which benefited from a 32.5% increase in unit sales volume and the impact of our 4.2% net selling price increase.

Research and Development Expense

Total research and development expenses was $1.8 million for the three months ended September 30, 2018, compared to $1.9 million for the three months ended September 30, 2017, a decrease of $0.1 million. The decrease was primarily due to a continued focus on and external expenditures related to the development of our V-Go SIM device. We expect market introduction in the US of the V-Go SIM during the summer of 2019.

Selling, General and Administrative Expense

Our selling, general and administrative expenses were $12.0 million for the three months ended September 30, 2018, compared to $10.0 million for the three months ended September 30, 2017, an increase of $2.0 million. The increase in expenses was due to an increase in promotional spending and direct to patient marketing.

Other Income (Expense), net

Interest expense, net was $0.9 million for the three months ended September 30, 2018, compared to $0.9 million for the three months ended September 30, 2017, an increase of less than $0.1 million. The increase was primarily due to the compounding of interest on the increasing balance of our debt.

Comparison of the Nine Months Ended September 30, 2018 and 2017

Revenue, net

Revenue was $19.5 million for the nine months ended September 30, 2018, compared to $14.5 million for the nine months ended September 30, 2017, an increase of $5.0 million or 34.8%. The increase was driven by a 23.1% increase in volume, which was primarily due to our transition in 2017 to a new high-touch and high-service capital-efficient market strategy, which involves our sales force focusing on and servicing a smaller, more targeted number of high insulin volume prescribing physicians. During the first nine months ended September 30, 2018 and on a year-over-year basis, total prescriptions grew 10%, and new prescriptions increased by 11%. In our targeted accounts, total and new prescriptions grew 25% and 24% year-over-year, respectively. In our non-targeted accounts, total and new prescriptions declined by 7% and 6% year-over-year, respectively. We also realized a net selling price increase of 11.7% for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The net selling price increase was driven by an 8.0% WAC price increase implemented during the second half of 2017 and the benefit of improvements in various sales deductions. During the nine months ended September 30, 2018, we implemented a V-Go initiation program in territories covered by our direct sales force. As part of this program, we allotted each of the physicians interested in the program the ability to identify and prescribe V-Go for up to 10 of their patients with type 2 diabetes. Under this program, new patients received V-Go units. The WAC price increase was partially offset by this program and international distribution, which realized lower net pricing.

Cost of Goods Sold and Gross Margin

Cost of goods sold was $10.3 million for the nine months ended September 30, 2018, compared to $8.9 million for the nine months ended September 30, 2017, an increase of $1.4 million. As a percentage of revenue, cost of goods sold decreased during the nine months ended September 30, 2018 to approximately 53.0% from approximately 61.6% during the nine months ended September 30, 2017.

Our gross profit as a percentage of revenues, or gross margin, for the nine months ended September 30, 2018 was 47.0%, compared to 38.4% for the nine months ended September 30, 2017. The increase in our gross margin was due to manufacturing efficiencies, which benefited from a 23.1% increase in unit sales volume and the impact of our 11.7% net selling price increase.

Research and Development Expense

Total research and development expenses was $5.7 million for the nine months ended September 30, 2018, compared to $5.1 million for the nine months ended September 30, 2017, an increase of $0.6 million. The increase was primarily due to an increased focus on and external expenditures related to the development of our V-Go SIM device. We expect market introduction in the US of the V-Go SIM during the summer of 2019.

Selling, General and Administrative Expense

Our selling, general and administrative expenses were $34.7 million for the nine months ended September 30, 2018, compared to $31.7 million for the nine months ended September 30, 2017, an increase of $3.0 million. The increase was driven primarily by an increase in promotional spending and direct to patient marketing, as well as an increase in field sales headcount of 40%, which occurred during the second quarter of 2017.

