Document and Entity Information - USD ($) $ in Millions	12 Months Ended
Document and Entity Information - USD ($) $ in Millions	Dec. 31, 2018	Mar. 26, 2019	Jun. 30, 2018
Document and Entity Information
Entity Registrant Name	Egalet Corp
Entity Central Index Key	0001586105
Document Type	10-K
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Shell Company	false
Entity Public Float			$ 22.7
Entity Common Stock, Shares Outstanding		9,360,968
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 35,323	$ 31,090
Marketable securities, available for sale	4,988	59,953
Accounts receivable	8,006	4,120
Inventory	2,639	3,225
Prepaid expenses and other current assets	2,715	2,672
Other receivables	846	893
Total current assets	54,517	101,953
Intangible assets, net	4,281	6,583
Restricted cash	400	400
Property and equipment, net	1,059	9,911
Deposits and other assets	1,676	1,011
Total assets	61,933	119,858
Current liabilities:
Accounts payable	8,561	10,160
Accrued expenses	24,584	16,104
Deferred revenue	0	7,456
Debt - current, net		1,081
Warrant liability		8,166
Total current liabilities	33,145	42,967
Debt - non-current portion, net		98,890
Deferred income tax liability	24	26
Derivative liability		16,623
Other liabilities	536	727
Total liabilities not subject to compromise	33,705	159,233
Liabilities subject to compromise	139,588
Commitments and contingencies (Note 17)
Stockholders' deficit:
Common stock--$0.001 par value; 275,000,000 and 75,000,000 shares authorized at December 31, 2018 and December 31, 2017, respectively; 56,547,101 and 45,939,663 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively	55	46
Additional paid-in capital	276,569	254,871
Accumulated other comprehensive income	869	1,008
Accumulated deficit	(388,853)	(295,300)
Total stockholders' deficit	(111,360)	(39,375)
Total liabilities and stockholders' deficit	$ 61,933	$ 119,858

Consolidated Balance Sheets (Parenthetical) - $ / shares	Dec. 31, 2018	Feb. 28, 2018	Dec. 31, 2017
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 0.001		$ 0.001
Common stock, authorized	275,000,000	275,000,000	75,000,000
Common stock, issued	56,547,101		45,939,663
Common stock, outstanding	56,547,101		45,939,663

Consolidated Statements of Operations - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Revenues
Revenues	$ 30,353	$ 26,136
Type of Revenue	us-gaap:ProductMember	us-gaap:ProductMember
Costs and Expenses
Cost of sales (excluding amortization of product rights)	$ 7,447	$ 5,153
Type of cost of sales	us-gaap:ProductMember	us-gaap:ProductMember
Amortization of product rights	$ 2,107	$ 2,082
General and administrative	24,079	34,065
Sales and marketing	33,730	35,532
Research and development	3,536	14,744
Restructuring and other charges	17,043	2,760
Total costs and expenses	87,942	94,336
Loss from operations	(57,589)	(68,200)
Other (income) expense:
Change in fair value of warrant and derivative liability	(12,292)	(2,546)
Interest expense, net	41,280	17,666
Other (gain) loss	(144)	(750)
Gain on extinguishment of debt		(13,221)
Loss on foreign currency exchange	(1)	10
Total other (income) expense	28,843	1,159
Reorganization charges	9,022
Loss before reorganization charges and provision (benefit) for income taxes	(95,454)	(69,359)
Net loss	$ (95,454)	$ (69,359)
Per share information:
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (1.81)	$ (2.05)
Weighted-average shares outstanding, basic and diluted (in shares)	52,775,116	33,755,462

Consolidated Statements of Comprehensive Loss - USD ($)	12 Months Ended
Consolidated Statements of Comprehensive Loss - USD ($)	Dec. 31, 2018	Dec. 31, 2017
Consolidated Statements of Comprehensive Loss
Net loss	$ (95,454,000)	$ (69,359,000)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities	45,000	(37,000)
Foreign currency translation adjustments	(184,000)	945,000
Comprehensive loss	$ (95,593,000)	$ (68,451,000)

Consolidated Statements of Changes in Stockholders' (Deficit) Equity - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Accumulated Comprehensive Income (loss)	Total
Balance at beginning of the period at Dec. 31, 2016	$ 25	$ 230,379	$ (225,178)	$ 100	$ 5,326
Balance at beginning of the period (in shares) at Dec. 31, 2016	25,189,125
Increase (Decrease) in Stockholders' Deficit
Forfeiture of restricted shares of common stock	(32,771)
Issuance of common stock, net of costs	$ 18	23,204			23,222
Issuance of common stock, net of costs (in shares)	18,283,309
Exchange of convertible debt and issuance of warrants	$ 3	(5,393)			(5,390)
Exchange of convertible debt and issuance of warrants (in shares)	2,500,000
Stock-based compensation expense		5,918			5,918
Unrealized gain (loss) on available for sale securities				(37)	(37)
Foreign currency translation adjustment				945	945
Net loss			(69,359)		(69,359)
Balance at end of the period at Dec. 31, 2017	$ 46	254,871	(295,300)	1,008	(39,375)
Balance at end of the period (in shares) at Dec. 31, 2017	45,939,663
Increase (Decrease) in Stockholders' Deficit
Cumulative adjustment to accumulated deficit \| ASU 2016-09		763	(763)
Issuance of restricted shares of common stock		9			9
Issuance of restricted shares of common stock (in shares)	1,500,000
Forfeiture of restricted shares of common stock	(225,000)
Issuance of common stock, net of costs	$ 8	5,220			5,228
Issuance of common stock, net of costs (in shares)	8,332,438
Conversion feature of 6.50% Notes		12,496			12,496
Exercise of warrants	$ 1				1
Exercise of warrants (in shares)	1,000,000
Stock-based compensation expense		3,973			3,973
Unrealized gain (loss) on available for sale securities				45	45
Foreign currency translation adjustment				(184)	(184)
Net loss			(95,454)		(95,454)
Balance at end of the period at Dec. 31, 2018	$ 55	$ 276,569	(388,853)	$ 869	(111,360)
Balance at end of the period (in shares) at Dec. 31, 2018	56,547,101
Increase (Decrease) in Stockholders' Deficit
Cumulative adjustment to accumulated deficit \| ASU 2014-09			$ 1,901		$ 1,901

Consolidated Statements of Changes in Stockholders' (Deficit) Equity (Parenthetical)	Dec. 31, 2018	Sep. 18, 2018	Dec. 31, 2017
6.50% Notes
Interest rate (as a percent)	6.50%	6.50%	6.50%

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Operating activities:
Net loss	$ (95,454)	$ (69,359)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,193	5,062
Non-cash impairment of property and equipment	6,886
Change in fair value of warrant and derivative liability	(12,292)	(2,546)
Stock-based compensation expense	3,973	5,918
Non-cash interest and 13% Notes redemption premium	38,307	5,070
Amortization of discount on marketable securities	(209)	(24)
Deferred income taxes	(1)
Gain on extinguishment of debt		(13,221)
Changes in assets and liabilities:
Accounts receivable	(4,257)	(3,012)
Inventory	429	(1,525)
Prepaid expenses and other current assets	(46)	(132)
Other receivables	3	219
Deposits and other assets	(666)	(375)
Accounts payable	(1,600)	7,597
Accrued expenses	6,104	(2,132)
Deferred revenue		3,475
Other liabilities	(184)	(179)
Net cash used in operating activities	(54,814)	(65,164)
Investing activities:
Payments for purchase of property and equipment	(9)	(88)
Purchases of investments	(23,465)	(101,338)
Sales of investments	4,509	12,195
Maturity of investments	74,174	71,647
Net cash provided by (used in) investing activities	55,209	(17,584)
Financing activities:
Net proceeds from issuance of common stock	5,228	32,888
Payments on borrowings	(895)
Net proceeds from debt and royalty rights		38,304
Exchange of convertible notes		(1,532)
Royalty payments in connection with the 13% Notes	(421)	(307)
Net cash provided by financing activities	3,912	69,353
Effect of foreign currency translation on cash and cash equivalents	(74)	530
Net increase (decrease) in cash, cash equivalents and restricted cash	4,233	(12,865)
Cash, cash equivalents and restricted cash at beginning of period	31,490	44,355
Cash, cash equivalents and restricted cash at end of period	35,723	31,490
Supplemental disclosures of cash flow information:
Cash interest payments	11,896	12,817
Non-cash financing activities:
Fair value of warrants issued in connection with debt and common stock		9,667
Reclassification to additional paid-in capital of derivative liability	$ 12,496	9,030
Fair value of warrants issued in connection with common stock		$ 3,640
13% Notes
Financing activities:
Interest rate (as a percent)	13.00%
Senior Secured Debt 13.0 percent redemption premium
Financing activities:
Interest rate (as a percent)	13.00%

Organization and Description of the Business	12 Months Ended
Organization and Description of the Business	Dec. 31, 2018
Organization and Description of the Business
Organization and Description of the Business	1. Organization and Description of the Business Egalet Corporation (the “Company”) is a commercial-stage pharmaceutical company commercializing innovative treatments for different types of pain and inflammation. Given the need for acute and chronic pain products and the issue of prescription abuse, the Company is focused on bringing non-narcotic and abuse-discouraging (“AD”) opioid formulations to healthcare providers. The Company is currently selling SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”) and OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”). SPRIX Nasal Spray is a nonsteroidal anti-inflammatory drug indicated in adult patients for the short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. OXAYDO is an immediate release (“IR”) oxycodone product designed to discourage abuse via snorting, indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. Using its proprietary Guardian Technology (“GT”), the Company developed ARYMO ER, an extended-release (“ER”) morphine product formulated with abuse-deterrent (“AD”) properties, which is approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Due to, among other things, lack of market adoption of branded ER morphine products, the Company discontinued the manufacturing and promotion of ARYMO ER on September 28, 2018. In addition to ARYMO ER, the Company developed a pipeline of products also using GT, which it may look to partner. The Company plans to continue to grow revenues of its commercial products, explore business development opportunities and leverage its proprietary technology. On October 30, 2018, the Company entered into a definitive asset purchase agreement (the “Purchase Agreement”) to acquire four non-narcotic marketed pain and inflammation products, VIVLODEX®, TIVORBEX®, ZORVOLEX® and INDOCIN® (indomethacin) oral suspension and suppositories (collectively, the “Iroko Products”) and one development product from Iroko Pharmaceuticals Inc. and its subsidiaries (“Iroko”). To facilitate the transactions contemplated by the Purchase Agreement (the “Iroko Acquisition”) and to reorganize its financial structure, the Company and its wholly-owned subsidiaries (“the Debtors”) filed voluntary petitions for reorganization (the “Bankruptcy Petitions”) under Chapter 11 of the United States (“U.S.”) Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Court”) and a related Joint Plan of Reorganization (“the Plan”) on October 30, 2018. The Iroko Acquisition was consummated, and the Plan went effective, on January 31, 2019. Refer to Note 21— Subsequent Events for additional details. Liquidity and Substantial Doubt in Going Concern Nasdaq Transfer and Delisting: Tender Offer On July 18, 2018, the Company filed a Tender Offer Statement on Schedule TO with respect to the right of each holder of its 5.50% Convertible Senior Notes due 2020 (the “5.50% Notes”) to sell, and the obligation of the Company to repurchase for cash, all or a portion of each such holder’s 5.50% Notes on September 19, 2018, on the terms and subject to the provisions set forth in the Fundamental Change Company Notice, Make-Whole Fundamental Change Company Notice and Offer to Repurchase to Holders of the 5.50% Convertible Senior Notes due 2020, dated July 31, 2018, as amended August 10, 2018 (the “Offer”). The Offer was commenced in accordance with the requirements of the indenture governing the 5.50% Notes (the “5.50% Notes Indenture”) as a result of the determination by The Nasdaq Stock Market LLC (“Nasdaq”) that the Company had ceased to meet the requirements for the listing of its common stock on The Nasdaq Global Market and to transfer such listing to the Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Nasdaq Transfer”). The Nasdaq Transfer constituted both a Fundamental Change and a Make-Whole Fundamental Change under the 5.50% Notes Indenture. In accordance with the terms of the 5.50% Notes Indenture, as a result of the Nasdaq Transfer, the Company was required, on or before the 20th calendar day following the Nasdaq Transfer, to give notice of the Fundamental Change and Make-Whole Fundamental Change to the holders of the 5.50% Notes and to make an offer to purchase all of the 5.50% Notes. The scheduled expiration time of the Offer was 5:00 p.m., New York City time, on September 18, 2018 (the “Expiration Time”), and the scheduled repurchase date was September 19, 2018 (the “Fundamental Change Repurchase Date”). On September 18, 2018, the day prior to the Fundamental Change Repurchase Date and shortly before the Expiration Time, the Company received written notification from Nasdaq indicating that, as the Company had not regained compliance with Nasdaq’s continued listing requirements for the listing of the Company’s common stock on the Nasdaq Capital Market or fulfilled certain of the milestones and conditions contained in a compliance plan originally submitted to the Nasdaq Hearings Panel by the Company in June 2018, the Nasdaq Hearings Panel determined to delist the Company’s common stock from the Nasdaq Capital Market and that there would be a suspension of trading in the Company’s common stock effective at the open of business on September 19, 2018 (the “Delisting Notice”). As of December 31, 2018, shares of the Company’s common stock were quoted by the OTCQX Bulletin Board (the “OTCQX”) following the suspension of trading of the Company’s common stock on the Nasdaq Capital Market on September 19, 2018. Events of Default; Forbearance Agreement On September 18, 2018, following the Company’s receipt of the Delisting Notice, the Company and its subsidiaries determined to enter into a Forbearance Agreement (the “Forbearance Agreement”) with certain holders (the “FA Supporting Holders”) of the Company’s 13% Notes. Pursuant to the Forbearance Agreement, the FA Supporting Holders agreed to forbear from exercising their rights and remedies under the indenture governing the Company’s 13% Notes (the “13% Notes Indenture”) and the related security documents until the earlier of (a) 11:59 p.m. on October 14, 2018 and (b) following an Event of Termination (as defined in the Forbearance Agreement) (such period, the “Forbearance Period”) with respect to certain potential events of default arising under the 13% Notes Indenture. On each of October 14, 2018, October 21, 2018 and October 24, 2018, the Company and the FA Supporting Holders entered into amendments to the Forbearance Agreement to extend the Outside Time to 11:59 New York City time on October 21, 2018, October 24, 2018 and October 28, 2018, respectively. The Events of Termination included, among other things, the Company or any of its subsidiaries making any purchase of the 5.50% Notes or the Company’s 6.50% Convertible Senior Notes (the “6.50% Notes”). As a result, the consummation of the Offer would have resulted in an Event of Termination under the Forbearance Agreement and permitted the holders of 13% Notes to exercise all rights and remedies available under the 13% Notes Indenture and related security documents. The expiration, termination and withdrawal of the Offer without payment resulted in none of the 5.50% Notes that were tendered in the Offer being accepted for purchase and no consideration was paid to holders of 5.50% Notes who tendered their 5.50% Notes in the Offer. All 5.50% Notes previously tendered and not withdrawn were returned or credited back to the respective holders thereof. Consequently, the failure of the Company to complete the Offer in accordance with the terms of the 5.50 % Notes Indenture constituted an Event of Default thereunder and resulted in a cross-defaults under the 13% Notes Indenture and the indenture governing the Company’s 6.50% Notes (the “6.50% Notes Indenture”). Chapter 11 Cases On October 30, 2018, the Debtors voluntarily filed the Bankruptcy Petitions in the U. S. Bankruptcy Court for the District of Delaware. The Debtors requested that the Chapter 11 cases (the “Chapter 11 Cases”) be jointly administered for procedural purposes only under the caption “In re Egalet Corporation, et al., Case No. 18-12439”. Upon filing, the Company intended to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company continued ordinary course operations substantially uninterrupted during the Chapter 11 Cases and sought approval from the Bankruptcy Court for relief under certain “first day” motions authorizing the Debtors to continue to conduct its business in the ordinary course. On January 14, 2019, the Court entered the Confirmation Order confirming the Plan under Chapter 11 of the Bankruptcy Code. On January 31, 2019 (the “Effective Date”), and substantially concurrent with the consummation of the Iroko Acquisition, the Plan became effective. Refer to Note 21—Subsequent Events for additional details. Significant Bankruptcy Court Actions On November 1, 2018 after the first-day hearing of the Chapter 11 Cases, the Bankruptcy Court issued certain interim orders relating to the Company’s businesses. These orders authorized the Debtors to, among other things, use cash collateral and its existing cash management system on an interim basis and pay certain prepetition debts related to customer programs, critical vendors, insurance programs, taxes, and employee wages and benefits. In addition, on December 3, 2018 the Bankruptcy Court held the second-day hearing and issued final orders related to the matters approved in the interim orders as well as certain other related matters. These orders allowed the Company to operate its business in the normal course. Substantial Doubt Regarding Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. As of December 31, 2018, the Company had an accumulated deficit of $388.9 million and working capital of $21.4 million, which does not reflect the Company’s outstanding indebtedness which has been recorded within liabilities subject to compromise at December 31, 2018. Even after the Company’s emergence from bankruptcy it will continue to have significant indebtedness and its ability to continue as a going concern is contingent upon the successful integration of the Iroko Acquisition, increasing its revenue, managing its expenses and complying with the terms of its new debt agreements. These factors, in combination with others described above, result in the conclusion that there is substantial doubt about the ability of the Company to continue as a going concern for the one-year period after the date that these financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Summary of Significant Accounting Policies and Basis of Accounting

