BIODELIVERY SCIENCES INTERNATIONAL INC - Quarter Report: 2017 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

For the transition period from                    to                     

Commission file number 001-31361

BioDelivery Sciences International, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number (including area code): 919-582-9050

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company”, or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of November 9, 2017, there were 55,898,927 shares of company Common Stock issued and 55,883,436 shares of company Common Stock outstanding.

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BioDelivery Sciences International, Inc. and Subsidiaries

Quarterly Report on Form 10-Q

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)

See notes to condensed consolidated financial statements

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)

See notes to condensed consolidated financial statements

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)

See notes to condensed consolidated financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

See notes to condensed consolidated financial statements

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SUPPLEMENTAL CASH FLOW INFORMATION

(U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA)

Non-cash Operating, Financing and Investing Activities:

The Company recorded the fair value of the bargain purchase price of the BELBUCA^® acquisition totaling $27.3 million to income during the nine months ended September 30, 2017 in accordance with accounting principles generally accepted in the United States (“GAAP”) (see note 7, Business Combinations and Asset Acquisitions).

The Company recorded the fair value of warrants totaling $4.5 million to equity with an offsetting amount to Notes payable in connection with the CRG Term Loan Agreement (as defined in note 11) during the nine months ended September 30, 2017 in accordance with GAAP (see note 13, Stockholders’ Equity).

See notes to consolidated financial statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

Overview

BioDelivery Sciences International, Inc., together with its subsidiaries (collectively, the “Company”) is a specialty pharmaceutical company that is developing and commercializing, either on its own or in partnerships with third parties, new applications of approved therapeutics to address important unmet medical needs using both proven and new drug delivery technologies. The Company is focusing on developing products to meet unmet patient needs in the areas of pain management and addiction.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of these financial statements. The condensed consolidated balance sheet at December 31, 2016 has been derived from the Company’s audited consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2016. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

Operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of results for the full year or any other future periods.

As used herein, the Company’s common stock, par value $.001 per share, is referred to as the “Common Stock.”

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company, Arius Pharmaceuticals, Inc. (“Arius”), Arius Two, Inc. (“Arius Two”) and Bioral Nutrient Delivery, LLC (“BND”). For each period presented BND has been an inactive subsidiary. All significant inter-company balances and transactions have been eliminated.

Use of estimates in financial statements

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates of the Company include: revenue recognition, sales allowances such as returns of product sold, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales commissions, amortization, stock-based compensation, determination of fair values of assets and liabilities in connection with business combinations, and deferred income taxes.

Reacquisition of BELBUCA^®

On December 7, 2016, the Company entered into an agreement (the “Termination Agreement”) with Endo Pharmaceuticals, Inc. (“Endo”) terminating Endo’s licensing of rights to the Company’s BELBUCA^® (buprenorphine) buccal film product (“BELBUCA^®”). The closing of the Termination Agreement, and the formal termination of the BELBUCA^® license to Endo and closing of the transactions further described below occurred on January 6, 2017 (see note 7, Business Combinations and Asset Acquisitions).

Inventory

Other than the inventory purchased from Endo that remains in inventory at September 30, 2017 and is stated at fair value, inventories are stated at the lower of cost or net realizable value with costs determined for each batch under the first-in, first-out method and specifically allocated to remaining inventory. Inventory consists of raw materials, work in process and finished goods. Raw materials include amounts of active pharmaceutical ingredient for a product to be manufactured, work in process includes the bulk inventory of laminate (the Company’s drug delivery film) prior to being packaged for sale, and finished goods include pharmaceutical products ready for commercial sale.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete, inventory that has a cost basis in excess of the expected net realizable value and inventory that is in excess of expected demand based upon projected product sales. The Company recorded $0.2 million in inventory allowances as of September 30, 2017. There were no allowances recorded as of December 31, 2016.

Deferred revenue

Consistent with the Company’s revenue recognition policy, deferred revenue represents cash received in advance for licensing fees, consulting, research and development services and related supply agreements. Such payments are reflected as deferred revenue until recognized under the Company’s revenue recognition policy. Deferred revenue is classified as current if management believes the Company will be able to recognize the deferred amount as revenue within twelve months of the balance sheet date.

The Company deferred sales, until January 1, 2017, of its BUNAVAIL^® (buprenorphine and naloxone) buccal film, Schedule 3 (“CIII”) product (“BUNAVAIL^®”) and recognized such revenue when the product was sold through to the end user. There were no product sales by the Company of BELBUCA^® before January 2017.

Revenue recognition

Net product sales

Beginning in the first quarter of 2017, the Company has determined that it had sufficient experience with BELBUCA^® and BUNAVAIL^® to estimate its returns at time of ex-factory sales. The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the Company’s price to the buyer is fixed or determinable; and (d) collectability is reasonably assured. The Company sells its products primarily to large national wholesalers, which have the right to return the products they purchase. The Company recognizes revenue from sales transactions where the buyer has the right to return the product at the time of sale only if (1) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from any provided by the Company, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes product sales net of estimated allowances for rebates, price adjustments, returns, chargebacks and prompt payment discounts. Given the sufficient experience with BELBUCA^® and BUNAVAIL^®, the Company can reasonably estimate the amount of future product returns, and therefore, the risk of estimating product returns has been substantially eliminated. The effect in income from operations and on net income is that the Company is able to recognize revenue earlier on the sell-in method, net of a provision for estimated returns, since the Company can record revenue once sold to the wholesaler rather than waiting until the product is sold to the end user on a sell-through basis.

The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

In its analyses, the Company uses prescription data purchased from a third-party data provider to develop estimates of historical inventory channel sell-through. The Company utilizes an internal analysis to compare historical net product shipments to estimated historical prescriptions written. Based on that analysis, management develops an estimate of the quantity of product in the channel which may be subject to various rebate, chargeback and product return exposures. To estimate months of ending inventory in the Company’s distribution channel, the Company divides estimated ending inventory in the distribution channel by the Company’s recent prescription data, not taking into account any future anticipated demand growth beyond the succeeding quarter. Monthly for each product line, the Company prepares an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written for the period. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product estimated to be in the distribution channel.

Product Returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an 18-month period that begins six months prior to and ends twelve months subsequent to expiration of the products.

Rebates- The liability for government program rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each program’s administrator.

Price Adjustments and Chargebacks-The Company’s estimates of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Company’s listed prices of its products. In the event that the sales mix to third-party payers is different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated and such differences may be significant.

The Company, from time to time, offers certain promotional product-related incentives to its customers. These programs include certain product incentives to pharmacy customers and other sales stocking allowances. The Company has voucher programs for BELBUCA^® and BUNAVAIL^® whereby the Company offers a point-of-sale subsidy to retail consumers. The Company estimates its liabilities for these voucher programs based on the actual redemption rates as reported to the Company by a third-party claims processing organization. The Company accounts for the costs of these special promotional programs as price adjustments, which are a reduction of gross revenue.