Other Income (Expense), net

Interest expense, net was $2.8 million for the nine months ended September 30, 2018, compared to $3.3 million for the nine months ended September 30, 2017, a decrease of $0.5 million. The decrease was primarily due to the restructuring of our $50.0 million term loan with CRG, or the Term Loan, and the $5.0 million note payable with WCAS, or the WCAS Note, in March, 2017. In connection with our March 2017 public offering, $25.0 million of the Term Loan and $2.5 million of the WCAS Note were converted into 2,500,000 and 250,000 shares of our Series A Convertible Preferred Stock, respectively.

Liquidity and Capital Resources

We are subject to a number of risks similar to those of early stage commercial companies, including dependence on key individuals, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital necessary to fund the development of our products, and competition from larger companies. We expect that our sales performance and the level of selling and marketing efforts, as well as the status of each of our new product development programs, will significantly impact our cash requirements.

We have evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. We have incurred losses each year since inception and have experienced negative cash flows from operations in each year since inception. As of September 30, 2018, we had $24.3 million in cash and cash equivalents and an accumulated deficit of $508.0 million. Our restructured Term Loan includes a liquidity covenant whereby we must maintain a cash balance of at least $2.0 million. Based on our current business plan assumptions, we believe that we have sufficient cash and cash equivalents to fund our current operations into the second quarter of 2019. These factors raise substantial doubt about our ability to continue as a going concern.

We completed a public offering on April 26, 2018, as a result of which we received aggregate net proceeds of approximately $21.8 million, after deducting underwriting discounts and commissions of approximately $1.8 million and offering expenses of approximately $0.4 million. On May 2, 2018, the underwriters in the public offering exercised a portion of their 30-day option to purchase additional shares of our common stock, as a result of which we received additional net proceeds of approximately $2.6 million, after deducting underwriting discounts of $0.2 million.

In January 2018, as a component of management's plan to secure additional financing, we entered into a common stock purchase agreement, or the First Purchase Agreement with Aspire Capital Fund, LLC, or Aspire Capital for the sale of up to $20.0 million of our common stock (see "Equity Transactions" below) The First Purchase Agreement provided that we could sell an aggregate of up to 1,375,868 shares of our common stock to Aspire Capital, (which represented 19.99% of our outstanding shares of common stock on the date we entered into the First Purchase Agreement) without shareholder approval. Pursuant to the First Purchase Agreement, we sold 1,250,868 shares for net proceeds of approximately $1.8 million. The First Purchase Agreement was terminated in June 2018.

In January 2018, we entered into an At the Market Issuance Sales Agreement, or the Sales Agreement with B. Riley FBR, Inc., or FBR with respect to an at the market offering program, under which we may, from time to time in our sole discretion, issue and sell through FBR, acting as agent, shares of our common stock, or the Placement Shares. FBR has the option to decline any sales orders at its discretion. The issuance and sale, if any, of the Placement Shares by us under the Agreement will be made pursuant to a prospectus supplement to our registration statement on Form S-3, originally filed with the Securities and Exchange Commission, or the SEC, on October 4, 2017, and declared effective by the SEC on December 15, 2017, for the sale of up to $2.8 million of shares of our common stock. As of the date of this report we have not sold any shares pursuant to the Sales Agreement.

In June 2018, we entered into a common stock purchase agreement, or the Second Purchase Agreement with Aspire Capital, for the sale of up to $21.0 million of our common stock (see "Equity Transactions" below). The Second Purchase Agreement provides that we may sell an aggregate of up to 4,726,383 shares of our common stock (which represents 19.99% of our outstanding shares of common stock on the date we entered into the Second Purchase Agreement), without shareholder approval. As of September 30, 2018, we have sold 1,205,409 shares of common stock, including the Initial Purchase Shares under the Second Purchase Agreement for net proceeds of approximately $1.3 million. There is uncertainty regarding the utilization of financing associated from the Sales Agreement and the Second Purchase Agreement.

Our common stock is currently listed on the Nasdaq Capital Market. 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.

We continue to pursue additional sources of financing to fund our operations. However, we can provide no assurance that additional financing will be consummated on acceptable terms, or at all. If we are unable to effect a sufficient financing or capital raise, there would be a material adverse effect on us. These consolidated financial statements have been prepared with the assumption that we will continue as a going concern and will be able to realize our assets and discharge our liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of us to continue as a going concern.