12 Months Ended

Dec. 31, 2018

Summary of Significant Accounting Policies and Basis of Accounting

Summary of Significant Accounting Policies and Basis of Accounting

2. Summary of Significant Accounting Policies and Basis of Accounting

Basis of Accounting

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s consolidated financial statements include the accounts of Egalet Corporation and its wholly‑owned subsidiaries, Egalet Limited and Egalet US, Inc. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management 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 and the reported amounts of revenues and expenses during the reporting period.

Significant areas that require management’s estimates include intangible assets, revenue recognition, useful lives of assets, accrued expenses, the outcome of litigation, convertible debt, share-based payments, warrant and derivative liabilities, income taxes and liabilities subject to compromise. The Company is subject to risks and uncertainties due to changes in, among other things, the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results.

Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. As of December 31, 2018, long‑lived assets based upon geographic location were located in both the United States and Denmark, with a net book value of $1.1 million and $4,000 respectively. For the years ended December 31, 2018 and 2017, revenue from product sales was derived entirely from the United States.

Concentrations of Credit Risk and Off‑Balance Sheet Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and investments in marketable securities and accounts receivable. The Company maintains its cash balances in accounts with financial institutions that management believes are creditworthy. The Company invests cash that is not currently being used for operational purposes in accordance with its investment policy. The policy allows for the purchase of low-risk debt securities issued by U.S. government agencies and very highly rated corporations, subject to certain concentration limits. The Company believes its established guidelines for investment of its excess cash maintain safety and liquidity through its policies on diversification and investment maturity.

The below table represents the Company’s accounts receivable concentration by customer at December 31, 2018 and 2017:


	2018		2017
Customer A	70.2	%	10.0	%
Customer B	14.3	%	39.0	%
Customer C	9.0	%	23.0	%
Customer D	5.5	%	26.0	%
Customer E	0.6	%	1.0	%
Total	99.6	%	99.0	%

Cash, Restricted Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash balances of $34.7 million and $1.0 million were maintained at financial institutions in the United States and Denmark, respectively, at December 31, 2018. Bank deposits are insured up to approximately $250,000 and $121,000 for U.S. and Danish financial institutions, respectively.

Marketable Securities, Available-for-Sale

Marketable securities consist of securities with original maturities greater than three months and are composed of securities issued by U.S. government agencies and corporate debt securities. Marketable securities have been classified as current assets in the accompanying Consolidated Balance Sheets based upon the nature of the securities and their intended use to fund operations.

Management determines the appropriate classification of securities at the time of purchase. The Company has classified its investment portfolio as available-for-sale in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments—Debt and Equity Securities. The Company’s available-for-sale securities are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss). Realized gains and losses are determined using the specific identification method and are included in interest expense. Marketable securities are evaluated periodically for impairment. If it is determined that a decline of any investment is other than temporary, then the carrying amount of the investment is written down to fair value and the write-down is included in the Consolidated Statements of Comprehensive Loss as a loss.

Fair Value Measurements

The carrying amounts reported in the Company’s consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their respective fair values because of the short-term nature of these accounts. The carrying value of the derivative liabilities are the estimated fair value of the liability as further described in Note 5 – Fair Value Measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Fair value should be based on the assumptions that market participants would use when pricing an asset or liability and is based on a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to the Company’s assumptions (unobservable inputs). Fair value measurements should be disclosed separately by level within the fair value hierarchy. For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with established fair value hierarchy.

Financial assets that the Company measures at fair value on a recurring basis include cash equivalents and marketable securities. These financial assets are generally classified as Level 1 or 2 within the fair value hierarchy. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices (adjusted), interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The fair value hierarchy level is determined by the lowest level of significant input.

The Company’s financial assets have been initially valued at the transaction price and subsequently valued at the end of each reporting period, typically utilizing third-party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market-based approaches, and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by its third-party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. The Company did not adjust or override any fair value measurements provided by its pricing services as of December 31, 2018 or 2017.

Financial liabilities that the Company measures at fair value on a recurring basis include derivative liabilities consisting of the interest make whole feature of the 5.50% and 6.50% Notes, the conversion feature of the 6.50% Notes and the warrant liability associated with the July 2017 Equity offering. These financial liabilities are classified as Level 3 within the fair value hierarchy. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The fair value hierarchy level is determined by the lowest level of significant input.

The Company’s financial liabilities have been initially and subsequently valued at the end of each reporting period, typically utilizing third-party valuation services. The valuation services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs for similar instruments to determine value, if available. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the valuations provided by its third-party valuation services by reviewing their pricing valuation and matrices and confirming the relevant markets are active. The Company did not adjust or override any fair value measurements provided by its valuation services as of December 31, 2018 and December 31, 2017.

During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2, or Level 3 financial assets or liabilities. The Company did not have any non-recurring fair value measurements on any assets or liabilities at December 31, 2018 and December 31, 2017.

Stock-Based Compensation

The Company uses the Black-Scholes valuation model in determining the fair value of equity awards. For stock options granted to employees and directors with only service-based vesting conditions, the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award and recognizes it as expense over the requisite service period on a straight-line basis. The Company records the expense of services rendered by non-employees based on the estimated fair value of the stock option as of the respective vesting date. Further, the Company expenses the fair value of non-employee stock options that contain only service-based vesting conditions over the requisite service period of the underlying stock options.

The fair value for restricted stock awards is determined based on the closing market price of the Company’s common stock on the grant date of the awards. The expense is recognized over the requisite service period on a straight-line basis.

Property and Equipment

Property and equipment consist primarily of laboratory and manufacturing equipment, furniture, fixtures, and other property, all of which are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight‑line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. The following estimated useful lives were used to depreciate the Company’s assets:


	Estimated Useful Life
Laboratory and manufacturing equipment	3	-	10	years
Furniture, fixtures and other property	3	-	7	years

Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is charged to income.

Intangible and Long-Lived Assets

Intangible and long-lived assets consist of in‑process research and development (“IP R&D”) and product rights. IP R&D is considered an indefinite‑lived intangible asset and is assessed for impairment annually or more frequently if impairment indicators exist. If the associated research and development effort is abandoned, the related assets would be written‑off and the Company would record a non‑cash impairment loss on its consolidated statement of operations. For those product candidates that reach commercialization, the IPR&D asset will be amortized over its estimated useful life.

Long-lived intangible assets acquired as part of the SPRIX Nasal Spray acquisition and OXAYDO license are being amortized on a straight-line basis over their estimated useful lives of 5 years and 7 years, respectively. The Company estimated the useful life of the assets by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition for the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review.

The Company assesses the recoverability of its long‑lived assets, which include property and equipment and product rights whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset and a charge to operating results. During the year ended December 31, 2018, the Company recorded a charge of $113,000 to restructuring and other charges to write off the remaining IP R&D intangible asset related to our Guardian Technology due to the Company’s decision to discontinue the manufacturing and promotion of ARYMO ER. For the year ended December 31, 2017, the Company determined that there was no impairment of its intangible and other long‑lived assets.

Net Product Sales

The Company recognizes revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers, at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients.

The Company sells SPRIX Nasal Spray in the United States to a single specialty pharmaceutical distributor subject to rights of return. The Company recognizes revenue from sales of SPRIX Nasal Spray upon delivery of the product to its customer.

The Company sells OXAYDO and formerly sold ARYMO ER in the United States to several wholesalers, all subject to rights of return. The Company recognizes revenue of OXAYDO and ARYMO ER upon delivery of the product to its customers.

Product Sales Allowances

The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company’s agreements with customers and third-party payors that may result in future rebates or discounts taken. In certain cases, such as patient discount programs, the Company recognizes the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, the Company may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. The Company’s product sales allowances include:

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

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

Prompt Pay Discounts. The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Patient Discount Programs. The Company offers co-pay discount programs for each of its products to patients, in which patients receive a co-pay discount on their prescriptions. The Company utilizes data provided by independent third parties to determine the total amount that was redeemed and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Rebates. Managed care rebates are payments to governmental agencies and third parties, primarily pharmacy benefit managers and other health insurance providers. The reserve for these rebates is based on a combination of actual utilization provided by the third party and an estimate of customer buying patterns and applicable contractual rebate rates to be earned over each period. The Company recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Inventories and Cost of Sales

Inventories are stated at the lower of cost or market net of reserve for excess and obsolete inventory and cost is determined using the average-cost method. At December 31, 2018, inventory consisted of raw materials, work in process, and finished goods. At December 31, 2017, inventory consisted of raw materials, work in process, finished goods and deferred cost of goods

Cost of sales includes the cost of inventory sold or reserved, which includes manufacturing and supply chain costs, product shipping and handling costs, and product royalties. The cost of sales associated with the deferred product revenues are recorded as deferred costs, which are included in inventory, until such time the deferred revenue is recognized.

Long Term Debt

5.50% Notes

In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes in two separate closings. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2015. The 5.50% Notes are convertible at 67.2518 shares per $1,000 principal amount of the 5.50% Notes (equivalent to an initial conversion price of approximately $14.87 per share of common stock).

In December 2017, the Company closed exchange agreements with certain holders of the outstanding 5.50% notes for $36.4 million in principal value of the 5.50% Notes. The total face value of the outstanding 5.50% notes was reduced from $61.0 million to $24.6 million as a result of the Exchange. As part of the exchange, the Company issued $23.9 million in principal amount of new 6.50% convertible notes due December 31, 2024. See below for further information.

13.0% Notes

In August 2016, the Company completed the initial closing (the “Initial Closing”) of its offering (the “Offering”) of up to $80.0 million aggregate principal amount of its 13.0% senior secured notes and entered into an indenture governing the Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). The Company issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing and issued an additional $40.0 million aggregate principal amount of the Notes on approval from the Food and Drug Administration (“FDA”) of ARYMO ER in January 2017 (the “Second Closing”). Net proceeds from the Initial Closing and Second Closing were $37.2 million and $38.3 million respectively, after deducting offering expenses. The Notes were sold only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

6.50% Notes

In December 2017, the Company issued $23.9 million in principal amount of the 6.50% Notes. The 6.50% notes were issued to existing 5.50% Note holders in exchange for $36.4 million in face value of the 5.50% Notes. Interest on the 6.50% Notes is payable semi-annually in arrears on January 1 and July 1 of each year, commencing July 1, 2018. The 6.50% Notes are convertible at 749.6252 shares per $1,000 principal amount of the 6.50% Notes (equivalent to an initial conversion price of approximately $1.33 per share of common stock).

Refer to Note 11–Long Term Debt for additional information.

Liabilities Subject to Compromise

The Company’s financial statements include amounts classified as Liabilities Subject to Compromise, which represent liabilities that existed prior to the effectiveness of its bankruptcy plans and that were restructured under the Plan of Reorganization. These amounts include amounts related to (i) the 5.50% Notes, (ii) the 6.50% Notes and (iii) the 13.0% Notes, including the accrued interest thereon, and accrued vendor liabilities. Refer to Note 10–Liabilities Subject to Compromise for additional details.

Interest Make-Whole Derivative

The 5.50% Notes include an interest make-whole feature whereby if a noteholder converted any of the 5.50% Notes prior to April 1, 2018, subject to certain restrictions, the noteholder would be entitled, in addition to the other consideration payable or deliverable in connection with such conversion, to an interest make-whole payment equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the notes to be converted had such notes remained outstanding from the conversion date through April 1, 2018, computed using a discount rate equal to 2%. The Company has determined that this feature is an embedded derivative and has recognized the fair value of this derivative as a liability on the Company’s Consolidated Balance Sheet, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s Consolidated Statements of Operations and Comprehensive Loss as change in fair value of derivative liabilities. The fair value of this embedded derivative was determined based on a binomial tree lattice model.

The 6.50% Notes include an interest make-whole feature whereby if a noteholder converts any of the 6.50% Notes prior to January 1, 2021, subject to certain restrictions, they are entitled, in addition to the other consideration payable or deliverable in connection with such conversion, to an interest make-whole payment equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the notes to be converted had such notes remained outstanding from the conversion date through January 1, 2021, computed using a discount rate equal to 2%. The Company has determined that this feature is an embedded derivative and has recognized the fair value of this derivative as a liability on the Company’s Consolidated Balance Sheets, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s Consolidated Statements of Operations and Comprehensive Loss as change in fair value of derivative liabilities. The fair value of this embedded derivative was determined based on a binomial tree lattice model.