Prompt Payment Discounts-The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within the first 30 to 37 days after the invoice date depending on the customer and the products purchased.

Gross to Net Accruals-A significant majority of the Company’s gross to net adjustments to gross product revenues are the result of accruals for its voucher program and Medicaid rebates, with the majority of those programs having an accrual to payment cycle of anywhere from one to three months. In addition to this relatively short accrual to payment cycle, the Company receives daily information from the wholesalers regarding their sales of the Company’s products and actual on hand inventory levels of its products. This enables the Company to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

Cost of sales

Cost of sales includes the direct costs attributable to the production of BREAKYL^™ and PAINKYL^™ (the Company’s out-licensed breakthrough cancer pain therapies). It includes all costs related to creating the product at the Company’s contract manufacturing location in Germany. The Company’s contract manufacturer bills the Company for the final product, which includes materials, direct labor costs, and certain overhead costs as outlined in applicable supply agreements. Cost of sales also includes royalty expenses that the Company owes to third parties.

For BELBUCA^® and BUNAVAIL^®, cost of sales includes raw materials, production costs at the Company’s three contract manufacturing sites, quality testing directly related to the products, and depreciation on equipment that the Company has purchased to produce BELBUCA^® and BUNAVAIL^®. It also includes any batches not meeting specifications and raw material yield losses. Yield losses and batches not meeting specifications are expensed as incurred. Prior to January 1, 2017, cost of sales was recognized as actual product was sold through to the end user. Beginning January 1, 2017, cost of sales is recognized when sold to the wholesaler from our distribution center.

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These accounting standard updates (each individually an “ASU”) apply to all companies that enter into contracts with customers to transfer goods or services. These two ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. The new standards are required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company expects to adopt the new standards by using the modified retrospective approach with the cumulative effect of the change reflected in retained earnings as of January 1, 2018 and to not restate prior periods. The Company has commenced work to assess the impact of the new revenue standard on its principal revenue streams. The Company has not made a determination on the impact to its consolidated financial statements. The Company is implementing changes to its accounting processes, internal controls and disclosures to support the new accounting.

The FASB’s new leases standard, ASU 2016-02 Leases (Topic 842), was issued on February 25, 2016. ASU 2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019, but may be adopted earlier. The Company expects to adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its consolidated statements of operations, but the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its consolidated balance sheets as a result of the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. In addition, the standard will require that the Company update its systems, processes and controls it uses to track, record and account for its lease portfolio.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a screen to determine when an integrated set of assets and activities (a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new standard also requires that a business include at least one substantive process and narrows the definition of outputs. The new guidance will be applied prospectively and is effective for the Company for interim and annual periods beginning on January 1, 2018 and early adoption is permitted. The Company expects to adopt this standard beginning in 2018. Adoption of this new standard may result in more transactions being accounted for as asset acquisitions versus business combinations; however, the impact to the Company’s consolidated financial statements will depend on the facts and circumstances of future transactions.

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(Unaudited)

In January 2017, the FASB issued ASU Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including in-process research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1. Under this new guidance if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASU does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This ASU will be applied prospectively and is effective for annual and interim impairment test performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company currently does not expect any impact of the adoption of the ASU on its condensed consolidated financial statements.

At September 30, 2017, the Company had cash of approximately $19.7 million. The Company used $12.3 million of cash during the nine months ended September 30, 2017 and had stockholders’ equity of $18.9 million, versus stockholders’ deficit of $17.7 million at December 31, 2016. The Company has access to additional capital through CRG Servicing LLC (“CRG”) from the CRG loan of $15 million as well as equity markets if the Company chooses or a combination of both that would provide sufficient capital to extend its runway through the end of 2018 and beyond. This estimation assumes that the Company does not accelerate the development of existing, or acquire other drug development opportunities or otherwise face unexpected events, costs or contingencies, any of which could affect the Company’s cash requirements. As a result of the Company’s late filing of certain financing information related to its reacquisition of BELBUCA^®, the Company is unable to utilize its universal shelf registration statement and associated at-the-market offering program until April 2018.

Additional capital will be required to support the commercialization of the Company’s reacquired BELBUCA^® product, ongoing commercialization activities for BUNAVAIL^®, the reformulation project for and the anticipated commercial relaunch of ONSOLIS^® (which is out-licensed to Collegium Pharmaceutical, Inc. (“Collegium”) in the US), the continued development of Buprenorphine Depot Injection or other products which may be acquired or licensed by the Company, and for general working capital requirements. Based on product development timelines and agreements with the Company’s development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding. Additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all.

The following table represents the components of inventory as of:

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

The following table represents the components of accounts payable and accrued liabilities as of:

Property and equipment, summarized by major category, consist of the following as of:

Depreciation expense for the nine month periods ended September 30, 2017 and September 30, 2016, was approximately $0.5 million and $0.3 million, respectively. Depreciation expense for the three month periods ended September 30, 2017 and September 30, 2016, was approximately $0.2 million and $0.1 million, respectively.

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(Unaudited)

The Company has periodically entered into license and development agreements to develop and commercialize certain of its products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments, royalties and other forms of payment to the Company. The Company’s most significant license and development agreements are as follows:

Meda license, development and supply agreements

On January 27, 2015, the Company announced that it had entered into an assignment and revenue sharing agreement with Meda AB (“Meda”), a subsidiary of Mylan N.V., to return to the Company the marketing authorization for ONSOLIS^® in the U.S. and the right to seek marketing authorizations for ONSOLIS^® in Canada and Mexico. Following the return of the U.S. marketing authorization from Meda, the Company submitted a prior approval supplement for the new formulation to the U.S. Food and Drug Administration (“FDA”) in March 2015, which was approved in August 2016. In connection with the return to the Company by Meda of the U.S. marketing authorization in January 2015, the remaining U.S.-related deferred revenue of $1.0 million was recorded as contract revenue during the year ended December 31, 2015. On February 27, 2016, the Company entered into an extension of the assignment and revenue sharing agreement to extend the period until December 31, 2016, which terminated on May 11, 2016 upon the signing of the Termination and Revenue Sharing Agreement (“the Agreement”).

Efforts to extend the Company’s supply agreement with its ONSOLIS^® manufacturer, Aveva, which is now a subsidiary of Apotex, Inc., were unsuccessful and the agreement expired. However, the Company identified an alternate supplier and requested guidance from the FDA on the specific requirements for obtaining approval to supply product from this new vendor. Based on the Company’s current estimates, the Company will submit the necessary documentation to the FDA for qualification of the new manufacturer by the end of 2017.