In March 2018, we received a written notification from the Listing Qualifications Department of the Nasdaq Stock Market, or Nasdaq, indicating that we were not in compliance with Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because our stockholder's equity, as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, was below the required minimum of $2.5 million. The notification letter also indicated that, as of March 6, 2018, we did not meet the alternative compliance standards relating to the market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

In accordance with the Nasdaq Listing Rules, we submitted a plan to regain compliance to Nasdaq within 45 days of our receipt of the notification letter. In May 2018, we received a letter from Nasdaq which stated that, based on the disclosure in our Form 10-Q for the period ended March 30, 2018, filed on May 9, 2018, Nasdaq had determined that we complied with Nasdaq Listing Rule 5550(b)(1). However, if we failed to evidence compliance in our next periodic report, we may be subject to delisting.

The following table shows a summary of our cash flows for the nine months ended September 30, 2018 and 2017:



	Nine Months Ended September 30,
(Dollars in thousands)	2018			2017
Net cash provided by (used in):
Operating activities	$	(28,254	)	$	(24,290	)
Investing activities	(1,166		)	(248		)
Financing activities	27,734			48,757
Total	$	(1,686	)	$	24,219

Operating Activities

The increase in net cash used in operating activities for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was associated with more timely payment of accounts payable, lower stock compensation expense and the increase in accounts receivable from growing revenue.

Investing Activities

The net cash used in investing activities for the nine months ended September 30, 2018 was primarily related to purchases of capital equipment for our production lines. The use of cash in 2017 was related to augmenting the already existing production lines and corresponding capacity with our CMO built during prior years. Additionally, in 2017, we sold some of our property and equipment as a result of the change in our overall operational strategy and plan. We do not expect to have significant investing activity in the next 12 months from the date of this report.

Financing Activities

The net cash provided by financing activities for the nine months ended September 30, 2018 was the result of a public offering executed in April, 2018, execution of sales of common stock under the First Purchase Agreement and the Second Purchase Agreement, and proceeds from our Employee Stock Purchase Program. Net cash provided by financing activities for the nine months ended September 30, 2017 was the result of gross proceeds from our March 2017 public offering, which raised net proceeds of $48.8 million, after deducting underwriting discounts and offering expenses.

Indebtedness

Senior Secured Debt

In May 2013, we entered into a $50.0 million term loan with CRG, or the Term Loan, which is structured as a senior secured loan with a six-year term. The Term Loan is secured by substantially all of our assets, including our material intellectual property. Due to certain events of default in 2015, we entered into a series of forbearance agreements in 2015 and 2016 with CRG. The initial forbearance agreement was entered into on May 18, 2015 and has subsequently been amended five times. The forbearance agreements, as amended, but no longer in effect today, contained a number of terms and conditions in exchange for CRG's agreement to forbear.

Concurrently with the closing of the 2016 Merger we restructured our Term Loan. The provisions of the restructured Term Loan require quarterly interest payments during the term of the loan, which were set to commence on June 30, 2018, but have been adjusted to commence on June 30, 2019. The amended repayment of principal on amounts borrowed under the Term Loan is scheduled to be completed on March 31, 2022. We may, in our discretion, repay the revised loan in whole or in part without any penalty or prepayment fees.

In February 2017, we entered into an agreement with CRG to, among other things, reduce the amount required by the liquidity covenant in the Term Loan, which had originally required us to maintain a cash balance greater than $5.0 million, to $2.0 million. Additionally, in accordance with an agreement we entered into with CRG and WCAS in February 2017, an aggregate of $27.5 million of our then-outstanding debt held by CRG and WCAS was converted upon the closing of our March 2017 public offering into 2,750,000 shares of our Series A Convertible Preferred Stock, at a conversion price of $10.00 per share, which was the per share public offering price of our common stock in the March 2017 public offering.