Warrant Liability

On July 6, 2017, the Company entered into an underwriting agreement with Cantor Fitzgerald & Co. relating to an underwritten public offering (the “July 2017 Equity Offering”) of 16,666,667 shares of the Company’s common stock and accompanying warrants to purchase 16,666,667 shares of common stock, at a combined public offering price of $1.80 per share and accompanying warrant, for gross proceeds of $30.0 million. Each warrant was issued at an exercise price of $2.70, subject to adjustment in certain circumstances. The shares of common stock and warrants were issued separately. The warrants may be exercised at any time on or after the date of issuance and will expire five years from the date of issuance.

The Company accounted for the warrants using ASC 480 – Distinguishing Liabilities from Equity and determined that the warrants were a freestanding financial instrument that are subject to liability classification. Pursuant to the terms of the agreement, the Company could be required to settle the warrants in cash in the event of an acquisition of the Company, and as a result the warrants are required to be measured at fair value and reported as a current liability in the Company’s Consolidated Balance sheet, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s Consolidated Statements of Operations and Comprehensive Loss as change in fair value of derivative liabilities.

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s non‑U.S. operations is the Danish Krone. Assets and liabilities of foreign operations are translated into U.S. dollars based on exchange rates at the end of each reporting period. Revenues and expenses are translated at average exchange rates during the reporting period. Gains and losses arising from the translation of assets and liabilities are included as a component of accumulated other comprehensive loss or income on the Company’s Consolidated Balance Sheets. Gains and losses resulting from foreign currency transactions are reflected within the Company’s Consolidated Statements of Operations. The Company has not utilized any foreign currency hedging strategies to mitigate the effect of its foreign currency exposure.

Intercompany payables and receivables are considered to be long-term in nature and any change in balance due to foreign currency fluctuation is included as a component of the Company's Consolidated Statements of Comprehensive Loss and Accumulated Other Comprehensive Loss within the Company's Consolidated Balance Sheets.

Comprehensive Loss

Comprehensive loss is defined as changes in stockholders’ deficit exclusive of transactions with owners (such as capital contributions and distributions). Comprehensive loss is composed of net loss, foreign currency translation adjustments and unrealized gains or losses on marketable securities classified as available for sale.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Current tax liabilities or receivables are recognized for the amount of taxes the Company estimates are payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax return if such a position is more likely than not to be sustained. Then, the tax benefit recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the Company’s Consolidated Statement of Operations and Comprehensive Loss. Accrued interest and penalties are included within the related tax liability line in the Company’s Consolidated Balance Sheets. The Company did not have any accrued interest or penalties associated with any unrecognized tax positions at December 31, 2018 and 2017, and there were no such interest or penalties recognized during the years ended December 31, 2018 and 2017.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the top U.S. federal corporate tax rate to 21 percent; requiring companies to pay a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; eliminating the corporate alternative minimum tax and changing how existing such credits can be realized; creating the base erosion anti-abuse tax, a new minimum tax; creating a new limitation on deductible interest expense; and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The Tax Act reduces the Company’s U.S. corporate income tax rate from 34% to 21%, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate to 21% under the Tax Act, the Company revalued its ending net deferred tax assets and liabilities at December 31, 2017.

The Tax Act provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits. The Company did not have to recognize any income tax expense related to the transition tax due to current and historical losses at its controlled foreign corporation.

The global intangible low-taxed income tax and base erosion provisions are effective for taxable years beginning after December 31, 2017. The Company does not currently expect these provisions to have a material impact on its tax rate due to losses at its controlled foreign corporation and they are currently below the gross receipts threshold for purposes of the base erosion provisions.

Due to the timing of the new tax law and the substantial changes it brings, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin (“SAB”) No. 118 which provides registrants a measurement period to report the impact of the new US tax law. During the measurement period, provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made. To the extent that all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up to one year following enactment of the Tax Act. The Company finalized the accounting for the Tax Act and has recorded no additional amount during the current year.

Basic and Diluted Net Loss Per Share of Common Stock

Basic net loss per share of common stock is computed by dividing net loss applicable to common stockholders by the weighted‑average number of common shares outstanding during the period. Diluted net loss per share of common stock is computed by dividing the net loss applicable to common stockholders by the sum of the weighted‑average number of common shares outstanding during the period plus the potential dilutive effects of common stock options and warrants outstanding during the period calculated in accordance with the treasury stock method, plus the potential dilutive effects of the 5.50% and 6.50% Notes using the if-converted method. Because the impact of these items is anti‑dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of common stock for the years ended December 31, 2018 and 2017.

Customer Concentration

Customer concentration for the years ended December 31, 2018 and 2017 are as follows:


	2018			2017
Customer A		76.3	%		76.0	%
Customer B		9.9	%		9.7	%
Customer C		6.4	%		5.8	%
Customer D		6.0	%		7.2	%
Customer E		0.6	%		—	%
Total		99.2	%		98.7	%

Recent Accounting Pronouncements

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

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

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The standard is effective on January 1, 2019, with early adoption permitted. The Company adopted the new standard on January 1, 2019 and is using the effective date as its date of initial application. In July 2018, the FASB issued an update that provided an additional transition option that allows companies to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The Company elected this optional transition method. The Company also elected the “package of practical expedients”, which permits it to not reassess the Company’s prior conclusions about lease identification, lease classification and initial direct costs. The Company continues to evaluate other practical expedients available under the standard.

The Company has substantially completed its assessment of the standard. The Company continues to finalize its calculations, including its discount rate assumptions, related to the new standard. The Company is also continuing to establish new processes and internal controls that may be required to comply with the new lease accounting and disclosure requirements set by the new standard.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the year ended December 31, 2018.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance becomes effective in calendar year 2018 and early adoption in calendar year 2017 is permitted. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.

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

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

The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. As a result of the adoption of ASU 2014-09, the Company recorded a cumulative adjustment of $1.9 million, which reduced its accumulated deficit as of January 1, 2018. Refer to Note 3 - Revenue from Contracts with Customers for further details.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not exceed the carrying amount of goodwill. This standard, which will be effective for the Company beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this new accounting guidance will have on its consolidated financial statements, if any.

Revenue from Contracts with Customers

12 Months Ended

Dec. 31, 2018

Revenue from Contracts with Customers

Revenue from Contracts with Customers

3. Revenue from Contracts with Customers

Adoption of ASC Topic 606, Revenue from Contracts with Customers

The Company adopted ASC 606 on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption, referred to herein as the “new guidance”. The reported results as of, and for the year ended December 31, 2018 reflect the application of ASC 606 guidance while the reported results as of, and for the year ended December 31, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as “legacy GAAP” or the “previous guidance”. The adoption of ASC 606 had a material impact on the Company’s Consolidated Balance Sheets, Statements of Operations and Stockholders’ Deficit as of the adoption date and for the year ended December 31, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's products to its customers and will provide financial statement readers with enhanced disclosures.

Financial Statement Impact of Adopting ASC 606

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


	December 31, 2017		Adjustments due to ASU 2014-09		January 1, 2018
Accounts receivable		4,120		(371)		3,749
Inventory		3,225		(157)		3,068
Accrued expenses		16,104		5,028		21,132
Deferred revenue		7,456		(7,456)		-
Accumulated deficit		(295,300)		1,901		(293,399)

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

Revenue Recognition

Under ASC 606, revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. To recognize revenue pursuant to the provisions of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses whether the goods or services promised within each contract are distinct to determine those that are performance obligations.

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

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the significant financing practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2018.

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

The Company’s performance obligations are to provide pharmaceutical products to several wholesalers or a single specialty pharmaceutical distributor. All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good to a customer, which is typically upon delivery. Payments for invoices are generally due within 30 to 65 days of invoice date.

Disaggregation of Revenue

The following table summarizes revenue by revenue source for the years ended December 31, 2018 and 2017:


		Year Ended December 31,
(in thousands)	2018		2017
Product lines
SPRIX Nasal Spray	$	23,424	$	19,920
OXAYDO		5,767		5,576
ARYMO ER		1,162		640
Total	$	30,353	$	26,136

Reserves for Variable Consideration

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

Product Returns

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

Specialty Pharmacy Fees

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

Wholesaler Fees

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

Prompt Pay Discount

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

Patient Discount Programs

The Company offers co-pay discount programs to patients for each of its products, in which patients receive a co-pay discount on their prescriptions. For discount amounts that are not immediately available, the Company estimates the total amount that will be redeemed using the expected value method based on the quantity of product shipped. The Company recognizes the discount as a reduction of revenue in the same period as the related revenue.

Commercial and Government Rebates

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

The following table summarizes activity in each of the net product sales allowance and reserve categories for the year ended December 31, 2018:


(in thousands)	Fees and distribution costs		Co-pay assistance		Rebates		Returns		Total
Balances at December 31, 2017	$	595	$	3,644	$	579	$	—	$	4,818
Adjustment for ASU 2014-09		—		4,221		656		—		4,877
Allowances for current period sales		8,183		74,530		7,799		2,883		93,395
Adjustment related to prior period sales		—		—		180		—		180
Credits or payments made for prior period sales		(555)		(7,866)		(1,235)		—		(9,656)
Credits or payments made for current period sales		(7,761)		(61,203)		(5,315)		(863)		(75,142)
Balance at December 31, 2018	$	462	$	13,326	$	2,664	$	2,020	$	18,472

Total gross product sales									$	123,928

Total provision for product sales allowances and accruals as a percentage of total gross sales										75%

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the Company’s reported Consolidated Balance Sheet as of December 31, 2018 to the pro forma amounts had the previous guidance been in effect:


			Adjustments Due to		Pro Forma if the previous
	As reported		ASU 2014-09		accounting was in effect

Accounts receivable		8,006		371		8,377
Inventory		2,639		495		3,134
Accrued expenses		24,584		(10,104)		14,480
Deferred revenue		-		13,582		13,582
Accumulated deficit		(388,853)		(2,612)		(391,465)

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

The following table compares the Company’s reported Consolidated Statement of Operations for the year ended December 31, 2018 to the pro forma amounts had the previous guidance been in effect:


			Adjustments Due to		Pro Forma if the previous
	As reported		ASU 2014-09		accounting was in effect

Net product sales	$	30,353	$	(1,117)	$	29,236
Cost of sales (excluding amortization of product rights)		7,447		(406)		7,041
Net loss		(95,454)		(711)		(96,165)
Per share information:
Net loss per share of common stock, basic and diluted	$	(1.81)	$	(0.01)	$	(1.82)
Weighted-average shares outstanding, basic and diluted		52,775,116		52,775,116		52,775,116

Amounts reported on certain line items within net cash used in operating activities on the Company’s Consolidated Statement of Cash Flows changed as a result of the adoption of ASU 2014-09, but there was no change in the reported amounts of total operating, investing and financing cash flow.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 31, 2018. The guidance provides certain practical expedients that limit this requirement including performance obligations that are part of a contract that has an original expected duration of one year or less. All of the Company’s contracts are eligible for the practical expedient provided by ASC 606, therefore the Company elected not to disclose any remaining performance obligations.

Contract Balances from Contracts with Customers

When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of goods or services to the customer under the terms of a contract, the Company records a contract liability. Contract liabilities are recognized as revenue after control of the products is transferred to the customer and all revenue recognition criteria have been met. The Company classifies contract liabilities as deferred revenue. The Company had no deferred revenue as of January 1, 2018 or December 31, 2018.

Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable when the rights become unconditional. The Company had no contract assets as of January 1, 2018 or December 31, 2018.

Costs to Obtain and Fulfill a Contract

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

Investments

12 Months Ended

Dec. 31, 2018

Investments

Investments

4. Investments

Marketable securities consisted of the following as of December 31, 2018:


(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	4,990	$	—	$	(2)	$	4,988
Total	$	4,990	$	—	$	(2)	$	4,988

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


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

At December 31, 2018, the Company held 2 marketable securities, which were in a continuous loss position for less than one year. The unrealized losses are the result of current economic and market conditions and the Company has determined that only a temporary impairment existed at December 31, 2018.

The fair value of marketable securities at December 31, 2018 with a maturity of less than one year was $5.0 million. The Company had no marketable securities with a maturity of greater than one year as of December 31, 2018.

Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Measurements

Fair Value Measurements

5. Fair Value Measurements

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

·

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

·

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

·

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

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


(in thousands)	Fair Value Measurements as of December 31, 2018

	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds and commercial paper)	$	22,996	$	—	$	—	$	22,996
Marketable securities, available-for-sale		—		4,988		—		4,988
Total assets	$	22,996	$	4,988	$	—	$	27,984

Liabilities
Interest make-whole derivatives	$	—	$	—	$	—	$	—
Warrant liability		—		—		—		—
Total liabilities	$	—	$	—	$	—	$	—


(in thousands)	Fair Value Measurements as of December 31, 2017

	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents (money market funds)	$	16,973	$	—	$	—	$	16,973
Marketable securities, available-for-sale		—		59,953		—		59,953
Total assets	$	16,973	$	59,953	$	—	$	76,926

Liabilities
Interest make-whole derivatives	$	—	$	—	$	2,589	$	2,589
Conversion feature, 6.50% Notes		—		—		14,034		14,034
Warrant liability		—		—		8,166		8,166
Total liabilities	$	—	$	—	$	24,789	$	24,789

The 5.50% Notes included and 6.50% Notes include an interest make-whole feature whereby if a noteholder had converted any of the 5.50% Notes prior to April 1, 2018, or converts any of the 6.50% Notes prior to July 1, 2021, the Company will, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the notes to be converted had such notes remained outstanding from the conversion date through April 1, 2018 (5.50% Notes), or July 1, 2021 (6.50% Notes), computed using a discount rate equal to 2%.

The embedded conversion options in the 6.50% Notes are required to be separately accounted for as derivatives as the Company did not have enough available authorized shares to cover the conversion obligation as of the date of issuance as of December 31, 2017. In February 2018, the Company held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders approved an amendment to the Company’s Third Amended and Restated Certificate of Incorporation to increase the number of shares of the Company’s authorized common stock from 75,000,000 to 275,000,000 shares. As the Company had reserved sufficient shares of its common stock to satisfy the conversion provisions of the 6.50% Notes, the conversion feature was considered indexed to its stock and the fair value of the conversion feature was reclassified from a liability into stockholders’ deficit in the first quarter of 2018.

The Company has determined that the above features are embedded derivatives and has recognized the fair value of the derivatives as liabilities in the Company’s Consolidated Balance Sheet, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s Consolidated Statements of Operations and Comprehensive Loss as change in fair value of derivative liabilities.