On May 11, 2016, the Company and Collegium executed a definitive License and Development Agreement (the “License Agreement”) under which the Company has granted to Collegium the exclusive rights to develop and commercialize ONSOLIS^® in the U.S. See “Collegium License and Development Agreement” below.

Collegium license and development agreement

On May 11, 2016, the Company and Collegium executed a License Agreement under which the Company granted Collegium the exclusive rights to develop and commercialize ONSOLIS^® in the U.S.

Under the terms of the License Agreement, Collegium will be responsible for the manufacturing, distribution, marketing and sales of ONSOLIS^® in the U.S. The Company is obligated to use commercially reasonable efforts to continue the transfer of manufacturing to the anticipated manufacturer for ONSOLIS^® and to submit a corresponding Prior Approval Supplement (the “Supplement”) to the FDA with respect to the current NDA for ONSOLIS^®. Following approval of the Supplement, the NDA and manufacturing responsibility for ONSOLIS^® (including the manufacturing relationship with the Company’s manufacturer, subject to the Company entering into an appropriate agreement with such manufacturer that is acceptable and assignable to Collegium) will be transferred to Collegium.

Financial terms of the License Agreement include:

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Pursuant to the License Agreement, the royalty from Collegium to the Company terminates after the (a) expiration of the last-to-expire valid claim of the licensed patents in the territory covering a particular licensed product or (b) generic saturation for such licensed product. The License Agreement also contains customary termination provisions that include a right by either party to terminate upon the other party’s uncured material breach, insolvency or bankruptcy, as well as in the event a certain commercial milestone is not met.

ONSOLIS^® was originally licensed to, and launched in the U.S. by, Meda. In January 2015, the Company entered into an assignment and revenue sharing agreement (the “ARS Agreement”) with Meda pursuant to which Meda transferred the marketing authorizations for ONSOLIS^® in the U.S. back to the Company. Under the ARS Agreement, financial terms were established that enable Meda to share a significant portion of the proceeds of milestone and royalty payments received by the Company from any new North American partnership for ONSOLIS^® that may be executed by the Company. The execution of the License Agreement between the Company and Collegium also required the execution of a definitive termination agreement between the Company and Meda embodying those royalty-sharing terms, returning ONSOLIS^®-related assets and rights in the U.S., Canada, and Mexico to the Company, and including certain other provisions. In addition, the Company’s royalty obligations to CDC IV, LLC (“CDC”) and its assignees will remain in effect. CDC provided funding for the development of ONSOLIS^® in the past.

Endo license and development agreement

In January 2012, the Company entered into a License and Development Agreement with Endo pursuant to which the Company granted Endo an exclusive commercial world-wide license to develop, manufacture, market and sell the Company’s BELBUCA^® product and to complete U.S. development of such product candidate for purposes of seeking FDA approval (the “Endo Agreement”). BELBUCA^® is 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.

Pursuant to the Endo Agreement, the Company has received the following payments:

On December 7, 2016, the Company and Endo entered into the Termination Agreement to terminate Endo’s licensing rights for BELBUCA^®. The transaction closed on January 6, 2017. At the closing date, the Company purchased from Endo the following net assets (the “net assets”): (i) current BELBUCA^® product inventory and work-in-progress, (ii) material manufacturing contracts related to BELBUCA^® , (iii) BELBUCA^®-related domain names and trademarks (including the BELBUCA^® trademark), (iv) BELBUCA^® -related manufacturing equipment, and (v) all pre-approval regulatory submissions, including any Investigational New Drug Applications and New Drug Applications, regulatory approvals and post-approval regulatory submissions concerning BELBUCA^® . The purchase price for the net assets (the “Asset Purchase Price”) was equal to the sum of: (i) the aggregate book value of the portion of the transferred product inventory forecasted to be used or sold by the Company, (ii) the aggregate book value of work-in-

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(Unaudited)

progress inventory, and (iii) the assumption of any assumed liabilities. Together with the Asset Purchase Price, pursuant to the terms of the Termination Agreement, the Company will also pay to Endo a fee in the amount of $5 million in consideration for (i) Endo’s agreement not to compete for a period of two years from the closing date of the termination agreement and (ii) Endo’s waiver of its right to sell product for twelve months following the closing of the termination agreement.

At the closing date, the Company accepted transfer of the net assets and assumed and agreed to discharge when due all applicable liabilities assumed by the Company, which consisted of post-closing obligations for liabilities and payments associated with the net assets, the assumed contracts related to the net assets and applicable taxes (with the obligation for pre-closing and other certain liabilities resulting from the acts or omissions of Endo being retained by Endo). The Asset Purchase Price, together with all other payments (including a non-compete covenant payment) due to Endo under the Termination Agreement, will be paid to Endo in cash in four quarterly installments on the last calendar day of each quarter in 2017. Furthermore, the Company is not responsible for future royalties or milestone payments to Endo and Endo is not obligated to any future milestone payments to the Company. The Termination Agreement contains customary representations and warranties and mutual releases and indemnification.

At the closing date, the Company and Endo entered into a Transition Services Agreement which governed the post-closing rights and responsibilities of the Company and Endo in connection with the license termination and the transfer of the Assets to the Company. Under this agreement, the Company and Endo agreed to the handling of transition matters such as managing customer contracts, BELBUCA^® price reporting, payments, returns and rebates, and customer and managed care relations. In connection therewith, Endo has agreed to provide to the Company an agreed upon number of work hours to be provided by Endo personnel during the transition for certain of these transition services and other assistance with respect to the transition of BELBUCA^® to the Company.

The BELBUCA^® acquisition was accounted for as a business combination in accordance with ASC No. 805, Business Combinations which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. The Company believes the estimates used are reasonable and the significant effects of the BELBUCA^® acquisition are properly reflected.

The following table summarizes the consideration paid to acquire BELBUCA^® and the estimated values of assets acquired and liabilities assumed in the accompanying condensed consolidated balance sheet based on their fair values on January 6, 2017 (the date of the Endo Closing):

Inventories acquired included raw materials, work-in-progress and finished goods. The fair value of the acquired finished goods inventory was estimated by adjusting the anticipated selling price costs to sell and an appropriate profit on selling activities. For work-in-process, in addition to those inputs used to estimate the fair value of finished goods, the cost and estimated profit on completing the manufacturing are also included. The fair value of the raw materials represent cost to acquire the materials from suppliers.

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

The fair value of the equipment was determined by consideration of replacement cost and equipment condition and was assigned a useful life of seven years. The fair value of the license and distribution rights intangible assets as amortized in the accompanying condensed consolidated balance sheets were estimated primarily using the “income method,” which starts with a forecast of all expected future cash flows. As such, it is considered level 3 in the fair value hierarchy. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of sales, commercial expenses, research and development costs and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors. The license and distribution rights intangible assets will be amortized over ten years, which approximates the current, remaining patent life of the BELBUCA^® -related intellectual property.