WCAS Note

In 2011, we issued a $5.0 million note payable to WCAS, which we refer to as the WCAS Note. Amounts due under the WCAS Note originally bore interest at 10% per annum, payable semi-annually. The note was amended in 2013 to bear interest at 12% per annum, with all interest accruing as compounded payment-in-kind, or PIK interest, which was added to the aggregate principal amount of the loan semi-annually. The then outstanding principal amount of the note, including accrued PIK interest, is due in full in September 2021, and may be paid off at any time without penalty. Concurrently with the closing of the 2016 Merger, we restructured the WCAS Note. For more information, see Note 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

On March 28, 2017, $2.5 million of the WCAS Note was converted into 250,000 shares of our Series A Preferred Stock upon completion of the March 2017 public offering at a conversion rate of $10 per share. The interest rate on the remaining principal balance of $2.5 million was also decreased back to 10% per annum payable entirely as PIK interest with a debt maturity date of September 21, 2021. No interest payments are required during the term of the loan.

Equity Transactions

In March 2017, we completed an underwritten public offering, in which we sold 5,250,000 shares of common stock at a public offering price of $10.00 per share. We received gross proceeds of approximately $52 million and net proceeds of approximately $48.8 million, net of underwriting discounts, commissions and other offering expenses.

In January 2018, we entered into the First Purchase Agreement with Aspire Capital, for the sale of up to $20 million of our common stock. Pursuant to the First Purchase Agreement, we could sell up to an aggregate of 1,375,868 shares of common stock (which represents 19.99% of our outstanding shares of common stock on the date we entered into the First Purchase Agreement) without stockholder approval. The First Purchase Agreement permitted us to sell additional shares of common stock above the 19.99% limit provided that (i) we obtained stockholder approval or (ii) stockholder approval had not been obtained and at any time the 1,375,868 share limitation was reached and at all times thereafter the average price paid for all shares issued under the First Purchase Agreement, including 125,000 shares of common stock we issued to Aspire Capital as consideration for entering into the First Purchase Agreement was equal to or greater than $3.02, which was the consolidated closing bid price of our common stock on the date we entered into the First Purchase Agreement for net proceeds of approximately $1.8 million. In addition to these restrictions, we were prohibited from selling shares to Aspire Capital under the First Purchase Agreement at a price less than $1.00 per share. All shares of common stock sold to Aspire Capital under the First Purchase Agreement were registered on a Registration Statement on Form S-1 (File No. 333-222454), which was declared effective by the SEC on February 12, 2018. The First Purchase Agreement was terminated in June 2018 at the time we entered into the Second Purchase Agreement with Aspire Capital (as described below).

In January 2018, we entered into the Sales Agreement with FBR with respect to an at-the-market offering program, under which we may, from time to time, issue and sell through FBR, as sales agent, the Placement Shares. FBR has the option to decline any sales orders at its discretion. The issuance and sale, if any, of the Placement Shares by us under the Sales Agreement will be made pursuant to a prospectus supplement dated January 26, 2018 to our Shelf Registration Statement, for the sale of up to approximately $2.8 million of shares of our common stock. As of the date of this report, we have not sold any shares under the Sales Agreement.

In April 2018, we completed an underwritten public offering, in which we sold 13,700,000 shares of common stock at a public offering price of $1.75 per share. We received gross proceeds of approximately $24 million and net proceeds of approximately $21.8 million, after deducting underwriting discounts and commissions of approximately $1.8 million and offering expenses of $0.4 million. On May 2, 2018, we sold an additional 1,600,000 shares of common stock pursuant to the 30-day option we granted the underwriters in connection with the offering, for net proceeds of approximately $2.6 million. Therefore, the total net proceeds from this underwritten public offering was $24.4 million, net of underwriting discounts and commissions and offering expenses.