The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the year ended December 31, 2018:


(in thousands)						Reclassification		Fair Value
		December 31,				to Additional		Change in		December 31,
		2017		Additions		Paid in Capital		2018		2018
Interest make-whole derivatives		2,589	$	—	$		$	(2,589)	$	—
Conversion feature, 6.50% Notes		14,034		—		(12,497)		(1,537)		—
Warrant liability		8,166		—				(8,166)		—
Total liabilities	$	24,789	$	—	$	(12,497)	$	(12,292)	$	—

The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the year ended December 31, 2017:


(in thousands)						Fair Value
		December 31,				Change in		December 31,
		2016		Additions		2017		2017
Interest make-whole derivatives	$	12	$	2,683	$	(106)	$	2,589
Conversion feature, 6.50% Notes		—		14,973		(939)		14,034
Warrant liability		—		9,667		(1,501)		8,166
Total liabilities	$	12	$	27,323	$	(2,546)	$	24,789

Interest make-whole derivative

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

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

 Credit spread at the valuation date

 Discount yield as of the valuation date

As of December 31, 2018, the Company determined that the 6.50% Notes interest make-whole features had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 1 – Organization Description of the Business.

Conversion feature

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

The Company has determined that the above features of the interest make-whole provision and conversion features are embedded derivatives and has recognized the fair value of the derivatives as liabilities in the Company’s Consolidated Balance Sheets, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s Consolidated Statements of Operations and Comprehensive Loss as change in fair value of derivative liabilities.

Warrant liability

The fair value of the Company’s warrant liability was estimated utilizing a lattice tree model both for the initial valuation and as of December 31, 2018. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. As of December 31, 2018, the Company determined the warrant liability had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 1 – Organization and Description of the Business.

As of December 31, 2018, the fair value of the Company’s 5.50% Notes and 6.50% Notes and the included interest make whole features, along with the conversion feature of the 6.50% Notes were estimated utilizing the binomial lattice tree model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value measurement was based on several factors including:

 Credit spread at the valuation date

 Discount yield as of the valuation date

The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2018 were as follows and are included in liabilities subject to compromise on the Company’s Consolidated Balance Sheet:


(in thousands)	Fair Value		Carrying Value		Face Value

5.50% Notes due 2020	$	—	$	24,650	$	24,650
6.50% Notes due 2024	$	—	$	23,888	$	23,888

As of December 31, 2018, the Company determined that the fair value of the 13% Notes is significantly below the current $79.1 million carrying value given the liquidity events discussed in Note 1 – Organization and Description of the Business.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Inventory

12 Months Ended

Dec. 31, 2018

Inventory

Inventory

6. Inventory

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


	December 31,
(in thousands)	2018		2017
Raw materials	$	1,374	$	850
Work in process		665		772
Finished goods		600		1,446
Deferred cost of sales		—		157
Total	$	2,639	$	3,225

As a result of the discontinuation of manufacturing and promotion of ARYMO ER effective September 28, 2018, the Company recognized a write-down of the remaining inventory of ARYMO ER of $707,000 in the year ended December 31, 2018, which is included in Restructuring and other charges on the Company’s Consolidated Statements of Operations.

During the years ended December 31, 2018 and 2017 the Company recorded a reserve for excess and obsolete inventory of $57,000 and $542,000, respectively.

Property and Equipment

12 Months Ended

Dec. 31, 2018

Property and Equipment

Property and Equipment

7. Property and Equipment

Property and equipment and related accumulated depreciation are as follows:


	December 31,
(in thousands)	2018		2017
Leasehold improvements	$	1,431	$	—
Laboratory and manufacturing equipment		—		14,911
Furniture, fixtures and other property		867		888
Construction in process		—		241
Less accumulated depreciation		(1,239)		(6,129)
Property and equipment, net	$	1,059	$	9,911

As a result of the discontinuation of manufacturing and promotion of ARYMO ER effective September 28, 2018, the Company recognized a write-down of equipment related to the manufacture of ARYMO ER of $6.8 million in the year ended December 31, 2018, which is included in Restructuring and other charges on the Company’s Consolidated Statements of Operations.

Depreciation expense was $2.1 million and $2.8 million for the years ended December 31, 2018 and 2017, respectively.

Intangible Assets

12 Months Ended

Dec. 31, 2018

Intangible Assets

Intangible Assets

8. Intangible Assets

The following represents the balance of the intangible assets including accumulated amortization at December 31, 2018:


	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,623	$	(4,330)	$	3,293	3.00
SPRIX Nasal Spray product rights		4,831		(3,843)		988	1.00
Total	$	12,454	$	(8,173)	$	4,281

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


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

There was no impairment to the OXAYDO and SPRIX Nasal Spray intangible assets recognized in the years ended December 31, 2018 and 2017. As a result of the discontinuation of manufacturing and promotion of ARYMO ER effective September 28, 2018, the Company recognized a write-down of the remaining intangible asset value of the IP R&D intangible asset associated with the Guardian Technology of $113,000 in September 2018, which is included in Restructuring and other charges on the Company’s Consolidated Statements of Operations.

Estimated amortization of the intangible assets for the five years subsequent to December 31, 2018 is as follows:


(in thousands)
2019	$	2,055
2020	$	1,111
2021	$	1,089
2022	$	26
2023	$	—

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

In January 2015, the Company entered into a Collaboration and License Agreement with Acura to commercialize OXAYDOTM (oxycodone hydrochloride) tablets containing Acura’s Aversion® Technology (the “OXAYDO License Agreement”). The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2016 as a result of the first commercial sale of OXAYDO. The Company also incurred transaction costs of $172,000 associated with the transaction. The Company recorded an intangible asset of $7.7 million related to the transaction. Refer to Note 19—Acquisitions and License and Collaboration agreements for additional details.

During each of the years ended December 31, 2018 and 2017, the Company recognized amortization expense of $1.1 million related to the OXAYDO product right intangible asset.

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

In January 2015, the Company entered into and consummated the transactions contemplated by the Purchase Agreement with Luitpold to purchase SPRIX Nasal Spray (the “SPRIX Purchase Agreement”). Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million. The Company recorded an intangible asset of $4.6 million related to this transaction. Refer to Note 19–Acquisitions and License and Collaboration agreements for additional details.

During the years ended December 31, 2018 and 2017, the Company recognized amortization expense of $985,000 and $960,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.

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

In connection with the acquisition of Egalet A/S in 2010, the Company recognized an IP R&D asset related to the drug delivery platform specifically designed to help deter physical abuse of pain medications, the Guardian Technology. Through December 31, 2016, the IP R&D was considered an indefinite-lived intangible asset and was assessed for impairment annually or more frequently if impairment indicators existed. Following the approval of ARYMO ER in January 2017, the Company began to amortize the intangible asset over a useful life of five years.

During the years ended December 31, 2018 and 2017, the Company recognized amortization expense of $27,000 and $36,000. The remaining IP R&D intangible asset was written off due to the Company’s decision to discontinue the manufacturing and promotion of ARYMO ER in the year ended December 31, 2018.

Accrued Expenses

12 Months Ended

Dec. 31, 2018

Accrued Expenses

Accrued Expenses

9. Accrued Expenses

Accrued expenses were as follows:


(in thousands)	December 31,		December 31,
	2018		2017
Sales allowances	$	17,174	$	4,721
Payroll and related		3,567		4,349
Interest		—		3,270
Professional services		1,847		627
Royalties		1,049		800
Sales and marketing		81		1,247
Manufacturing services		34		579
Clinical research		—		355
Other		832		156
	$	24,584	$	16,104

Liabilities Subject to Compromise

12 Months Ended

Dec. 31, 2018

Liabilities Subject to Compromise

Liabilities Subject to Compromise

10. Liabilities Subject to Compromise

As of December 31, 2018, the Company has segregated liabilities and obligations whose treatment and satisfaction were dependent on the outcome of its reorganization under the Chapter 11 Cases and has classified these items as liabilities subject to compromise. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities of the Debtors, as well as all pending litigation against the Debtors, were stayed while the Company is subject to the Chapter 11 Cases. The ultimate amount and treatment for these types of liabilities will be subject to the claims resolution processes in the Chapter 11 Cases and the terms of the Plan confirmed by the Bankruptcy Court in the Chapter 11 Cases. Liabilities subject to compromise may vary significantly from the stated amounts of claims filed with the Bankruptcy Court. Although prepetition claims are generally stayed, at hearings held on November 1, 2018, the Bankruptcy Court approved the Debtors’ “first day” motions generally designed to stabilize the Debtors’ operations and cover, among other things, human capital obligations, supplier relations, customer relations, business operations, tax matters, cash management, utilities and retention of professionals.

Liabilities subject to compromise consist of the following:


(in thousands)	December 31, 2018
13.0% Senior Secured Debt	$	79,104
5.50% Convertible Notes		24,650
6.50% Convertible Notes		23,888
13.0% Senior Secured Debt redemption premium		7,200
Accrued interest		2,464
Accrued royalty rights		2,119
Accrued expenses		163
Liabilities subject to compromise	$	139,588

In December 2018, the Company made an adequate protection payment of $896,000 to the holders of the Senior Secured Debt that reduced the outstanding principal balance of the Notes as of December 31, 2018. The payment was made as part of the First Lien Cash Distribution arrangement required by the Plan of Reorganization.

On the Effective Date of the Company’s Plan of Reorganization on January 31, 2019, the accrued interest was cancelled, the Convertible Notes were converted to equity and the Senior Secured Debt was converted to newly issued notes, equity and partially repaid in cash. See Note 21–Subsequent Events for additional details.

Long Term Debt

12 Months Ended

Dec. 31, 2018

Long Term Debt

Long Term Debt

11. Long Term Debt

5.50% Convertible Senior Notes Due 2020

In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year and commenced on October 1, 2015. As of December 31, 2018, a total of $24.7 million in principal amount of the 5.50% Notes remained outstanding.

The 5.50% Notes are general, unsecured and unsubordinated obligations of the Company and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the 5.50% Notes. The 5.50% Notes are effectively subordinated to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness.

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

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

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

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

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

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

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

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

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

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

On July 31, 2018, the Company filed a Tender Offer Statement on Schedule TO with respect to the Offer in accordance with the requirements of the indenture governing the 5.50% Notes Indenture. The expiration, termination and withdrawal of the Offer without payment on September 19, 2018 resulted in none of the 5.50% Notes that were tendered in the Offer being accepted for purchase and no consideration was paid to holders of the 5.50% Notes who tendered their 5.50% Notes in the Offer. All 5.50% Notes previously tendered and not withdrawn were returned or credited back to the respective holders thereof. Consequently, the failure of the Company to complete the Offer in accordance with the terms of the 5.50% Notes Indenture constituted an Event of Default thereunder. Refer to Note 1—Organization and Description of the Business —Liquidity and Substantial Doubt in Going Concern – Nasdaq Transfer and Delisting: Tender Offer.

As a result of the Nasdaq Transfer and the corresponding Fundamental Change under the 5.50% Notes Indenture, the conversion criteria for the 5.50% Notes was met as of July 11, 2018 and, as an Event of Default (as defined in the 5.50% Indenture) occurred on September 19, 2018 when the Company failed to consummate the Offer and was continuing, the trustee or the holders of at least 25% in aggregate principal amount of the outstanding 5.50% Notes have the right pursuant to the 5.50% Note Indenture to declare all the outstanding 5.50% Notes to be due and payable immediately. However, any efforts to enforce such payment obligations under the 5.50% Notes Indenture were automatically stayed as a result of the Bankruptcy Petitions and as of the Petition Date, the creditors’ rights of enforcement in respect of the 5.50% Notes Indenture were subject to the applicable provisions of the Bankruptcy Code.

On October 30, 2018, the Company entered into a restructuring support agreement (the “Support Agreement”) with creditors holding approximately 94% in aggregate principal amount outstanding and in excess of a majority in number of our 13% Notes and approximately 67% in aggregate principal amount outstanding of our existing 5.50% notes and 6.50% Notes (the “Supporting Noteholders”) in connection with the Company’s filing of the Chapter 11 Cases on October 30, 2018.

Pursuant to the Support Agreement, the Supporting Noteholders agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments (as defined below) pending the outcome of the Bankruptcy Petitions. Under the Plan, the claims under the 5.50% Notes were converted into equity interests in the Company. Refer to Note 21—Subsequent Events for further details.

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

The liability component of the 5.50% Notes on the date of issuance was computed as $41.6 million, including the value of the embedded interest make-whole derivative of $0.9 million and the carrying value of the 5.50% Notes of $40.6 million. Accordingly, the equity component on the date of issuance was $19.4 million. The amortization of the discount on the 5.50% Notes was accelerated in the year ended December 31, 2018 due to the reevaluation of the contractual term of the 5.50% Notes due to the events of default.

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

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

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

The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s Consolidated Balance Sheets at December 31, 2018 and 2017:


	December 31, 2018		December 31, 2017
(in thousands)
Principal	$	24,650	$	24,650
Unamortized debt discount		—		(4,222)
Carrying value	$	24,650	$	20,428

The carrying value of the 5.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017. Given the Events of Default, the Company reevaluated the remaining contractual term of the 5.50% Notes and recorded a charge to interest expense of $2.9 million in September 2018. The carrying value of the 5.50% Notes was included in Liabilities Subject to Compromise on the Company’s Consolidated Balance Sheet at December 31, 2018. Refer to Note 1—Organization and Description of the Business and Note 10—Liabilities Subject to Compromise for further details.

The Company did not record interest expense for the 5.50% Notes subsequent to the Chapter 11 filing as the Plan of Reorganization included the cancellation of accrued interest upon the Plan becoming effective.

6.50% Convertible Notes due 2024

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

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

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

As a result of the Charter Amendment, as of February 14, 2018, the Company had reserved sufficient shares of its common stock to satisfy the conversion provisions of the 6.50% Notes and accordingly, the conversion feature is considered indexed to the Company’s common stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders’ deficit during the first quarter of 2018.

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

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

In addition, the 6.50% Notes Indenture required the Company to use its reasonable best efforts to (i) seek stockholder approval of an amendment to the Company’s Third Amended & Restated Certificate of Incorporation, as amended, in order to increase the amount of authorized shares available for issuance thereunder, and (ii) if and when such approval is obtained, to reserve from such amount the number of shares that may be issued in respect of the 6.50% Notes and any other securities issued in connection with the Exchange. In February 2018, the Company held a special meeting of stockholders (the “Special Meeting”) and received stockholder approval of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to increase authorized shares by 200,000,000 shares. Refer to Note 20—Stockholders’ Deficit for further details. The Exchange Agreements also provide that, for a period of nine months, the Company will not enter into additional exchange transactions with the other holders of the 5.50% Notes the economic terms of which, taken as a whole, are more favorable to the 5.50% Note holders than the December 2017 Exchange.

Certain provisions in the 6.50% notes could require accelerated payment of principal and interest. The 6.50% Notes provide that the delisting of the Company’s common stock from the Nasdaq exchange would constitute a “fundamental change” under the 6.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 6.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. The Nasdaq Transfer did not constitute a fundamental change under the 6.50% Notes, but the Company’s delisting from the Nasdaq Capital Market on September 19, 2018 constituted a fundamental change under the 6.50% Notes Indenture.