As a result of the business combination, the Company recognized a deferred tax liability of $16.0 million. This deferred tax liability was netted against its deferred tax assets as of September 30, 2017. Because a full valuation allowance has been provided against the Company’s deferred tax assets as it is considered more likely than not that they will not be utilized, the Company released a corresponding amount of its valuation allowance during the nine months ended September 30, 2017 and recognized a $16.0 million tax benefit in the accompanying condensed consolidated statement of operations.

In January 2017, the Company recorded the asset acquisition as a bargain purchase gain of $27.3 million in the accompanying condensed consolidated statement of operations.

Pro forma impact of acquisition of BELBUCA^®

The following pro forma combined results of operations are provided for the year ended December 31, 2016, as though the BELBUCA^® acquisition had been completed as of January 1, 2016. These pro forma results are not presented for the interim period as the BELBUCA^® product line was not previously accounted for as a stand-alone business and interim results are therefore unavailable. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the BELBUCA^® acquisition or any estimated costs that will be incurred to integrate the BELBUCA^® product line, nor do they reflect the bargain purchase gain recognized. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.

The Company’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the BELBUCA^® acquisition and factually supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition with the following adjustments:

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

Evonik development and exclusive license option agreement:

On October 27, 2014, the Company entered into a definitive Development and Exclusive License Option Agreement (the “Development Agreement”) with Evonik Corporation, (“Evonik”) to develop and commercialize an injectable, extended release, microparticle formulation of buprenorphine for the treatment of opioid dependence (the “Evonik Product”). Under the Development Agreement, the Company also has the right to pursue development of the Evonik Product for pain management.

This product candidate is currently in the pre-clinical stage of development. An Investigational New Drug Application (“IND”) for the treatment of opioid dependence was filed in the fourth quarter 2016.

Purdue license and supply agreement:

On July 12, 2017, the Company, along with Purdue Pharma, an Ontario limited partnership (“Purdue”), announced that they had executed an exclusive agreement granting to Purdue the licensing, distribution, marketing and sale rights related to BELBUCA^® in Canada. Financial terms of the Purdue agreement include: (i) total upfront and other cash milestone payments (relating to marketing authorization transfer and certain other marketing- and sales-related milestones) of up to an aggregate of CAD 4.5 million, including approximately CAD 1.5 million (0.5 million CAD and 1.0 million CAD received August 2017 and October 2017, respectfully); (ii) a low double digit percent royalty payable quarterly by Purdue to the Company based on Canadian net sales of BELBUCA^®, which royalty rate is subject to adjustment in certain circumstances; (iii) an annual royalty fee commencing a period of time after the commercial launch of BELBUCA^® in Canada, which fee is creditable against royalties payable by Purdue and subject to reduction in certain circumstances; and (iv) payment by Purdue of certain costs incurred to obtain and transfer the marketing authorization for BELBUCA^® in Canada, a portion of which will be reimbursed by the Company as a reduction of royalties payable by Purdue.

Pursuant to the agreement, the royalty from Purdue to the Company terminates on the later of (a) the first date on which there is not at least one valid claim of the licensed patents in the territory covering any licensed product or (b) February 14th of the calendar year immediately following the first complete calendar year following the tenth anniversary of first commercial sale in which net sales total less than a predetermined amount.

On September 12, 2017, the Company announced Health Canada had granted market authorization to formally transfer the Drug Identification Number (DIN) ownership of BELBUCA ^® in Canada to Purdue. This approval triggered a milestone payment to the Company in the amount of CAD 1 million, which was received October 2017.

TTY license and supply agreement

On October 7, 2010, the Company announced a license and supply agreement with TTY Biopharm Co., Ltd. (“TTY”) for the exclusive rights to develop and commercialize BEMA^® Fentanyl in the Republic of China, Taiwan. The agreement results in potential milestone payments to the Company of up to $1.3 million, which include an upfront payment of $0.3 million that was received in 2010. In addition, the Company will receive an ongoing royalty based on net sales. TTY will be responsible for the regulatory filing of BEMA^® Fentanyl in Taiwan as well as future commercialization in that territory. The term of the agreement with TTY is for the period from October 4, 2010 until the date fifteen years after first commercial sale unless the agreement is extended in writing or earlier terminated as provided for in the agreement.

In February, March, June, August and September 2017, the Company received payments of $0.2 million, $0.03 million, $0.1 million, $0.2 million and $0.3 million, respectively, from TTY, which related to royalties based on product purchased in Taiwan by TTY of PAINKYL^™. Such payments of $0.5 million and $1.1 million are recorded in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017, respectively.

In February 2016 and June 2016, the Company received separate payments of $0.24 million each from TTY which is recorded in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2016. No such payments were received in the quarter ended September 30, 2016.

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

On May 29, 2015, the Company entered into a $30 million secured loan facility (the “Loan”) with MidCap Financial Trust, as agent and lender (“MidCap”), pursuant to the terms and conditions of that certain Amended and Restated Credit and Security Agreement, dated as of May 29, 2015 (the “Credit Agreement”), between the Company and MidCap (the “MidCap Credit Agreement”).

On February 21, 2017, the Company entered into a term loan agreement (the “Term Loan Agreement”) with CRG, as administrative agent and collateral agent, and the lenders named in the Term Loan Agreement (the “Lenders”). The Company utilized approximately $29.4 million of the initial loan proceeds under the Term Loan Agreement to repay all of the amounts owed by the Company under the MidCap Credit Agreement. Upon the repayment of all amounts owed by the Company under the MidCap Credit Agreement, all commitments under the MidCap Credit Agreement were terminated and all security interests granted by the Company and its subsidiary guarantors under the MidCap Credit Agreement were released (see note 11, Term Loan Agreement (CRG)). Certain warrants issued to MidCap and its affiliates in May 2016 related to the extension of the interest only period under the MidCap Credit Agreement remain outstanding as of September 30, 2017 and will expire, if not earlier exercised in May 2021. Such warrants are exercisable for 84,986 shares of Common Stock at an exercise price of $3.53 per share. During the nine months ended September 30, 2017, $0.7 million of deferred loan costs arising out of the MidCap Credit Agreement were expensed and recorded as interest expense in the accompanying condensed consolidated statement of operations.