In June 2018, we entered into the Second Purchase Agreement with Aspire Capital, pursuant to which, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 150,000 shares of our common stock per business day, in an aggregate amount of up to $21.0 million of our common stock over the term of the Second Purchase Agreement at a per share price equal to the lesser of the lowest sale price of our common stock on the purchase date; or the arithmetic average of the three lowest closing sale prices for our common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. We may sell an aggregate of 4,726,383 shares of our common stock (which represents 19.99% of our outstanding shares of common stock on the date we entered into the Second Purchase Agreement) without stockholder approval. We may sell additional shares of our common stock above the 19.99% limit provided that (i) we obtain stockholder approval or (ii) shareholder approval has not been obtained at any time the 4,726,383 share limitation is reached and at all times thereafter the average price paid for all shares issued under the

Second Purchase Agreement, including the 263,852 shares of common stock issued to Aspire Capital as consideration for entering into the Second Purchase Agreement, or the Commitment Shares, and the 791,557 shares purchased on the date of the agreement, or the Initial Purchase Shares, is equal to or greater than $1.62, which was the consolidated closing bid price of our common stock on the date we entered into the Second Purchase Agreement. In addition to these restrictions, we are prohibited from selling shares to Aspire Capital under the Second Purchase Agreement at a price per share less than $1.00. We have registered the sale of up to 10,000,000 shares of common stock issuable pursuant to the Second Purchase Agreement, including the Commitment Shares and the Initial Purchase Shares, on a Registration Statement on Form S-1 (File No. 333-226018), which was declared effective by the SEC on July 16, 2018. As of September 30, 2018, we have issued 1,205,409 to Aspire Capital under the Second Purchase Agreement, including the Initial Purchase Shares, for net proceeds of approximately $1.3 million. The First Purchase Agreement was terminated in June 2018 at the time we entered into the Second Purchase Agreement with Aspire Capital.

Related Party Transactions

We transact business with certain parties related to us, primarily with key stakeholders with the intent of managing working capital through additional debt or equity financing.

During the nine months ended September 30, 2017 CRG and WCAS converted their respective debt balances of $25.0 million and $2.5 million to 2,500,000 and 250,000 shares of our Series A Convertible Preferred Stock, respectively. At the time of the debt restructuring, $0.1 million of remaining debt issuance costs was extinguished and recorded against equity because CRG and WCAS are also two of our stockholders. Concurrent with the debt conversion, we capitalized a de minimis amount of issuance costs. CRG also purchased 4,000,000 shares of our common stock for an aggregate purchase price of $40.0 million in the March 2017 public offering.

Critical Accounting Policies and Use of Estimates

This management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this Quarterly Report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results.

Revenue Recognition

Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, we perform the following five steps:

(i) identification of the promised goods or services in the contract;


(ii)	determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and


(v)	recognition of revenue when (or as) we satisfy each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606.

Revenue from product sales is recorded net of adjustments for managed care rebates, wholesale distributions fees, cash discounts, and prompt pay discounts, all of which are established at the time of sale. In order to prepare our consolidated financial statements, we are required to make estimates regarding the amounts earned or to be claimed on the related product sales, including the following:


•	managed care rebates, which are based on the estimated end user payor mix and related contractual rebates;


•	distribution fees and prompt pay discounts, which are recorded based on specified payment terms, and which vary by customer and other incentive programs; and


•	Co-pay card redemption charges which are based on the net transaction costs of prescriptions filled via a company-subsidized card program and other incentive programs.

We believe our estimates related to managed care rebates distribution fees and prompt pay discounts do not have a higher degree of estimation complexity or uncertainty as the related amounts are settled within a relatively short period of time.

In connection with our adoption of ASC 606, we recorded a cumulative-effect adjustment to reduce retained earnings by a de minimis amount. This adjustment reflected the acceleration of $1.6 million in revenues, net, $0.3 million in distribution fees and managed care rebates and $0.5 million in costs of revenue associated with the deferred revenue and related costs at December 31, 2017 as well as a reserve for returns of approximately $0.8 million. The reported results for 2018 reflect the application of ASC 606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as "previous guidance".

Return Reserve

We record allowances for product returns as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required, including the customers’ return rights and our historical experience with returns and the amount of product sales in the distribution channel not consumed by patients and subject to return. We rely on historical return rates to estimate returns. In the future, if any of these factors and/or the history of product returns change, adjustments to the allowance for product returns may be required.