The failure of the Company to complete the Offer in accordance with the terms of the 5.50% Notes Indenture constituted a cross-default under the 6.50% Notes Indenture. Accordingly, the holders of the 6.50% Notes (or the trustee under the applicable indenture) would have the right to accelerate and declare due and payable immediately all principal and accrued but unpaid interest with respect to the 6.50% Notes if the 5.50% Notes holders (or trustee under the 5.50% Notes Indenture). The filing of the Chapter 11 Cases on October 31, 2018 also constituted an Event of Default under the 6.50% Indenture.

However, any efforts to enforce such payment obligations under the 6.50% Notes Indenture were automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the 6.50% Notes Indenture and as of the Petition Date, were subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments pending the outcome of the Bankruptcy Petitions. Refer to Note 1—Organization and Description of the Business. Under the Plan, the claims under the 6.50% Notes were converted into equity interests in the Company. Refer to Note 21—Subsequent Events for further details.

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

The following table summarizes how the issuance of the 6.50% Notes is reflected in the Company’s Consolidated Balance Sheets at December 31, 2018 and 2017:


	December 31, 2018		December 31, 2017
(in thousands)
Principal	$	23,888	$	23,888
Unamortized debt discount		—		(20,919)
Carrying value	$	23,888	$	2,969

The carrying value of the 6.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheet at December 31, 2017. Given the Event of Default, the Company reevaluated the remaining contractual term of the 6.50% Notes and recorded a charge to interest expense of $20.8 million during the third quarter of 2018. The carrying value of the 6.50% Notes was included in Liabilities Subject to Compromise on the Company’s Consolidated Balance Sheet at December 31. 2018. Refer to Note 1—Organization and Description of the Business and Note 10— Liabilities Subject to Comprise for additional details.

The Company did not record interest expense for the 6.50% Notes subsequent to the Chapter 11 filing as the Plan of Reorganization included the cancellation of accrued interest upon the Plan becoming effective.

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

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

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

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

The 13% Notes are senior secured obligations of the Company and equal in right of payment to all existing and future pari passu indebtedness of the Company (including the 5.50% Notes), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, have the benefit of a security interest in the Notes collateral and are junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred, which includes intellectual property, from time to time in accordance with the indenture governing the 13% Notes (the “13% Notes Indenture”). Following the Second Closing, the stated maturity date of the 13% Notes became September 30, 2033. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the13% Notes Indenture), holders of the 13% Notes may require the Company to repurchase for cash all or part of their 13% Notes at a repurchase price equal to 101.00% of the principal amount of the 13% Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.

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

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

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

The 13% Notes Indenture contains customary events of default with respect to the 13% Notes and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 13% Notes by notice to the Company and the Trustee, may (subject to the provisions of the 13% Notes Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 13% Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the 13% Notes Indenture, will be due and payable immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the 13% Notes Indenture), the 13% Notes will automatically become due and payable. Events of default under the 13% Notes Indenture include, among other things, a default in payment of principal on the 13% Notes (including upon any required repurchase or redemption), a default in payment of any other indebtedness for money borrowed in excess of $2,000,000 and certain events of bankruptcy or insolvency, both voluntary and involuntary. The Company accrued the redemption premium of $7.2 million upon filing for bankruptcy in October 2018.

In connection with the filing of the Bankruptcy Petitions, which constituted an event of default under the 13% Notes Indenture, with the principal and accrued but unpaid interest thereunder subject to acceleration to be due and payable, the Company reclassified the principal and accrued but unpaid interest balance to current liabilities. However, any efforts to enforce such payment obligations under the 13% Notes Indenture were automatically stayed as a result of the Bankruptcy Petitions and as of the Petition Date the creditors’ rights of enforcement in respect of the 13% Notes Indenture were subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Restructuring Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments pending the outcome of the Bankruptcy Petitions. Refer to Note 1 — Organization and Description of the Business. Under the Plan, the claims under the 13% Notes were converted into newly issued notes, equity interests in the Company and cash. Refer to Note 21—Subsequent Events for further details.

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

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

The Company incurred fees and legal expenses of $4.5 million in connection with the issuance of the 13% Notes, which have been recorded as a discount on the debt in the Company’s Consolidated Balance Sheets and are amortized using the effective interest method. The Company calculated an effective interest rate of 14.6% upon origination of the 13% Notes based on its best estimate of future cash outflows.

The Royalty Rights were determined to be a freestanding element with respect to the 13% Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument. The Company has Royalty Rights obligations of $1.9 million and $4.1 million as of December 31, 2018 and 2017, respectively, which are classified as current and non-current debt in the consolidated balance sheet.

The accounting for the 13% Notes requires the Company to make certain estimates and assumptions about the future net sales of OXAYDO and SPRIX Nasal Spray in the United States, and prior to the discontinuation of ARYMO ER, future net sales of ARYMO ER. The estimates of the magnitude and timing of OXAYDO and SPRIX Nasal Spray net sales are subject to significant variability due to the recent product launch and the extended time period associated with the financing transaction and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company continues to gain experience marketing OXAYDO and SPRIX Nasal Spray. The fair value of the Royalty Rights associated with certain net product sales was estimated to be approximately $5.0 million using a probability-weighted present value analysis. Upon informing he FDA in September 2018 that the Company was discontinuing the manufacturing and promotion of ARYMO ER, the Company adjusted the fair value of the Royalty Rights associated with ARYMO ER by reducing the liability by $691,000 and interest expense in the third quarter of 2018.

The following table summarizes how the issuance of the 13% Notes is reflected in the Company’s Consolidated Balance Sheet at December 31, 2018 and 2017:


	December 31, 2018		December 31, 2017
(in thousands)
Gross proceeds	$	79,104	$	80,000
Unamortized debt discount		—		(7,572)
Carrying value	$	79,104	$	72,428

The carrying value of the 13% Notes was classified as a non-current liability on the Company’s Consolidated Balance Sheets at December 31, 2017. Given the Event of Default, the Company reevaluated the remaining contractual term of the 13% Notes and recorded a charge to interest expense of $7.6 million in September 2018. The carrying value of the 13% Notes was included in Liabilities Subject to Compromise on the Company’s Consolidated Balance Sheets at December 31, 2018. Refer to Note 1—Organization and Description of the Business and Note 10—Liabilities Subject to Compromise for further details. The Royalty Rights remaining at December 31, 2018 based on net sales of OXAYDO and SPRIX total $1.9 million and are included in Liabilities Subject to Compromise on the Company’s Consolidated Balance Sheets. The Royalty Rights issued in connection with the 13% Notes at December 31, 2017 were $4.1 million

Current and non-current debt on the Company’s Consolidated Balance Sheet at December 31, 2017 includes the carrying value of the 5.50% Notes and the 13% Notes, as well as $4.1 million for the Royalty Rights issued in connection with the debt.

The Company did not record interest expense for the 13.0% Notes subsequent to the Chapter 11 filing as the Plan of Reorganization included the cancellation of accrued interest upon the Plan becoming effective.

The following table sets forth the Company’s net interest expense incurred for the years ended December 31, 2018 and 2017:



	For the Year Ended
	December 31,
(in thousands)	2018			2017
5.50% Notes	$	5,355	$	7,998
6.50% Notes		22,209		50
13% Notes		14,632		10,506
Amortization of premium on marketable securities		(234)		(38)
Interest income on investments		(682)		(850)
Total	$	41,280	$	17,666

Stock-Based Compensation Expense

12 Months Ended

Dec. 31, 2018

Stock-Based Compensation Expense

Stock-Based Compensation Expense

12. Stock-Based Compensation Expense

Chapter 11 Cases

On the Effective Date of the Company’s Plan of Reorganization (January 31, 2019) all of its outstanding equity interests and, accordingly, each of the plans described below, were terminated in accordance with the terms of the Reorganization Plan. Refer to Note 21—Subsequent Events for additional details

2013 Stock-Based Incentive Compensation Plan

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

2017 Inducement Plan

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

Employee Stock Purchase Plan

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

At the end of each offering period, shares of the Company’s common Stock may be purchased at 85% of the lower of the fair market value of the Company’s common stock on the first or last day of the respective offering period. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s common stock at the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the purchase date) represents an option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company has recognized stock-based compensation expense of $18,000 and $107,000 for the years ended December 31, 2018 and 2017, respectively, related to the Purchase Plan.

The Company terminated the Purchase Plan effective September 30, 2018. No purchases were made at the end of the offering period that ended December 31, 2018.

Shares Reserved for Future Issuance

As of December 31, 2018, the Company has reserved the following shares of the Company’s common stock for issuance:


Shares initially reserved under the 2013 Plan		1,680,000
Shares reserved under the Inducement Plan		300,000
Shares reserved under the Purchase Plan		750,000
Authorized increase to the 2013 Plan		10,600,000
Common stock options granted under the 2013 Plan		(6,314,688)
Common stock options granted under the Inducement Plan		(212,500)
Restricted stock awards granted under the 2013 Plan		(3,043,660)
Restricted stock units granted under the 2013 Plan		(600,000)
Common stock issued under the Purchase Plan		(184,961)
Stock options and restricted stock awards forfeited		2,435,265
Remaining shares available for future grant		5,409,456

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


		Year Ended December 31,
(in thousands)		2018		2017
General and administrative	$	3,537	$	4,460
Sales and marketing		231		524
Research and development		205		570
Restructuring and other charges		—		364
Total stock-based compensation expense	$	3,973	$	5,918

Stock Options Outstanding Under Equity Compensation Plans


	Stock Options Outstanding
				Weighted-average
				Remaining
	Number of	Weighted-Average		Contractual
	Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2017	4,110,612	$	6.41
Granted	1,123,750		0.66
Exercised	—		—
Forfeited	(558,677)		4.28
Cancelled	(253,139)		8.86
Outstanding at December 31, 2018	4,422,546	$	5.08	7.53
Vested or expected to vest at December 31, 2018	4,422,546	$	5.08	7.53
Exercisable at December 31, 2018	2,332,882	$	6.63	6.53

The intrinsic value of the Company’s 4,422,546 stock options outstanding as of December 31, 2018 was $0 based on a per share price of $0.00, the Company’s closing stock price on that date, and a weighted-average exercise price of $5.08 per share.

There were no options exercised in the years ended December 31, 2018 and 2017.

The Company uses the Black-Scholes valuation model in determining the fair value of equity awards. For stock options granted to employees and directors with only service-based vesting conditions, the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award and recognizes it as expense over the requisite service period on a straight-line basis. The Company records the expense of services rendered by non-employees based on the estimated fair value of the stock option as of the respective vesting date. Further, the Company expenses the fair value of non-employee stock options that contain only service-based vesting conditions over the requisite service period of the underlying stock options.

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

·

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

·

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

·

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

The Company used the binomial model to estimate the compensation cost for the June 2017 Grant. Key assumptions used in calculating the total estimated compensation cost of $1.3 million included (i) an estimated term of 5.6 years, (ii) expected volatility of 95.54%, (iii) expected dividends of $0.00 and (iv) a risk-free return of 1.80%. Stock-based compensation expense related to the June 2017 Grant will be recognized ratably over the requisite service period of 5.6 years. The Company recognized stock-based compensation expense of $204,000 and $136,000 for the years ended December 31, 2018 and 2017, respectively.

The per-share weighted-average grant date fair value of the options granted to employees during the years ended December 31, 2018 and 2017 was estimated at $0.46 and $3.62, respectively, per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2018		2017
Risk-free interest rate	2.79	%	1.93	%
Expected term of options (in years)	5.90		6.15
Expected volatility	80.60	%	80.57	%
Dividend yield	—		—

The weighted-average valuation assumptions were determined as follows:

·

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

·

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

·

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

Prior to January 1, 2017, the Company estimated the expected volatility based on actual historical volatility of the stock price of similar companies with publicly-traded equity securities. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The impact of this change had an immaterial effect on the Company’s financial results for the year ended December 31, 2017.

·

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

As of December 31, 2018, there was $3.7 million of total unrecognized compensation expense, related to unvested options granted under the Plan, which will be recognized over the weighted-average remaining period of 1.88 years.

Restricted Stock Granted under the 2013 Stock-Based Incentive Plan

A summary of the status of the Company’s restricted stock awards at December 31, 2018 and of changes in restricted stock awards outstanding under the Plan for the year ended December 31, 2018 is as follows:


		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2017	25,047	$	7.07
Granted	2,100,000	$	0.55
Forfeited	(305,000)	$	0.55
Vested restricted stock awards	(9,104)	$	7.07
Unvested at December 31, 2018	1,810,943	$	0.61

For stock awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. All restricted stock awards issued above vest over time as stipulated in the individual award agreements. In the event of a change in control of the Company, the unvested awards will be accelerated and fully vested immediately prior to the change in control. There are no performance-based features or market conditions.

The fair value of restricted stock awards vested for the years ended December 31, 2018 and 2017, was $2,000 and $1.8 million, respectively.

As of December 31, 2018, there was $451,000 of total unrecognized stock-based compensation expense, related to restricted stock under the Plan, which will be recognized over the weighted-average remaining period of 0.73 years.

Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes

Income Taxes

13. Income Taxes

Income taxes have been recorded on the following losses before income taxes:


(in thousands)	As of December 31,
	2018		2017
Domestic operations	$	(91,262)	$	(52,568)
Foreign operations		(4,192)		(16,791)
Loss before provision for income taxes	$	(95,454)	$	(69,359)

The benefit for income taxes consists of the following for 2018 and 2017:


	As of
(in thousands)	December 31,
	2018		2017
Current:
U.S. federal	$	—	$	—
State and local		—		—
Foreign		—		—
Total current taxes		—		—
Deferred:
U.S. federal	$	—	$	—
State and local		—		—
Foreign		—		—
Total deferred taxes		—		—
Total income tax benefit	$	—	$	—

For the years ended December 31, 2018 and 2017, the Company had no interest or penalties accrued related to unrecognized tax benefits. Any interest and penalties relating to unrecognized tax benefits will be recorded as a component of income tax expense. The following table indicates the changes to the Company’s unrecognized tax benefits:


(in thousands)	For the Year Ended
	December 31,
	2018		2017
Beginning balance	$	73	$	73
Increase related to prior tax years		—		—
Increase related to current year		—		—
Ending balance	$	73	$	73

Of the Company’s unrecognized tax benefits, none would affect the Company’s effective tax rate in the period recognized due to the offsetting impact of the valuation allowance recorded against the Company’s net operating losses. The Company does not expect its unrecognized tax benefit liability to change significantly over the next 12 months.