Pursuant to the Term Loan Agreement, the Company borrowed $45.0 million from the Lenders as of the Closing Date, and may be eligible to borrow up to an additional $30.0 million in two tranches of $15.0 million each contingent upon achievement of certain conditions, including: (i) in the case of the first tranche, representing the second potential draw under the Loan Agreement (the “Second Draw”), satisfying both (a) certain minimum net revenue thresholds on or before September 30, 2017 or December 31, 2017 and (b) a certain minimum market capitalization threshold for a period of time prior to the funding of the Second Draw (provided, that if the Company does not achieve the minimum net revenue thresholds necessary for the Second Draw but does achieve a certain minimum market capitalization threshold for a period of time prior to December 31, 2017, the Company would be eligible for a Second Draw funding in the amount of $5.0 million); and (ii) in the case of the second tranche, representing the third potential draw under the Loan Agreement (the “Third Draw”), satisfying both (a) certain minimum net revenue thresholds on or before June 30, 2018 or September 30, 2018 and (b) a certain minimum market capitalization threshold for a period of time prior to the funding of the Third Draw. The Company has qualified for the Second Draw.

After the payoff of the MidCap Credit Agreement (see note 10), the Company is utilizing the initial proceeds under the Term Loan Agreement (after deducting loan origination costs and broker and other fees) of approximately $13.7 million, plus any additional amounts that may be borrowed in the future, for general corporate purposes and working capital.

The Term Loan Agreement has a six-year term with three years of interest-only payments (which can be extended to four years if the Company achieves certain net revenue and market capitalization thresholds prior to December 31, 2019), after which quarterly principal and interest payments will be due through the December 31, 2022 maturity date. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of 12.50%, 3.5% of which (i.e., a resultant 9.0% rate) may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount. On each borrowing date (including the Closing Date), the Company is required to pay CRG a financing fee based on the loan drawn on that date. The Company is also required to pay the Lenders a final payment fee equivalent to 9% of the original loan amount upon repayment of the Loans in full, in addition to prepayment amounts described below.

The Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the Term Loan Agreement at any time upon prior notice to the Lenders subject to a certain prepayment fees during the first five years of the term (which fees are

lowered over time) and no prepayment fee thereafter. In certain circumstances, including a change of control and certain asset sales or licensing transactions, the Company is required to prepay all or a portion of the loan, including the applicable prepayment premium of on the amount of the outstanding principal to be prepaid.

As security for its obligations under the Term Loan Agreement, on the funding date of the initial borrowing, the Company and the Subsidiary Guarantors entered into a security agreement with CRG whereby the Company and the subsidiary guarantors of the Company under the Term Loan Agreement (the “Subsidiary Guarantors”) granted to CRG, as collateral agent for the Lenders, a lien on substantially all of its assets including intellectual property (subject to certain exceptions). The Term Loan Agreement requires the

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(Unaudited)

Company to maintain minimum cash and cash equivalents balance and, each year through the end of 2022, to meet a minimum net annual revenue threshold. The Company is in compliance as of September 30, 2017. In the event that the Company does not meet the minimum net annual revenue threshold, then the Company can satisfy the requirement for that year by raising two (2) times the shortfall by way of raising equity or subordinated debt.

The Term Loan Agreement also contains customary affirmative and negative covenants for a credit facility of this size and type, including covenants that limit or restrict the Company’s ability to, among other things (but subject in each case to negotiated exceptions), incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions, license intellectual property rights on an exclusive basis or repurchase stock.

The Term Loan Agreement includes customary events of default that include, among other things, non-payment, inaccuracy of representations and warranties, covenant breaches, a material adverse change (as defined in the Term Loan Agreement), cross default to material indebtedness or material agreements, bankruptcy and insolvency, material judgments and a change of control. The occurrence and continuance of an event of default could result in the acceleration of the obligations under the Term Loan Agreement. Under certain circumstances, a default interest rate of an additional 4.00% per annum will apply on all outstanding obligations during the existence of an event of default under the Term Loan Agreement.

The following table represents future maturities of the CRG obligation as of September 30, 2017:

In connection with the initial borrowing made under the Term Loan Agreement, the Company issued to CRG and certain of its affiliates five separate warrants to purchase an aggregate of 1,701,583 shares of the Common Stock (the “CRG Warrants”). The CRG Warrants are exercisable any time prior to February 21, 2027 at a price of $2.38 per share, with typical provisions for cashless exercises. The exercise of the CRG Warrants could have a dilutive effect to the Common Stock to the extent that the market price per share of the Common Stock, as measured under the terms of the CRG Warrants, exceeds the exercise price of the CRG Warrants. CRG is also entitled to receive a smaller amount of similar warrants concurrently with the funding, if applicable, of the Second Draw and the Third Draw.

The Company operates in a single industry engaging in the development and commercialization of pharmaceutical products principally in the areas of pain management and addiction. Accordingly, the Company’s business is classified as a single reportable segment.

The following table presents net sales by product (in thousands):

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(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

Stock-based compensation

During the nine months ended September 30, 2017, a total of 908,661 options to purchase Common Stock, with an aggregate fair market value of approximately $1.8 million, were granted to Company employees. Options granted to employees have a term of 10 years from the grant date and vest ratably over a three year period. Options granted to the Company’s Board of Directors have a term of 10 years from the grant date and one-half of those Options vest at grant date and the remaining half vest in one year. The fair value of each option is amortized as compensation expense evenly through the vesting period.

The Company’s stock-based compensation expense is allocated between research and development and selling, general and administrative as follows:

The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the options.

Expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of options granted during the nine months ended September 30, 2017 follows:

Option activity during the nine months ended September 30, 2017 was as follows:

As of September 30, 2017, options exercisable totaled 1,807,765. There was approximately $8.1 million of unrecognized compensation cost related to non-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through 2020.

During the nine month ended September 31, 2017, an executive officer of the Company exercised approximately 0.15 million stock options, with net proceeds to the Company of approximately $0.3 million.

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(Unaudited)

Restricted stock units

During the nine months ended September 30, 2017, 2,342,315 RSUs were granted to the Company’s executive officers and employees, with a fair market value of approximately $4.5 million. The fair value of restricted units is determined using quoted market prices of the Common Stock and the number of shares expected to vest. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended. Of the aforementioned 2017 RSU grants, 2,060,000 are one-half time-based and one-half are performance based and all vest over a three-year period. The performance-based RSUs provide for vesting if specified predetermined net revenue and operating income goals are achieved with respect to the annual fiscal years 2017 through 2019. Actual performance relative to the predetermined performance measures are evaluated independently at the end of each fiscal year and the number of awards that will vest will be based upon the percentage of the individual performance measure achieved relative to the predetermined target. This allows for partial vesting relative to separate performance measures. Additionally, 120,000 RSUs were granted to Company employees and vest in full in one year. Cumulatively, these RSUs were granted over the plan allotment of our 2011 Equity Incentive Plan and will require stockholder approval at the 2017 annual stockholder meeting. The remaining 162,315 RSUs were granted to the Company’s Board of Directors and one-half of those RSUs vest at grant date and the remaining half vest in one year. Cumulatively, these RSUs were also granted over the plan allotment of our 2011 Equity Incentive Plan and will require approval at the 2017 annual stockholder meeting.

Warrants

The Company has granted warrants to purchase shares of Common Stock.