Inventories

Inventories consists of raw materials, work in process and finished goods, which are valued at the lower of cost and net realizable value. Cost is determined on a first in, first out, or FIFO, basis and includes material costs, labor and applicable overhead. We perform a review regarding our excess or obsolete inventory and write down any inventory that has no alternative uses to its net realizable value. Economic conditions, customer demand and changes in purchasing and distribution can affect the carrying value of inventory. As circumstances warrant, we record lower of cost and net realizable value inventory adjustments. In some instances, these adjustments can have a material effect on the financial results of an annual or interim period. In order to determine such adjustments, we evaluate the age, inventory turns and estimated fair value of product inventory by stage of completion and record an adjustment if estimated market value is below cost.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our impairment review process is based upon an estimate of future undiscounted cash flow. Factors we consider that could trigger an impairment review include the following:


•	significant underperformance relative to expected historical or projected future operating results,


•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business


•	significant negative industry or economic trends


•	significant technological changes, which would render equipment and manufacturing processes obsolete

Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs. There were no charges and a de minimis amount of charges recorded during the three and nine months ended September 30, 2018, respectively. There were no charges recorded during the three and nine months ended September 30, 2017.

Share-Based Compensation

The fair value of stock options on the date of grant is calculated using the Black-Scholes option pricing model, based on key assumptions such as the fair value of common stock, expected volatility and expected term. Previously, we used a peer group of

companies to calculate volatility in the Black-Scholes option pricing model. In 2018, we began to use a blended rate, which included our company and the peer group of companies to calculate volatility. Compensation cost for restricted stock awards issued to employees is measured using the grant date fair value of the award, adjusted to reflect actual forfeitures. Our estimates of these important assumptions are primarily based on third-party valuations, historical data, peer company data and our judgment regarding future trends and other factors.

Off-Balance Sheet Arrangements

We did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of September 30, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to financial market risks in the ordinary course of our business. Our cash and cash equivalents include cash in readily available checking and money market accounts, as well as certificates of deposit. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate. Additionally, the interest rate on our outstanding indebtedness is fixed and is therefore not subject to changes in market interest rates.

Inflation Risk

Inflation generally affects us by increasing our cost of labor and pricing of contracts. We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board, or FASB issued ASU No. 2016-02, Leases. ASU 2016-2 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease effectively finances a purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (finance lease) or on a straight line basis over the term of the lease (operating lease). A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-2 supersedes the existing guidance on accounting for leases in "Leases (Topic 840)." Subsequent to ASU 2016-02, the FASB has issued ASU No. 2018-01 (“ASU 2018-01”) Leases (Topic 842): Land Easement Practical Expedient for Transition which clarifies the application of lease easements and eases adoption efforts for some land easements. The provisions of ASU 2016-2 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted and the provisions are to be applied using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. We are in the process of evaluating the impact of adoption on our consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 amends the FASB Accounting Standards Codification or ASC to expand the scope of FASB ASC Topic 718, Compensation-Stock Compensation, to include accounting for share-based payment transactions for acquiring goods and services from non-employees. The amendments in ASU 2018-07 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2018. In designing and evaluating disclosure controls and procedures, we recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of September 30, 2018, based on the evaluation of these disclosure controls and procedures, management concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the first nine months of 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Management does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Part II - Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Although we are not required to include risk factors in our Quarterly Report on Form 10-Q because we are a smaller reporting company, we believe the following risk factors are important to highlight in addition to the risk factors described in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 28, 2018 and in our subsequent public filings.

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern.

Since our inception in 2006, we have incurred significant net losses. Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result our independent registered public accounting firm included an explanatory paragraph regarding the same in our Annual Report on Form 10-K. Substantial doubt about our ability to continue as a going concern may create negative reactions to the price of our common stock and we may have a more difficult time obtaining financing in the future.