The principal components of the Company’s deferred tax assets and liabilities were as follows:


(in thousands)		As of December 31,
	2018		2017
Deferred tax assets:
Inventory	$	75	$	96
Accrued expenses		874		725
Deferred revenue		—		1,843
Stock-based compensation expense		1,146		1,072
Intangible assets		1,112		969
Other		152		341
Other debt		552		1,149
Interest 163(j)		7,489		—
Sales returns and rebates		1,154		—
Fixed assets		2,206		—
Convertible notes		940		—
Net operating losses		64,669		56,943
Deferred tax assets		80,369		63,138
Deferred tax liabilities:
Fixed assets	$	—	$	(747)
Convertible notes		—		(1,445)
Deferred tax liabilities		—		(2,192)
Net deferred tax assets		80,369		60,946
Less: valuation allowance		(80,389)		(60,966)
Net deferred tax liabilities after valuation allowance	$	(20)	$	(20)

As of December 31, 2018, the Company had foreign net operating loss (“NOL”) carry forwards of $91.4 million from its operations in Denmark, which are available to reduce future foreign taxable income. The NOL carry forwards are not subject to future expiration and may be carried forward indefinitely. However, if there is a more than 50% change of stockholders by value or vote at the end of the tax year as compared to the beginning of the tax year, these existing foreign NOLs may not be available to offset certain types of future foreign income (generally, “net financial income”, which includes interest income net of interest expense, dividends, and capital gains and losses). The Company files income tax returns in the U.K., because Egalet Limited (“Egalet UK”) was incorporated in that jurisdiction; however, Egalet UK has no business operations in the U.K. and the Company has no plans to commence operations in that jurisdiction in the foreseeable future. As such, the Company has determined that it will not record U.K. NOL’s as a component of their deferred tax inventory, since there is currently no expectation that the NOLs will ever be realized. As of December 31, 2018, the Company had U.S. federal and state NOL’s of $176.0 million and $111.8 million, respectively. These domestic NOL carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three‑ year period in excess of 50%. This could limit the amount of NOLs that the Company can utilize annually to offset future domestic taxable income or tax liabilities, if any. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. These federal and state NOL’s will begin to expire in 2033 and through 2036. As a result of the Tax Act, the Federal NOL incurred in 2018 will have an indefinite life.

ASC 740 – Tax Provisions requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its net deferred tax assets at December 31, 2018 and 2017, respectively, because the Company has determined that is it more likely than not that these assets will not be fully realized. The Company experienced a net change in valuation allowance of $19.4 million and $27.9 million, which includes the impact of the Tax Reform for the years ended December 31, 2018 and 2017, respectively.

At December 31, 2018, no provision has been made for U.S. federal and state income taxes of foreign earnings due to the history of foreign losses and the Company does not expect to incur any future United States federal and state income tax with respect to its foreign companies.

The Company files income tax returns in Denmark, the U.K., the United States, and in various U.S. states. The foreign tax returns are subject to tax examinations for the tax years ended July 31, 2013 through December 31, 2018. The domestic tax returns are subject to tax examinations for the tax years ended December 31, 2015 through December 31, 2018. However, to the extent the Company utilizes in the future any tax attribute NOL carry forwards from a tax period that may otherwise be closed to examination, the Internal Revenue Service, state tax authorities, or other governing parties may still adjust the NOL upon their examination of the future period in which the attribute was utilized.

A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:


	For the Year
	Ended
(in thousands)	December 31,
	2018		2017
Federal income tax at the statutory rate	21.0	%	34.0	%
Permanent tax items	(0.4)		(0.3)
State income tax, net of federal benefit	5.1		2.6
Change in foreign tax rate	(1.0)		(3.1)
Equity compensation shortfall	—		(0.7)
Tax reform rate change	—		(25.8)
Change in valuation allowance	(24.7)		(6.7)
Effective income tax rate	—	%	—	%
The Tax Act was enacted on December 22, 2017 and was the driver of the rate change item above.

Employee Benefit Plans	12 Months Ended
Employee Benefit Plans	Dec. 31, 2018
Employee Benefit Plans
Employee Benefit Plans	14. Employee Benefit Plans The Company's 401(k) Employee Savings Plan (the "401(k) Plan") is available to all U.S. employees meeting certain eligibility criteria. As the Company has elected a Safe-Harbor provision for the 401(k) Plan, participants are always fully vested in their employer contributions. The Company matches 100% of the first 3% of participating employee contributions and 50% of the next 2% of participating employee contributions. The Company contributed approximately $591,000 and $617,000 to the 401(k) Plan in the years ended December 31, 2018 and 2017, respectively. The Company's contributions are made in cash. The Company's common stock is not an investment option available to participants in the 401(k) Plan. For its employees based in Denmark, the Company subscribes to a state plan for which the expense for the financial year is equal to the contributions called by, and thus payable to, such plan. Under Denmark’s state plan, contributions paid by the Company are in full discharge of the Company’s liability and are recognized as an expense for the period. For the years ended December 31, 2018 and 2017 the Company recorded $107,000 and $202,000 respectively, for contributions under its state plan for Denmark employees.

Restructuring and Other Charges

12 Months Ended

Dec. 31, 2018

Restructuring and Other Charges

Restructuring and Other Charges

15. Restructuring and Other Charges

The following table presents a summary of the Company’s restructuring and other charges for the years ended December 31, 2018 and 2017:


(in thousands)	Year Ended December 31,
	2018		2017
ARYMO write down of assets	$	8,184	$	—
Halo termination fee		3,100		—
Legal fees		4,331		—
Other professional fees		1,428		—
Severance		—		2,760
Total restructuring and other costs	$	17,043	$	2,760

Restructuring and other charges for the year ended December 31, 2018 reflect the write-down of assets related to the discontinuation of ARYMO ER, a termination payment to Halo Pharmaceuticals also related to the discontinuance of ARYMO ER and legal and professional fees relating to, but incurred prior to the bankruptcy filing. Restructuring and other charges for the year ended December 31, 2017 reflect costs related to the Company’s expense reduction plan announced in August 2017 to decrease the operating expenses that did not directly support the growth of the Company’s commercial business.

Reorganization Charges

12 Months Ended

Dec. 31, 2018

Reorganization Charges

Reorganization Charges

16. Reorganization Charges

The Company incurred reorganization charges of $9.0 million subsequent to the bankruptcy filing in the year ended December 31, 2018 related to its Chapter 11 filing. The charges were comprised of a redemption premium on the 13% Notes, legal, professional and court fees.


(in thousands)	For the Year Ended
	December 31, 2018
13% Notes redemption premium	$	7,200
Legal fees		1,003
Other professional fees		528
U.S. Bankruptcy Court fees		214
Other fees		77
Total reorganization charges	$	9,022

Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Commitments and Contingencies

17. Commitments and Contingencies

Operating Leases

The Company’s corporate U.S. headquarters are located in Wayne, Pennsylvania, where it leases 19,797 square feet of office space under a lease agreement that expires in February 2022 unless terminated earlier. The Company also maintained a research laboratory, pilot manufacturing and administrative facility in Vaerlose, Denmark, where it leased 12,895 square feet of space under a lease agreement that automatically renewed every 12 months. The Company has terminated the Denmark lease and vacated the facility in February 2019.

The following is a schedule by year of the future minimum rental payments required under non-cancelable leases as of December 31, 2018:


(in thousands)
2019		533
2020		543
2021		553
2022		92
Total minimum lease payments	$	1,721

Rent expense was $574,000 and $617,000 for the years ended December 31, 2018 and 2017, respectively.

Legal Proceedings

On January 27, 2017 and February 10, 2017, respectively, two putative securities class actions were filed in the U.S. District Court for the Eastern District of Pennsylvania that named as defendants Egalet Corporation and current officer Robert S. Radie and former officers Stanley J. Musial and Jeffrey M. Dayno (the “Officer Defendants” and together with Egalet Corporation, the “Defendants”). These two complaints, captioned Mineff v. Egalet Corp. et al., No. 2:17-cv-00390-MMB and Klein v. Egalet Corp. et al., No. 2:17-cv-00617-MMB, assert securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired Egalet Corporation securities between December 15, 2015 and January 9, 2017. On May 1, 2017, the Court entered an order consolidating the two cases (the “Securities Class Action Litigation”) before it, appointing the Egalet Investor Group (consisting of Joseph Spizzirri, Abdul Rahiman and Kyle Kobold) as lead plaintiff and approving their selection of lead and liaison counsel. On July 3, 2017, the plaintiffs filed their consolidated amended complaint, which named the same Defendants and also asserted claims for purported violations of Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs brought their claims individually and on behalf of a putative class of all persons who purchased or otherwise acquired shares of the Company between November 4, 2015 and January 9, 2017 inclusive. The consolidated amended complaint based its claims on allegedly false and/or misleading statements and/or failures to disclose information about the likelihood that ARYMO ER would be approved for intranasal abuse-deterrent labeling. The Defendants moved to dismiss the consolidated amended complaint on September 1, 2017 (the “Motion to Dismiss”), the plaintiffs filed their opposition on October 31, 2017, and the Defendants filed their reply on December 8, 2017. The Court heard oral arguments on the Motion to Dismiss on February 20, 2018 and entered an order pursuant to which the plaintiffs filed a motion for leave to file a second amended complaint on March 6, 2018. The Defendants responded on March 20, 2018 and the plaintiffs filed their reply on March 27, 2018. The Court heard oral arguments on the plaintiffs’ motion for leave to file a second amended complaint on July 12, 2018. On August 2, 2018, the Court granted the Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice. On August 31, 2018, plaintiffs filed their notice of appeal with the United States Court of Appeal for the Third Circuit. On November 7, 2018, the Defendants filed a notice of suggestion of bankruptcy and unopposed motion to stay the appeal as to the Officer Defendants (the appeal was automatically stayed as to the Company upon the Chapter 11 filing). On February 6, 2019, the Officer Defendants filed a Notice of Lifting of Automatic Stay of Proceedings and Discharge of Subordinated Claims, as plaintiffs’ claim against the Company was extinguished as part of the bankruptcy, which restarted the appellate process. The Company disputes the allegations in the lawsuit and intends to defend these actions vigorously. The Company cannot determine the likelihood of, nor can it reasonably estimate the range of, any potential loss, if any, from these lawsuits.

On October 30, 2018, the Debtors filed the Bankruptcy Petitions in the U.S. Bankruptcy Court for the District of Delaware. The Debtors requested that the Chapter 11 cases (the “Chapter 11 Cases”) be jointly administered for procedural purposes only under the caption In re Egalet Corporation, et al., Case No. 18-12439. Upon filing, the Company intended to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company continued ordinary course operations substantially uninterrupted during the Chapter 11 Cases and sought approval from the Bankruptcy Court for relief under certain “first day” motions authorizing the Debtors to continue to conduct its business in the ordinary course. On January 14, 2019, the Court entered the Confirmation Order confirming the plan under Chapter 11 of the Bankruptcy Code. On January 31, 2019 (the “Effective Date”), and substantially concurrent with the consummation of the Iroko Acquisition, the Plan became effective. On March 26, 2019, the Bankruptcy Court issued a final decree closing the Chapter 11 Cases. Refer to Note 21—Subsequent Events for additional details.

Net Loss Per Share of Common Stock

12 Months Ended

Dec. 31, 2018

Net Loss Per Share of Common stock

Net Loss Per Share of Common stock

18. Net Loss Per Share of Common Stock

The following table sets forth the computation of basic and diluted loss per share of the Company’s common stock for the years ended December 31, 2018 and 2017:


(in thousands, except share and per share data)	Year Ended December 31,
	2018		2017
Basic and diluted net loss per common share calculation:
Net loss	$	(95,454)	$	(69,359)
Weighted average common stock outstanding		52,775,116		33,755,462
Net loss per share of common stock—basic and diluted	$	(1.81)	$	(2.05)

The following outstanding securities for the year ended December 31, 2018 and 2017 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti‑dilutive:


	Year Ended December 31,
	2018	2017
Stock options outstanding	4,422,546	4,110,612
Unvested restricted stock awards	1,810,943	25,047
Common shares issuable upon conversion of the 5.50% Notes	1,657,757	1,657,757
Common shares issuable upon conversion of the 6.50% Notes	17,907,047	17,907,047
Common shares issuable upon exercise of warrants	16,666,667	17,666,667
Total	42,464,960	41,367,130

Acquisitions and License and Collaboration Agreements	12 Months Ended
Acquisitions and License and Collaboration Agreements	Dec. 31, 2018
Acquisitions and License and Collaboration Agreements
Acquisitions and License and Collaboration Agreements	19. Acquisitions and License and Collaboration Agreements Collaboration and License Agreement with Acura In January 2015, the Company entered into the OXAYDO License Agreement with Acura to commercialize OXAYDO tablets containing Acura’s Aversion Technology. OXAYDO (formerly known as Oxecta®) is currently approved by the FDA for marketing in the United States in 5 mg and 7.5 mg strengths, but was not actively marketed at the time of the OXAYDO License Agreement Under the terms of the OXAYDO License Agreement, Acura transferred the approved New Drug Application(“NDA”) for OXAYDO to the Company and the Company was granted an exclusive license under Acura’s intellectual property rights for development and commercialization of OXAYDO worldwide in all strengths. The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO. In addition, Acura will be entitled to a one-time $12.5 million milestone payment when OXAYDO net sales reach a level of $150.0 million in a calendar year. The Company has recorded a product rights intangible asset of $7.7 million related to the arrangement, which includes $172,000 of transaction costs related to the License Agreement. The OXAYDO intangible asset is being amortized over a useful life of 7 years, which coincides with the patent protection of the product in the United States. In addition, Acura receives from the Company, a tiered royalty percentage based on sales thresholds. Based on the Company’s current level of net sales, the royalty percentage payable to Acura is in the mid-single digits; however, the percentage may increase in future years in the event the Company achieves the higher sales thresholds set forth in the License Agreement. In addition, in any calendar year in which net sales exceed a specific threshold, Acura is entitled to receive a double-digit royalty on all OXAYDO net sales in that year. The Company’s royalty payment obligations commenced on the first commercial sale of OXAYDO and expire, on a country-by-country basis, upon the expiration of the last to expire valid patent claim covering OXAYDO in such country (or if there are no patent claims in such country, then upon the expiration of the last valid claim in the United States). Royalties will be reduced upon the entry of generic equivalents, as well for payments required to be made by the Company to acquire intellectual property rights to commercialize OXAYDO, with an aggregate minimum floor. The term of the Acura license agreement expires, in its entirety, upon the final expiration of any such patent claim in any country. OXAYDO is currently sold in the United States and is covered by six U.S. patents that expire between 2023 and 2025. Patents covering OXAYDO in foreign jurisdictions expire in 2024. Either the Company or Acura may terminate the license agreement for certain customary reasons, including cause, insolvency or patent challenge. The Company may terminate the license agreement upon 90 days prior written notice. During the pendency of the Chapter 11 Cases, any efforts by Acura to terminate the agreement pursuant to the provisions described above are automatically stayed as a result of the Bankruptcy Petitions and Acura’s rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. Purchase Agreement with Luitpold In January 2015, the Company entered into and consummated the transactions contemplated by the SPRIX Nasal Spray Purchase Agreement with Luitpold (the “SPRIX Purchase Agreement”). Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX Nasal Spray for a purchase price of $7.0 million. The Company concurrently purchased an additional $1.1 million of glassware, equipment and active pharmaceutical ingredient (“API”) from Luitpold and agreed to purchase an additional $340,000 of API after closing. Based on the projected future cash flows of SPRIX Nasal Spray through December 31, 2019, the SPRIX Nasal Spray intangible asset is being amortized over a useful life of 5 years. Under the SPRIX Purchase Agreement pursuant to which the Company acquired certain assets and liabilities associated with SPRIX Nasal Spray, the Company was assigned an exclusive license with Recordati Ireland Ltd. (“Recordati”) for intranasal formulations of ketorolac tromethamine (the “Licensed Product”), the active ingredient in SPRIX Nasal Spray. The Company is required to pay a fixed, single-digit royalty to Recordati on net sales of the Licensed Product. The exclusive term of the license agreement expires, on a country-by-country basis, on the later of the final expiration of any patent right in such country that contains a valid claim covering the Licensed Product, or ten years from the date of the first commercial sale of the Licensed Product in such country, and thereafter the Company will retain a non-exclusive, perpetual license in such country. In addition, during the exclusivity period with respect to the United States, Canada and Latin America, the royalty payable to Recordati is decreased if no patent containing a valid claim is in force in the country at the time of sale. SPRIX Nasal Spray is currently sold in the United States and is covered by a patent that expired in December 2018 and the first commercial sale of SPRIX Nasal Spray in the United States occurred in May 2011. During the pendency of the Chapter 11 Cases, any efforts by Recordati to terminate the license agreement pursuant to the provisions thereof are automatically stayed as a result of the Bankruptcy Petitions and Recordati’s rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. The Company accounted for the SPRIX Purchase Agreement as a business combination.