The fair value of each warrant grant is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the warrants.

Expected term of warrants granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of warrants granted during the nine months ended September 30, 2017 follows:

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(Unaudited)

Warrant activity during the nine months ended September 30, 2017 was as follows:

The following table reconciles the numerators and denominators of the basic and diluted loss per share computations (in thousands, except per share data).

Basic earnings per common share is calculated using the weighted average shares of Common Stock outstanding during the period. In addition to the weighted average shares of Common Stock outstanding, common equivalent shares from stock options, RSUs and warrants using the treasury stock method, are included in the diluted per share calculations unless the effect of inclusion would be antidilutive. During the three months ended September 30, 2017 and 2016, outstanding stock options, RSUs and warrants of 9,638,211 and 9,986,447, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect. During the nine months ended September 30, 2017 and 2016, outstanding stock options, RSUs and warrants of 5,230,179 and 10,196,872, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect.

On August 23, 2017, the Company and Mark A. Sirgo, the Company’s Vice Chairman, President and Chief Executive Officer (“Sirgo”), executed a Retirement Agreement (“Retirement Agreement”) memorializing the terms of Sirgo’s voluntary retirement from the Company, which will be effective January 2, 2018 (the “Retirement Date”, with the period from August 23, 2017 to the Retirement Date being referred to herein as the “Transition Period”). During the Transition Period and following the Retirement Date, Sirgo will continue to serve as Vice Chairman of the Company’s Board of Directors (the “Board”).

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(Unaudited)

Pursuant to the Retirement Agreement, Sirgo will continue to serve as the Company’s President and Chief Executive Officer during the Transition Period. By entering into the Retirement Agreement, the Company and Sirgo agreed to terminate Sirgo’s employment agreement with the Company, dated August 24, 2004, as amended by that First Amendment thereto (collectively with the related confidentiality agreement between the Company and Sirgo, the “Employment Agreement”) as of the Retirement Date, subject to those provisions of the Employment Agreement which survive termination (as the same were modified by the Retirement Agreement), including provisions related to confidentiality, non-solicitation and non-competition.

In connection with his retirement from the Company, and in consideration of his service to the Company (and in lieu of any similar benefits provided for in the Employment Agreement), Sirgo has received or will receive the following benefit pursuant to the Retirement Agreement:

In addition, pursuant to the Retirement Agreement:

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(12) months following the Retirement Date with a company with whom Sirgo had contact about a potential transaction in his capacity as an employee of the Company prior to the Retirement Date, then the Company shall issue to Sirgo, as an additional retirement benefit, fully vested shares of Common Stock in an amount equal to the number of shares Sirgo would have received pursuant to the LTIP had he remained employed with the Company through the Change in Control.

For purposes of this Agreement, the term “Change of Control” means the occurrence of any one or more of the following events (it being agreed that, with respect to paragraphs (i) and (iii) of this definition below, a “Change of Control” shall not be deemed to have occurred if the applicable third party acquiring party is an “affiliate” of the Company within the meaning of Rule 405 promulgated under the Securities Act of 1933, as amended):

(i) an acquisition (whether directly from the Company or otherwise) of any voting securities of the Company (the “ Voting Securities ”) by any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities and Exchange Act of 1934, as amended (the “ 1934 Act ”)), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of forty percent (40%) or more of the combined voting power of the Company’s then outstanding Voting Securities.

(ii) the individuals who, as of the date hereof, are members of the Company’s Board of Directors cease, by reason of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction affecting the Company, to constitute at least fifty-one percent (51%) of the members of the Board of Directors; or

(iii) approval by the Board of Directors and, if required, stockholders of the Company, or execution by the Company of any definitive agreement with respect to, or the consummation of (it being understood that the mere execution of a term sheet, memorandum of understanding or other non-binding document shall not constitute a Change of Control):

(A) a merger, consolidation or reorganization involving the Company, where either or both of the events described in clauses (i) or (ii) above would be the result;

(B) a liquidation or dissolution of or appointment of a receiver, rehabilitator, conservator or similar person for, or the filing by a third party of an involuntary bankruptcy against, the Company; or

(C) an agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a subsidiary of the Company).”

If the Retirement Date occurs after there has been a Change in Control, an additional cash payment equal to $0.2 million (less applicable withholdings) (the “CIC Retirement Payment”) to be paid in lump sum within ten (10) days of the Retirement Date, and (iv) if a Change in Control occurs on or after the Retirement Date and within twelve (12) months following the Retirement Date, with a company with whom Sirgo had contact about a potential transaction in his capacity as an employee of the Company prior to the Retirement Date, then the Company shall pay to Sirgo an additional amount equal to $0.2 million (less applicable withholdings) (the “Additional Retirement Payment”) in lump sum on the closing of the Change in Control.

The Retirement Agreement also contains other customary provisions, including provisions for Sirgo’s continuing participation in certain Company employee benefit plans, mutual releases of claims by the Company and Sirgo (subject to certain exceptions) and a covenant of cooperation.

Litigation related to ONSOLIS^®

On November 2, 2010, MonoSol Rx LLC (“MonoSol”) filed an action against the Company and its commercial partners for ONSOLIS^® in the Federal District Court of New Jersey (the “DNJ”) for alleged patent infringement and false marking. The Company was formally served in this matter on January 19, 2011. MonoSol claimed that our manufacturing process for ONSOLIS^®, which has

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(Unaudited)

never been disclosed publicly and which the Company and its partners maintain as a trade secret, infringes its patent (United States Patent No. 7,824,588) (the “’588 Patent”). Of note, the BEMA^® technology itself was not at issue in the case, nor is BELBUCA^® or BUNAVAIL^®, but rather only the manner in which ONSOLIS^®, which incorporates the BEMA^® technology, is manufactured. Pursuant to its complaint, MonoSol was seeking an unspecified amount of damages, attorney’s fees and an injunction preventing future infringement of MonoSol’s patents.