As of September 30, 2018, we had $24.3 million in cash and cash equivalents and an accumulated deficit of $508.0 million. To date, we have financed our operations primarily through sales of our capital stock, debt financings and limited sales of V-Go. In April 2018, we completed an underwritten public offering, in which we sold 13,700,000 shares of common stock at a public offering price of $1.75 per share. We received gross proceeds of approximately $24 million and net proceeds of approximately $21.8 million after deducting underwriting discounts, commissions and estimated offering expenses. On May 2, 2018, we sold an additional 1,600,000 shares of common stock pursuant to the 30-day option we granted the underwriters in connection with the offering, for net proceeds of approximately $2.6 million. In January 2018, we entered into a common stock purchase agreement, or the First Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, at our discretion, Aspire Capital would be committed to purchase up to an aggregate of $20.0 million of shares of our common stock over the 30-month term of the First Purchase Agreement. In June 2018, we terminated the First Purchase Agreement and entered into a second common stock purchase agreement, or the Second Purchase Agreement, with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, at our discretion, Aspire Capital is committed to purchase up to an aggregate of $21.0 million of shares of our common stock over the 30-month term of the Second Purchase Agreement. We sold 1,250,868 shares of common stock to Aspire Capital under the First Purchase Agreement for net proceeds of approximately $1.8 million, and as of September 30, 2018, have sold 1,205,409 shares of common stock to Aspire Capital under the Second Purchase Agreement for net proceeds of approximately $1.3 million. Additionally, in January 2018, we entered into an “at-the-market” sales agreement, or the Sales Agreement, with B. Riley FBR, Inc., or FBR, pursuant to which we may sell up a certain amount of shares of our common stock from time to time through FBR, acting as our sales agent, in one or more at-the-market offerings. FBR has the option to decline any sales orders at its discretion. As of the date of this report, we have not sold any shares under the Sales Agreement. Both the Second Purchase Agreement and the Sales Agreement are subject to limitations as described elsewhere in this Quarterly Report, and therefore there are no assurances that we will be able to raise funds from the Second Purchase Agreement or the Sales Agreement. We have devoted substantially all of our resources to the research, development and engineering of our products, the commercial launch of V-Go, the development of a sales and marketing team and the assembly of a management team to lead our business.

To implement our business strategy we need to, among other things, increase sales of our products with our existing sales and marketing infrastructure, fund ongoing research, development and engineering activities, expand our manufacturing capabilities, and obtain regulatory clearance in other markets outside the United States and European Union, or EU, or approval to commercialize our products currently under development. We expect our expenses to increase significantly as we pursue these objectives. The extent of our future operating losses and the timing of profitability are highly uncertain, especially given that we only recently commercialized V-Go, which makes predicting our sales more difficult. We will need to affect a financing or capital raise in the near term in order to sustain operations and implement our business strategy until we can achieve profitability from operations, if ever. Our inability to affect a financing or capital raise and continued losses from operations could have a material adverse effect on the Company. Any additional operating losses will have an adverse effect on our stockholders’ equity/(deficit), and we cannot assure you that we will ever be able to achieve or sustain profitability.

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

On March 7, 2018, we received a written notification from the Listing Qualifications Department of the Nasdaq Stock Market, or Nasdaq, indicating that we were not in compliance with Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because our stockholder's equity, as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, was below the required minimum of $2.5 million. The notification letter also indicated that, as of March 6, 2018, we did not meet the alternative compliance standards relating to the market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

In accordance with the Nasdaq Listing Rules, we submitted a plan to regain compliance to Nasdaq within 45 days of our receipt of the notification letter. On May 11, 2018, we received a letter from Nasdaq which stated that, based on the disclosure in our Form 10-Q for the period ended March 30, 2018, filed on May 9, 2018, Nasdaq had determined that we complied with Nasdaq Listing Rule 5550(b)(1). However, if we failed to evidence compliance in our next periodic report, we may be subject to delisting.

Although Nasdaq determined that we were in compliance with Nasdaq Listing Rule 5550(b)(1), based on the disclosure in our Form 10-Q for the period ended March 30, 2018, filed on May 9, 2018, there is no guarantee that we will continue to maintain compliance with Nasdaq Listing Rule 5550(b)(1) or any other Nasdaq listing rule in the future, which may subject us to delisting. Based upon our third quarter financial statements contained herein, we are not in compliance with Nasdaq Listing Rule 5550(b)(1) because our stockholder’s equity is below $2.5 million. Unless the market value of our common stock increases to at least $35 million, we may receive an additional notification letter from Nasdaq.