Stockholders' Deficit	12 Months Ended
Stockholders' Deficit	Dec. 31, 2018
Stockholders' Deficit
Stockholders' Deficit	20. Stockholders’ Deficit Chapter 11 Cases On the Effective Date of the Company’s Plan of Reorganization, January 31, 2019, all of its outstanding equity interests were extinguished in accordance with the terms of the Reorganization Plan. Refer to Note 21—Subsequent Events for additional details. At the Market Offering In July 2015, the Company entered into a Controlled Equity Offering Sales Agreement (“2015 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), under which the Company could, at its discretion, from time to time, sell shares of its common stock, for an aggregate offering price of up to $30.0 million. The Company provided Cantor with customary indemnification rights, and Cantor is entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold. Sales of the shares under the 2015 Sales Agreement have been and, if there are additional sales under the 2015 Sales Agreement, will be, made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended. The Company initiated sales of shares under the 2015 Sales Agreement at various times beginning in March 2017 and sold an aggregate of 9,786,622 shares of common stock resulting in net proceeds of $9.5 million after deducting commissions of $286,000, through July 27, 2018, the date on which the Company suspended all sales under the 2015 Sales Agreement. July 2017 Equity Offering On July 6, 2017, the Company entered into an underwriting agreement with Cantor Fitzgerald & Co. relating to an underwritten public offering (the “July 2017 Equity Offering”) of 16,666,667 shares of the Company’s common stock and accompanying warrants to purchase 16,666,667 shares of common stock, at a combined public offering price of $1.80 per share and accompanying warrant, for gross proceeds of $30.0 million. The net offering proceeds were $28.6 million after deducting underwriting discounts and commissions and offering-related costs of $1.4 million. Each warrant has an exercise price of $2.70, subject to adjustment in certain circumstances. As of December 31, 2018, the warrants had an exercise price of $1.92. The shares of common stock and warrants were issued separately. The warrants may be exercised at any time on or after the date of issuance and will expire five years from the date of issuance. The Company accounted for the warrants using ASC 480 – Distinguishing Liabilities from Equity and determined that the warrants were a freestanding financial instrument that are subject to liability classification. Pursuant to the terms of the agreement, the Company could be required to settle the warrants in cash in the event of an acquisition of the Company, and as a result the warrants are required to be measured at fair value and reported as a liability in the Company’s Consolidated Balance Sheets. The warrant exercise price is subject to adjustment upon the issuance of certain equity securities at a price less than the exercise price of the warrants then in effect. The fair value of the warrants to purchase shares of the Company’s common stock in connection with the July 2017 Equity Offering was $9.7 million on the date of issuance, which was determined using a lattice model that takes into account various future financing scenarios and the impact of those scenarios on the fair value of the warrants. The fair value of the warrants of $9.7 million on the date of issuance was recorded as a liability which will be marked to its estimated fair value at each reporting period. Refer to Note 5—Fair Value Measurements for further details. As of December 31, 2018, the Company determined the warrant liability had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 21 – Subsequent Events. Reclassification of the Derivative Liability In February 2018, the Company received shareholder approval to increase the number of its authorized shares of its common stock by 200,000,000 additional shares. Prior to this approval, the embedded conversion options in the 6.50% Notes were required to be separately accounted for as a derivative liability. Upon the shareholder approval to increase the number of authorized shares, the Company had sufficient authorized shares of its common stock to satisfy the conversion provisions of the 6.50% Notes. The fair value of the derivative liability of $12.5 million was reclassified from a liability into stockholders’ deficit during the first quarter of 2018.

Subsequent Events

12 Months Ended

Dec. 31, 2018

Subsequent Events.

Subsequent Events

21. Subsequent Events

Chapter 11 Cases

On January 14, 2019, the Court entered the Confirmation Order confirming the Plan under Chapter 11 of the Bankruptcy Code. On January 31, 2019 (the “Effective Date”), and substantially concurrent with the consummation of the Iroko Acquisition, the Plan became effective.

Pursuant to the Plan, on the Effective Date, among other things, the following transactions occurred:

 payment in full, in cash, of all administrative claims, statutory fees, professional fee claims and certain priority claims, other secured claims, and general unsecured claims (or, to the extent not so paid, such amounts shall be paid as soon as practicable after the Effective Date or in the ordinary course of business, subject to the reorganized company’s claims and defenses);

 the cancellation of all of the Company’s common stock and all other equity interests in the Company outstanding on the Effective Date prior to the consummation of the transactions;

the conversion of approximately $80.0 million of claims (the “First Lien Secured Notes Claims”) related to the Company’s old 13% Notes into

·

$50.0 million in aggregate principal amount of Series A-1 Notes,

·

The number of shares of the Company’s common stock (or warrants) representing, in the aggregate, 19.38% of the shares outstanding as of the Effective Date (subject to dilution only on account of the Management Incentive Plan (as defined in the Plan)) (the “First Lien Equity Distribution”),

·

$20.0 million in cash less certain amounts related to adequate protection payments, and

·

cash in an amount equal to certain unpaid fees and expenses of the trustee under the indenture governing the Old 13% Notes;

 the conversion of $48.6 million of claims (the “Convertible Notes Claims”) related to the Company’s 5.50% Convertible Senior Notes due 2020 and its 6.50% Convertible Senior Notes due 2023 into the number of shares of common stock of the Company (or Warrants) representing, in the aggregate, 31.62% of the shares outstanding as of the Effective Date (subject to dilution only on account of the Management Incentive Plan);

 the consummation of the Iroko Acquisition and other transactions contemplated by the Purchase Agreement; and

 the effectiveness of the discharge, release, exculpation and injunction provisions for the benefit of the Debtors’, certain of the Debtors’ claimholders and certain other parties in interest, each in their capacities as such, from various claims and causes of action.

Each of the foregoing percentages of equity in the Company is subject to dilution solely from the shares issued or reserved for issuance under the Management Incentive Plan (as defined in the Plan). On the Effective Date, following the consummation of the Iroko Acquisition and the other transactions contemplated by the Plan, there were 9,360,968 shares of common stock issued and outstanding and warrants for an aggregate of 4,972,364 shares of the Company’s common stock.

On the Effective Date, the Company issued (i) an aggregate of 4,774,093 shares of common stock to the former holders of First Lien Secured Notes Claims and Convertible Notes Claims and (ii) warrants for an aggregate of 2,535,905 shares of common stock to certain holders of First Lien Secured Notes Claims and Convertible Notes Claims. Based on the Confirmation Order and the Plan, the issuance of such shares of common stock of the Company and the warrants (including shares of common stock issuable upon the exercise thereof) are exempt from registration requirements of the Securities Act, in reliance on Section 1145 of the Bankruptcy Code.

Iroko Acquisition

Also, on the Effective Date, the Company issued an aggregate of 4,586,875 shares of its common stock and warrants for an aggregate of 2,436,459 shares of common stock to Iroko and certain of its affiliates pursuant to the Purchase Agreement. The issuance of the common stock pursuant to the Purchase Agreement was exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and Regulation D promulgated thereunder.

Upon the effectiveness of the Plan and the Iroko Acquisition, (i) Iroko, together with certain of its affiliates, owns approximately 49% of the outstanding common stock of the Company and (ii) the former holders of First Lien Secured Notes Claims and Convertible Notes Claims own, in the aggregate, approximately 51% of the outstanding common stock of the Company. Pursuant to the Plan, Iroko and the Supporting Noteholders (as defined in the Plan) have designated certain new members of the board of directors of the Company.

iCeutica License Agreement

Pursuant to the Purchase Agreement, on the Effective Date, the Company assumed the rights and obligations of Iroko and its subsidiaries pursuant to the Amended and Restated Nano-Reformulated Compound License Agreement, dated October 30, 2018 (the “iCeutica License”), with iCeutica Inc. and iCeutica Pty Ltd. (collectively, “iCeutica”) to license certain technology, intellectual property and expertise related to iCeutica’s SoluMatrix® technology, meloxicam and certain other rights of iCeutica.

Pursuant to the iCeutica License, iCeutica grants to the Company (as the assignee of Iroko) a sole and exclusive, world-wide right and license under certain iCeutica intellectual property to make, use, sell, offer and import certain products made from the compounds indomethacin, diclofenac, naproxen and meloxicam. In consideration of the grant of the iCeutica License, the Company is obligated to pay to iCeutica a mid-single digit royalty on all Net Sales of any licensed products, including pro rata portions of any combination products that include a licensed product.

The iCeutica License will terminate on a country-by-country basis until the expiration of the last-to-expire of any patent rights in such country, and otherwise twenty years after the date of the first commercial introduction of a licensed product in such country. Either party may terminate the license in its entirety if the other party materially breaches the License Agreement, subject to applicable cure periods. The iCeutica License also contains customary provisions for an agreement of this type related to intellectual property matters, confidentiality, representations and warranties and indemnification.

Interim Promissory Note

On the Effective Date, pursuant to the Purchase Agreement, the Company issued a $4.5 million promissory note to an affiliate of Iroko in respect of certain inventory purchases by Iroko during the pendency of the Iroko Acquisition (the “Interim Promissory Note”). The Interim Promissory Note bears interest at a rate of 8% per annum (payable by way of increasing the principal amount of the Interim Promissory Note on each interest payment date), is subordinate to the Notes, and matures on July 31, 2020.

Transition Services Agreement

On the Effective Date, the Company and Iroko Pharmaceuticals LLC (“Iroko LLC”), a subsidiary of Iroko, entered into a transition services agreement (the “Transition Services Agreement”) pursuant to which Iroko LLC has agreed to provide or cause to be provided certain services related to the Transferred Assets and the related business for a period of time following the Effective Date. The Transition Services Agreement includes customary provisions regarding fees, reimbursement of expenses, confidentiality and indemnification.

13% Senior Secured Notes Indenture

On the Effective Date, the Company issued $95.0 million aggregate principal amount of its 13% senior secured notes (the “Notes”) and entered into an indenture (the “Indenture”) governing the Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). The Notes were issued in two series: (x) $50 million of “Series A-1 Notes”, issued pursuant to the Plan to former holders of First Lien Secured Notes Claims and which will be subject to an interest holiday from the Effective Date through November 1, 2019 and (y) $45 million of “Series A-2 Notes,” issued to Iroko and certain of its affiliates and which are subject to the rights of set-off and recoupment and related provisions set forth in the Purchase Agreement. The obligations of the Company under the Indenture and the Notes are unconditionally guaranteed on a secured basis by the Guarantors.

Interest on the Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on May 1 and November 1 of each year (each, a “Payment Date”) commencing on May 1, 2019 (subject to the interest holiday referred to above with respect to the Series A-1 Notes). On each Payment Date, the Company will also pay an installment of principal on the Notes in an amount equal to 15% of the aggregate net sales of OXAYDO (oxycodone HCI, USP) tablets for oral use only —CII, SPRIX (ketorolac tromethamine) Nasal Spray, ARYMO ER, Egalet-002, and the Iroko Products for the two consecutive fiscal quarter period most recently ended, less the amount of interest paid on the Notes on such Payment Date.

The Notes are senior secured obligations of the Company and will be equal in right of payment to all existing and future pari passu indebtedness of the Company, will be senior in right of payment to all existing and future subordinated indebtedness of the Company, will have the benefit of a security interest in the Notes collateral and will be junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred from time to time in accordance with the Indenture. The stated maturity date of the Notes is January 31, 2024. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the Indenture), holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 101.00% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.

The Company may redeem the Notes at its option, in whole or in part from time to time, prior to January 31, 2020, at a redemption price equal to 100.00% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest, if any, through the redemption date, plus a make-whole premium computed using a discount rate equal to the treasury rate in respect of such redemption date plus 100 basis points. The Company may redeem the Notes at its option, in whole or in part from time to time, on or after January 31, 2020, at a redemption price equal to: (i) from and including January 31, 2020 to and including January 30, 2021, 103.00% of the principal amount of the Notes to be redeemed and (ii) from and including January 31, 2021 and thereafter, 100.00% of the principal amount of the Notes to be redeemed, in each case, plus accrued and unpaid interest to the redemption date. In addition, prior to January 31, 2020, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the Notes with the proceeds of one or more public or private equity offerings at a redemption price equal to 113.50% of the aggregate principal amount of the Notes to be redeemed, plus accrued and unpaid interest to the date of redemption in accordance with the Indenture; provided that at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after each such redemption and provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering. No sinking fund is provided for the Notes, which means that the Company is not required to periodically redeem or retire the Notes.

Pursuant to the Indenture, the Company and its restricted subsidiaries must also comply with certain affirmative covenants, such as furnishing financial statements to the holders of the Notes, and negative covenants, including limitations on the following: the incurrence of debt; the issuance of preferred and/or disqualified stock; the payment of dividends, the repurchase of shares and under certain conditions making certain other restricted payments; the prepayment, redemption or repurchase of subordinated debt; the merger, amalgamation or consolidation involving the Company; engaging in certain transactions with affiliates; and the making of investments other than those permitted by the Indenture. In addition, commencing December 31, 2019, the Company must maintain a minimum level of consolidated liquidity, based on unrestricted cash on hand and availability under any revolving credit facility, equal to the greater of (1) the quotient of the outstanding principal amount of the Notes divided by 9.5 and (2) $7,500,000.