Based on the Company’s original assertion that its proprietary manufacturing process for ONSOLIS^® does not infringe on patents held by MonoSol, and the denial and subsequent narrowing of the claims on the two reissued patents MonoSol has asserted against the Company while the third has had all claims rejected by the United States Patent and Trademark Office (“USPTO”), the Company remains confident in its original stated position regarding this matter. Thus far, the Company has proven that the “original” MonoSol’s US patent No 7,357,891 (the “’891 Patent”), and No 7,425,292 (the “’292 Patent”) in light of their reissuance with fewer and narrower claims were indeed invalid and the third and final patent, the ’588 patent, was invalid as well with all its claims cancelled. Given the outcomes of the ’292, ’891 and ’588 reexamination proceedings, at a January 22, 2015 status meeting, the Court decided to lift the stay and grant the Company’s request for the case to proceed on an expedited basis with a Motion for Summary Judgment to dismiss the action. On September 25, 2015, the Honorable Freda L. Wolfson granted the Company’s motion for summary judgment and ordered the case closed. The Company was found to be entitled to absolute intervening rights as to both patents in suit, the ’292 and ’891 patents and the Company’s ONSOLIS^® product is not liable for infringing the patents prior to July 3, 2012 and August 21, 2012, respectively. In October 2015, MonoSol appealed the decision of the court to the Federal Circuit. The Company had no reason to believe the outcome would be different and were prepared to vigorously defend the appeal. MonoSol, however, subsequently decided to withdraw the appeal. On February 25, 2016, MonoSol filed an Unopposed Motion For Voluntary Dismissal Of Appeal, which was granted by the court on February 26, 2016 and the case dismissed. Thus, the district court’s grant of the Summary Judgement of Intervening Rights stands. The possibility exists that MonoSol could file another suit alleging infringement of the ’292 and ’891 patents. The Company continues to believe, however, that ONSOLIS^® and its other products relying on the BEMA^® technology, including BUNAVAIL^® and BELBUCA^®, do not infringe any amended, reexamined claim from either patent.

Litigation related to BUNAVAIL^®

On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and MonoSol (collectively, the RB Plaintiffs) filed an action against the Company relating to its BUNAVAIL^® product in the United States District Court for the Eastern District of North Carolina (“EDNC”) for alleged patent infringement. BUNAVAIL^® is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL^®, which has never been disclosed publicly, infringes its patent (United States Patent No. 8,475,832) (the “’832 Patent”). On May 21, 2014, the Court granted the Company’s motion to dismiss. In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and therefore, the dismissal will stand and the RB Plaintiffs lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the ’832 Patent. If this occurs, based on the Company’s original position that its BUNAVAIL^® product does not infringe the ’832 Patent, the Company would defend the case vigorously (as the Company has done so previously), and the Company anticipates that such claims against them ultimately would be rejected.

On September 20, 2014, based upon the Company’s position and belief that its BUNAVAIL^® product does not infringe any patents owned by the RB Plaintiffs, the Company proactively filed a declaratory judgment action in the EDNC, requesting the Court to make a determination that its BUNAVAIL^® product does not infringe the RB Plaintiffs’ ’832 Patent, US Patent No. 7,897,080 (“’080 Patent”) and US Patent No. 8,652,378 (“’378 Patent”). With the declaratory judgment, there is an automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden of showing that the stay should be lifted. For the ’832 Patent, the January 15, 2014 inter partes review (“IPR”) was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal Circuit affirmed the USPTO’s decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possible for the RB Plaintiffs. The ’832 IPR was finally resolved with the invalidation of claims 15-19. For the ’080 Patent, all claims have been rejected in an inter partes reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the Patent Trial and Appeal Board (“PTAB”) in a decision dated March 27, 2015. In May 2015, the RB Plaintiffs filed a response after the decision to which we filed comments. In December 2015, the PTAB denied MonoSol’s request to reopen prosecution, but provided MonoSol an opportunity to file a corrected response. MonoSol filed the request in December 2015 and we subsequently filed comments on

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

December 23, 2015. The PTAB issued a communication on July 7, 2016 denying MonoSol’s request to reopen prosecution of the rejections of all claims over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds. MonoSol failed to appeal the final decision and all claims were cancelled in a reexamination certificate issued May 9, 2017. For the ’378 Patent, an IPR was filed on June 1, 2014, but an IPR was not instituted. However, in issuing its November 5, 2014 decision not to institute the IPR, the PTAB construed the claims of the ’378 Patent narrowly. As in prior litigation proceedings, we believe these IPR and the reexamination filings will provide support for maintaining the stay until the IPR and reexamination proceedings conclude. Indeed, given the PTAB’s narrow construction of the claims of the ’378 Patent, we filed a motion to withdraw the ’378 Patent from the case on December 12, 2014. In addition, we also filed a joint motion to continue the stay (with RB Plaintiffs) in the proceedings on the same day. Both the motion to withdraw the ’378 Patent from the proceedings and motion to continue the stay were granted.

On September 22, 2014, the RB Plaintiffs filed an action against the Company (and its commercial partner) relating to its BUNAVAIL^® product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent No. 8,765,167 (“’167 Patent”). As with prior actions by the RB Plaintiffs, the Company believes this is another anticompetitive attempt by the RB Plaintiffs to distract our efforts from commercializing BUNAVAIL^®. The Company strongly refutes as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit. On December 12, 2014, the Company filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against our commercial partner. The Court issued an opinion on July 21, 2015 granting the Company’s motion to transfer the venue to the ENDC but denying its motion to dismiss the case against the Company’s commercial partner as moot. The Company also filed a Joint Motion to stay the case in North Carolina at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the ‘167 IPRs in the USPTO. The Company will continue to vigorously defend this case in the EDNC.

In a related matter, on October 28, 2014, the Company filed multiple IPR requests on the ’167 Patent demonstrating that certain claims of such patent were anticipated by or obvious in light of prior art references, including prior art references not previously considered by the USPTO, and thus, invalid. The USPTO instituted three of the four IPR requests and the Company filed a request for rehearing for the non-instituted IPR. The final decisions finding all claims patentable were issued in March 2016 and the Company filed a Request for Reconsideration in the USPTO in April 2016, which was denied in September 2016 and appealed to Court of Appeals for the Federal Circuit (the “Federal Circuit”) in November 2016. The appeal is currently proceeding in the Federal Circuit with final briefing completed August 7, 2017 and oral argument pending. Regardless of the outcome of the appeal, the Company believes that BUNAVAIL^® will be found not to infringe the claims of the ’167 patent.

On January 13, 2017, MonoSol filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ‘167 patent. In lieu of answering the complaint, the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC on March 1, 2017 of which briefing on the motions was completed. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case has been transferred to Delaware District Court. The Company strongly refutes as without merit MonoSol’s assertion of patent infringement and will vigorously defend the lawsuit.

Teva Pharmaceuticals (formerly Actavis)

On February 8, 2016, the Company received a notice relating to a Paragraph IV certification from Actavis Laboratories UT, Inc. (“Actavis”) seeking to find invalid three Orange Book listed patents (the “BUNAVAIL^® Patents”) relating specifically to BUNAVAIL^®. The Paragraph IV certification relates to an Abbreviated New Drug Application (the “ANDA”) filed by Actavis with the FDA for a generic formulation of BUNAVAIL^®. The BUNAVAIL^® Patents subject to Actavis’ certification are U.S. Patent Nos. 7,579,019 (the “’019 Patent”), 8,147,866 (the “’866 Patent”) and 8,703,177 (the “’177 Patent”). Under the Food Drug and Cosmetic Act, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Amendments”), after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Actavis within 45 days from the date of receipt of the certification notice. On March 18, 2016, the Company filed a complaint in Delaware against Actavis, thus the Company is entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BUNAVAIL^®. The 30 month stay is expected to preempt any final approval by the FDA on Actavis’ ANDA until at least August of 2018.