We may not be able to obtain regulatory approval from the China State Drug Administration (SDA) for V-Go in a timely manner, if at all, which may delay or prevent our successful registration of V-Go in China. Delays in or failure to obtain the necessary approvals from the SDA could harm our business.

We recently entered into an agreement with an international contract research organization to begin the medical device registration process for V-Go in China. Before V-Go can be marketed and sold in China, V-Go must be approved by the SDA. Although we have determined our proposed regulatory pathway to obtain approval from the SDA, we have not yet received their regulatory approval regarding our clinical study protocol. The SDA will require successful completion of clinical trials in China and demonstrated manufacturing capability before it grants approval. Clinical trials are expensive and their results are unpredictable. It often takes a number of years before a product can be ultimately approved by the SDA. In addition, the SDA and other regulatory authorities may apply new standards for safety, manufacturing, packaging, and distribution of V-Go. SDA may also conduct overseas inspection of the manufacturer for its compliance with the GSP requirements. Complying with such standards may be time-consuming and expensive and could result in delays in obtaining SDA approval for V-Go, or possibly preclude us from obtaining SDA approval altogether. The SDA and other regulatory authorities may not approve V-Go and even if we do obtain the required regulatory approvals, such regulatory approvals may be subject to limitations on the indicated uses for which we may market V-Go, which may limit the size of the market for V-Go in China. If we do not obtain approval from the SDA in a timely manner or at all, it could delay or prevent the successful registration of V-Go in China.

Further, we are subject to additional risks, including those listed below, which may delay or prevent the successful registration of V-Go in China:

•delays in design verification, which could take eight to 12 months or longer;

•delays in obtaining clinical study protocol approval from the SDA;

•delays in obtaining clinical trial sites or subjects in a timely manner to meet the SDA protocol requirements; which could take 18 to 24 months to complete the clinical trial from the point when we receive approval of our clinical study protocol;

•delays in securing SDA approval for the clinical study report, which could add another 12 to 18 months to the process; and

•insufficient working capital to support our registration efforts;

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of March 2017 Public Offering Proceeds

On March 22, 2017, our registration statement on Form S-1 (File No. 333-215897) for our March 2017 public offering was declared effective by the Securities and Exchange Commission, or SEC. On March 28, 2017, we completed our March 2017 public offering whereby we sold 5,250,000 shares of common stock, at a public offering price of $10.00 per share, before underwriting discounts and expenses. The aggregate net proceeds received by us from the offering were $48.8 million after deducting the underwriting discounts and commissions and offering expenses paid by us.

As of September 30, 2018, we have used all of our net proceeds from our March 2017 public offering.

There was no material change in the planned use of proceeds from our March 2017 public offering as described in our prospectus dated March 24, 2017, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

Item 6. Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.




31.1*	Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2018.

31.2*	Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2018.

32.1*	Certification of Chief Executive Officer (Principal Executive Officer) pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 9, 2018.

32.2*	Certification of Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 9, 2018.

101	The following materials from Valeritas Holdings Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2018 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and September 30, 2017, (ii) Condensed Consolidated Statements of Financial Position at September 30, 2018 and December 31, 2017, (iii) Condensed Consolidated Statement of Shareholders' Equity at September 30, 2018 and December 31, 2017, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 2017 and (v) Notes to Condensed Consolidated Financial Statements.

* Filed herewith

Signatures

Pursuant to the requirements 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.

Valeritas Holdings, Inc.

(Registrant)

/s/ John Timberlake

John Timberlake

Chief Executive Officer and President

Principal Executive Officer

/s/ Erick Lucera

Erick Lucera

Vice President, Finance and Chief Financial Officer

Principal Financial Officer

Dated: November 9, 2018

Valeritas Holdings Inc. - FORM 10-Q - November 9, 2018

Attached files

Valeritas Holdings Inc. Reports