The Indenture governing the Notes contains customary events of default with respect to the Notes (including the Company’s failure to make any payment of principal or interest on the Notes when due and payable or the Company’s failure to comply with the minimum consolidated liquidity covenant described above), and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Notes by notice to the Company and the Trustee, may (subject to the provisions of the Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the Indenture, will be due and payable immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the Indenture), the Notes will automatically become due and payable. With respect to any event of default due to the Company’s non-compliance with the minimum liquidity covenant, the Company may, within ten business days, cure such default through the issuance of equity securities, subordinated debt securities or certain other capital contributions.

Preemptive Rights Agreements

On the Effective Date, the Company entered into preemptive rights agreements (the “Preemptive Rights Agreements”) with certain of the Supporting Noteholders. The Preemptive Rights Agreements provide for customary preemptive rights in favor of the stockholder parties thereto with respect to certain future issuances of debt or equity securities by the Company, subject to certain exceptions, for so long as such stockholder party continues to hold at least 2.5% of the outstanding shares of the Company’s common stock.

Collateral Agreement

On the Effective Date and in connection with its entry into the Indenture, the Company entered into a collateral agreement, dated as of the Effective Date, with the Collateral Agent and the subsidiary parties from time to time party thereto (the “Collateral Agreement”). Pursuant to the terms of the Collateral Agreement, the Notes and the related guarantees are secured by a first priority lien on substantially all of the Company’s and the Guarantors’ assets, in each case, subject to certain prior liens and other exclusions, and a pledge of 65% of the voting equity interests and 100% of the non-voting equity interests of the Company’s foreign subsidiaries (other than Egalet Limited and any Specified IP Subsidiary (as defined in the Indenture), of which 100% of the voting equity interests have been pledged) to the extent and only for so long as the Company determines in good faith that permitting a pledge of 100% of such voting Equity Interests would result in material adverse tax consequences for the Company or any of its subsidiaries, it being understood that, if a percentage less than 100% but greater than 65% of such voting equity interests may be pledged without any such material adverse tax consequences, then such percentage shall be pledged.

Stockholders’ Agreement

On the Effective Date, the Company entered into a stockholders’ agreement (the “Stockholders’ Agreement”) with Iroko and certain of its affiliates. Pursuant to the Stockholders’ Agreement, Iroko and the other stockholder parties have agreed to a customary lock-up with respect to their shares of common stock for a period of 90 days following the Effective Date and a customary standstill provision for a period of 24 months following the Effective Date, in each case, subject to certain exceptions. In addition, pursuant to the Stockholders’ Agreement, the stockholder parties are entitled to designate two nominees to the Company’s board of directors for so long as such entities hold 25% of the equity consideration received on the Effective Date. The Stockholders’ Agreement also provides for customary preemptive rights in favor of the stockholder parties with respect to certain future issuance of equity securities by the Company, subject to certain exceptions.

Warrant Agreements

On the Effective Date, the Company entered into warrant agreements (the “Warrant Agreements”) with Iroko, certain of Iroko’s affiliates and certain other parties entitled to receive shares of the Company’s common stock as consideration pursuant to the Purchase Agreement or in satisfaction of certain claims pursuant to the Plan. Pursuant to the Warrant Agreements, the Company issued warrants to purchase up to an aggregate of 2,436,459 shares of the Company’s common stock. The warrants are exercisable at any time at an exercise price of $0.001 per share, subject to certain ownership limitations including, with respect to Iroko and its affiliates, that no such exercise may increase the aggregate ownership of such parties above 49% of the number of shares of its common stock then outstanding for a period of 18 months.

Royalty Rights Agreements

On the Effective Date, the Company (i) entered into royalty rights agreements with Iroko and certain of its affiliates and (ii) amended and restated its existing royalty rights agreements with each of the other holders of the 13% Notes (collectively, the “Royalty Rights Agreement”). Pursuant to the Royalty Rights Agreements, the Company sold the right to receive, in the aggregate, a payment equal to 1.5% of the aggregate net sales of the Products through December 31, 2022, inclusive (the “Royalty Rights”). The Royalty Rights Agreements also include other terms and conditions customary in agreements of this type.

Lock-Up Agreements

On the Effective Date, the Company entered into lock-up agreements with Iroko, certain of Iroko’s Affiliates and certain of the Supporting Noteholders (as defined in the Plan) pursuant to which such entities agreed, for 90 days after the Effective Date, not to sell, pledge, encumber or take certain other actions with respect to 50% of the shares of common stock issued to such entity on the Effective Date, subject to certain customary exceptions.

Registration Rights Agreement

On the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with Iroko pursuant to which the Company agreed to file with the SEC, upon Iroko’s request at any time following the date which is 180 days following the date on which any equity securities of the Company are accepted for listing on any national securities exchange, a registration statement on Form S-1 or Form S-3, and thereafter to use its commercially reasonable efforts to cause to be declared effective as promptly as practicable, one or more registration statements for the offer and resale of the Company’s common stock held by Iroko and certain of its affiliates. The Registration Rights Agreement contains other customary terms and conditions, including, without limitation, provisions with respect to blackout periods, underwrite cutbacks, reimbursement of expenses and indemnification.

Amended and Restated Charter and Bylaws

On February 1, 2019, in accordance with the Plan, the Company’s Fourth Amended and Restated Certificate of Incorporation (as amended and restated, the “A&R Charter”) was filed with the Secretary of State of the State of Delaware, at which time the A&R Charter became effective. Among other things, the A&R Charter decreases the

number of shares of authorized common stock of the Company from 275,000,000 to 100,000,000 and decreases the maximum number of directors that may serve on the Board to seven.

On the Effective Date, pursuant to the Plan, the Company’s Second Amended and Restated Bylaws (the “A&R Bylaws”) became effective. Among other things, the A&R Bylaws provide for special director nomination procedures, related party transaction approval procedures and independence requirements with respect to certain directors appointed by the Supporting Noteholders pursuant to the Plan (or such directors successors), in each case, for a two-year period following the Effective Date.

Employment Agreement Amendments

On the Effective Date, the Company entered into amendments to the employment agreements of each of Robert S. Radie, Mark Strobeck, Barbara Carlin, Megan Timmins and Patrick Shea (the “Employment Agreement Amendments”). The Employment Agreement Amendments provide that, as consideration for such employee’s ability to participate in the Management Incentive Plan (as defined in the Plan), such employee waives any increased benefits pursuant to such employment agreement as a result of any “Change in Control” (as defined in the applicable employment) effected as a result of the consummation of the Iroko Acquisition and the other transactions contemplated by the Plan.

Impact on Net Operating Loss Carryforwards

On October 30, 2018, the Company filed voluntary chapter 11 petitions under Title 11 of the United States Code (the “Bankruptcy Code”). On January 14, 2019, the Bankruptcy Court approved the Company’s Joint Pre-Packaged Plan of Reorganization of the Debtors (the “Restructuring Plan”).

The Company’s emergence from bankruptcy pursuant to the Restructuring Plan, effective January 31, 2019, will result in cancellation of indebtedness income that will reduce the Company’s net operating loss carryforwards (“NOLs”) under Section 108 of the Internal Revenue Code of 1986, as amended (the “Code”). Additionally, the Company’s emergence will cause an Ownership Change, as of January 31, 2019, for purposes of Section 382, further limiting our ability to utilize the Company’s NOLs.

Generally, under Section 382, a change in ownership of a company of greater than 50% within a three-year period results in an annual limitation on that company’s ability to utilize its carryforwards from the tax periods prior to the Ownership Change. Under Section 382(l)(6), where an ownership change is pursuant to a Chapter 11 bankruptcy reorganization, the amount of the annual limitation that applies is equal to the “long-term tax-exempt rate” (published monthly by the IRS) for the month in which the ownership change occurs, multiplied by the Company’s equity value immediately following the Ownership Change.

By taking into account the Company’s equity value immediately after consummation of the Restructuring Plan, the limitation is increased as a result of cancellation of indebtedness pursuant to the Chapter 11 Filing. Any portion of the annual limitation that is not used in a particular year may be carried forward and used in subsequent years, subject to expiration.

The annual limitation is increased by certain built-in income and gains recognized (or treated as recognized) during the five years following an Ownership Change (up to the total amount of net built-in income and gain that existed at the time of the Ownership Change). Built-in income for this purpose includes the amount by which the Company’s tax depreciation and amortization expense during this five-year period is less than it would have been if the Company’s assets had a tax basis on the date of the ownership change equal to their fair market value. The Company expects any NOL limitation for the five years following the ownership change to be increased by built-in income and to result in a carryforward of excess limitation to future periods.

Adoption of Stock-Based Incentive Compensation Plan

On February 7, 2019, the Company’s Board of Directors approved and adopted the Egalet Corporation 2019 Stock-Based Compensation Plan (the “2019 Stock Plan”). Subject to the approval of the 2019 Stock Plan by the stockholders of the Company, the Company shall reserve for issuance 1,433,333 shares of common stock available for awards under the 2019 Stock Plan (subject to adjustment pursuant to and in accordance with the 2019 Stock Plan).

Revolving Credit Agreement

On March 20, 2019, (the “Closing Date”), the Company entered into a credit agreement (the “Revolving Credit Agreement”) with Cantor Fitzgerald Securities as administrative agent and collateral agent (in such capacities, the “Agent”) and certain funds managed by Highbridge Capital Management, LLC, as lenders (collectively, the “Lenders”), which Revolving Credit Agreement consists of a $20.0 million revolving line of credit. The Company drew $5.0 million on the Closing Date and must maintain at least 25% of the commitment amount outstanding at all times. The Company will use the proceeds of the loans under the Revolving Credit Agreement for working capital purposes and to pay costs and expenses incurred by the Revolving Credit Agreement and related transactions. This arrangement will be recognized as a related party transaction as the Lenders are holders of a portion of the Company’s 13% Notes that were issued on January 31, 2019.

Advances under the Revolving Credit Agreement bear interest at the Company’s option at either the LIBOR Rate (as defined in the Revolving Credit Agreement) plus 5.00% or the Base Rate (as defined in the Revolving Credit Agreement) plus 4.00%. The Revolving Credit Agreement matures on March 20, 2022.

The obligations of the Company under the Revolving Credit Agreement are unconditionally guaranteed on a senior secured basis by the Company’s wholly-owned subsidiaries, Egalet US Inc. and Egalet Ltd. (collectively, the “Guarantors”). As security for the Company’s obligations under the Revolving Credit Agreement, the Company and the Guarantors have granted to the Agent, for the benefit of the Lenders and other secured parties, a first priority lien on substantially all of their tangible and intangible personal property (other than certain specified excluded assets), including proceeds and accounts related to this property and the capital stock of the Guarantors, pursuant to the terms of that certain Collateral Agreement, dated as of the Closing Date (the “Collateral Agreement”), among the Company and the Guarantors in favor of the Agent for the benefit of the Lenders and other secured parties. The Revolving Credit Agreement will (i) be equal in right of payment to all existing and future pari passu indebtedness of the Company, (ii) be senior in right of payment to the obligations of the Company pursuant to that certain Indenture, dated as of January 31, 2019 (the “Indenture”), among the Company, the Guarantors and U.S. Bank National Association, as trustee and collateral agent, and (iii) be senior in right of payment to all existing and future subordinated indebtedness of the Company.

The Company may terminate the commitments under the Revolving Credit Agreement at its option, in whole or in part from time to time, subject to a termination fee equal to (x) 1.0% from the Closing Date through March 20, 2020 and (y) 0.50% from March 20, 2020 through March 20, 2021.

Pursuant to the Revolving Credit Agreement, the Company and its subsidiaries must also comply with certain customary affirmative covenants, such as furnishing financial statements to the Lenders, and negative covenants, including limitations on the following: incurring debt; issuing preferred and/or disqualified stock; paying dividends, repurchasing shares and, under certain conditions, making certain other restricted payments; prepaying, redeeming or purchasing subordinated debt; conducting a merger or consolidation involving the Company; engaging in certain transactions with affiliates; disposing of assets under certain circumstances; and making certain investments, in each case, other than those permitted by the Revolving Credit Agreement. In addition, commencing with the fiscal quarter ending on December 31, 2019, the Company must maintain a minimum level of consolidated liquidity, based on unrestricted cash on hand and availability under any revolving credit facility, equal to the greater of (1) the quotient of the outstanding principal amount of the senior secured notes issued pursuant to the Indenture divided by 9.5 and (2) $7,500,000.

The Revolving Credit Agreement contains customary events of default (including the Company’s failure to make any payment of principal or interest when due and payable, the failure to comply with the minimum consolidated liquidity covenant or other covenants described above, or upon a Change of Control (as defined in the Revolving Credit Agreement)), and, upon such events of default occurring and continuing, the Lenders may accelerate the loans. In the event of certain events of bankruptcy, insolvency or reorganization involving the Company or its subsidiaries, the obligations under the Revolving Credit Agreement will automatically become due and payable. With respect to any event of default due to the Company’s non-compliance with the minimum liquidity covenant (described above), the Company may, within ten business days, cure such default through the issuance of equity securities, subordinated debt securities or certain other capital contributions.

Collateral Agreement

On the Closing Date and in connection with its entry into of the Revolving Credit Agreement, the Company and the Guarantors entered into the Collateral Agreement, which granted a first priority lien on substantially all of the Company’s and the Guarantors’ assets, in each case subject to certain existing liens and other exclusions.

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

12 Months Ended

Dec. 31, 2018

Summary of Significant Accounting Policies and Basis of Accounting

Basis of Accounting

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s consolidated financial statements include the accounts of Egalet Corporation and its wholly‑owned subsidiaries, Egalet Limited and Egalet US, Inc. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management 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 and the reported amounts of revenues and expenses during the reporting period.

Significant areas that require management’s estimates include intangible assets, revenue recognition, useful lives of assets, accrued expenses, the outcome of litigation, convertible debt, share-based payments, warrant and derivative liabilities, income taxes and liabilities subject to compromise. The Company is subject to risks and uncertainties due to changes in, among other things, the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results.

Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. As of December 31, 2018, long‑lived assets based upon geographic location were located in both the United States and Denmark, with a net book value of $1.1 million and $4,000 respectively. For the years ended December 31, 2018 and 2017, revenue from product sales was derived entirely from the United States.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Concentrations of Credit Risk and Off‑Balance Sheet Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and investments in marketable securities and accounts receivable. The Company maintains its cash balances in accounts with financial institutions that management believes are creditworthy. The Company invests cash that is not currently being used for operational purposes in accordance with its investment policy. The policy allows for the purchase of low-risk debt securities issued by U.S. government agencies and very highly rated corporations, subject to certain concentration limits. The Company believes its established guidelines for investment of its excess cash maintain safety and liquidity through its policies on diversification and investment maturity.

The below table represents the Company’s accounts receivable concentration by customer at December 31, 2018 and 2017:


	2018		2017
Customer A	70.2	%	10.0	%
Customer B	14.3	%	39.0	%
Customer C	9.0	%	23.0	%
Customer D	5.5	%	26.0	%
Customer E	0.6	%	1.0	%
Total	99.6	%	99.0	%