The Company asserted three different patents against Actavis, the ’019 Patent, the ’866 Patent, and the ’177 Patent. Actavis did not raise non-infringement positions with regard to the ’019 Patent and the ’866 Patent in its Paragraph IV certification. Actavis did raise a non-infringement position on the ’177 Patent due to its assertion that the backing layer for its generic product does not have a pH

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

within the claimed range claimed in the patent. The Company asserted in its complaint that Actavis infringed the ’177 Patent either literally or under the doctrine of equivalents.

The Company believes that Actavis is unlikely to prevail on its claims that the ’019, ’866, and ’177 Patents are invalid, and, as the Company has done in the past, intends to vigorously defend its intellectual property. Each of the three patents carries the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which the Company prevailed, and all claims of the ’019 Patent survived. IPR petitioner MonoSol’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. MonoSol did not appeal and the decision is final.

On December 20, 2016, the USPTO issued U.S. Patent No. 9,522,188 (“the “’188 Patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product. On February 23, 2017, Actavis sent a Paragraph IV certification adding the ’188 Patent to its ANDA. The Company amended the complaint to add the ’188 Patent to the current litigation.

On January 31, 2017, the Company received a notice relating to a Paragraph IV certification from Teva Pharmaceuticals USA (“Teva”) relating to Teva’s ANDA on additional strengths of BUNAVAIL^®. Teva’s parent company, Teva Pharmaceuticals Ltd., recently acquired Actavis through an acquisition. On March 16, 2017, the Company brought suit against Teva and its parent company on these additional strengths within 45 days from the receipt of the notice in Delaware. As in the original case brought by Actavis, the Company is again entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference the additional strengths of BUNAVAIL^®. The 30 month stay is expected to extend until at least August of 2019. On June 20, 2017, the Court entered orders staying both BUNAVAIL^® suits at the request of the parties.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product.

On October 12, 2017, the Company announced that it had entered into a settlement agreement with Teva that resolved the Company’s BUNAVAIL^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company has entered into a non-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL^® in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.

Litigations related to BELBUCA^®

The Company received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents (the “BELBUCA^® Patents”) relating specifically to BELBUCA^®. The Paragraph IV certifications relate to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA^®. The BELBUCA^® Patents subject to Teva’s certification are the ’019 Patent and the ’866 Patent. Under the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of receipt of the certification notice. The Company filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017, thus the Company is entitled to receive a 30

month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA^®. The 30 month stay is expected to preempt any final approval by the FDA on Teva’s ANDA Nos. 209704 and 209772 until at least May of 2019 and for Teva’s ANDA No. 209807 until at least June of 2019.

The Company has asserted two different patents against Teva, the ’019 Patent and the ’866 Patent. Teva did not contest infringement of the claims of the ’019 Patent and also did not contest infringement of the claims of the ’866 Patent that cover BELBUCA^® in its Paragraph IV certifications.

The Company believes that Teva is unlikely to prevail on its claims that the ’019 and ’866 Patents are invalid, and, as the Company has done in the past, intends to vigorously defend its intellectual property. Both of the patents carry the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which the Company prevailed, and all claims of the ’019 Patent survived. IPR Petitioner MonoSol’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. MonoSol did not file a timely appeal at the Federal Circuit.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BELBUCA^® product.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

A five (5) day bench trial is currently scheduled to begin on November 19, 2018.

On August 28, 2017, the Court entered orders staying both BELBUCA^® suits at the request of the parties. On October 18, 2017, the Court entered orders continuing the stay in both BELBUCA^® suits at the request of the parties.

On October 5, 2017, the Company entered into a subsequent party acknowledgement relating to its participation in the Opioid PMR Consortium (the “OPC”). The participants are member companies, collectively undertaking various observational and clinical studies in order to satisfy certain post-marketing requirements by the FDA as holders of a NDA for extended-release and long-acting opioid analgesics. As a requirement of joining the OPC, the Company was required to pay its share of the previous expenses incurred and funded by the existing member companies. The Company’s pro-rata share of such expenses totals approximately $4.2 million, which will be paid during the fourth quarter of 2017. Ongoing expenses will be shared equally by the member companies and paid monthly for the remainder of 2017 through 2020.

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The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report. This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the SEC. See “Cautionary Note Regarding Forward Looking Statements” below.

Overview

Strategy

We are a specialty pharmaceutical company that is developing and commercializing, either on our own or in partnerships with third parties, new applications of approved therapeutics to address important unmet medical needs using both proven and new drug delivery technologies. We have developed and are continuing to develop pharmaceutical products aimed principally in the areas of pain management and addiction.

Our strategy is to:

We believe this strategy will allow us to increase our revenues, improve our margins and profitability and enhance stockholder value.

Third Quarter and Recent Highlights

Our Products and Related Trends

Our product portfolio currently consists of four products. As of the date of this report, three products are approved by the FDA and one is in development. Three of these four products utilize our patented BEMA^® thin film drug delivery technology.

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We expect to continue our research and development of pharmaceutical products and related drug delivery technologies, some of which will be funded by our commercialization agreements. We will continue to seek additional license agreements, which may include upfront payments. We anticipate that funding for the next several years will come primarily from earnings from sales of BELBUCA^® and BUNAVAIL^®, milestone payments and royalties from Meda and TTY, potential sales of securities and collaborative research agreements, including those with pharmaceutical companies.

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Update on Relaunch Activities in the U.S. for ONSOLIS^®

On January 27, 2015, we announced that we had entered into an assignment and revenue sharing agreement with Meda to return to us the marketing authorizations for ONSOLIS^® for the U.S. and the right to seek marketing authorizations for ONSOLIS^® in Canada and Mexico.

On May 11, 2016, we announced the signing of a licensing agreement under which we granted the exclusive rights to develop and commercialize in the U.S. to Collegium. Under terms of the agreement, Collegium will be responsible for the manufacturing, distribution, marketing and sales of ONSOLIS^® in the U.S. Both companies are collaborating on the ongoing transfer of manufacturing, which includes submission of a Prior Approval Supplement FDA. Upon approval of the Supplement, the NDA and manufacturing responsibility will be transferred to Collegium. Financial terms of our agreement with Collegium include a $2.5 million upfront non-refundable payment, a $4 million payment upon first commercial sale, $3 million payable to us related to ONSOLIS^® patent milestone, up to $17 million in potential payments based on achievement of performance and sales milestones, and upper-teen percent royalties based on various annual U.S. net sales thresholds. Meda shares in the proceeds of our partnership with Collegium, and the completion of this transaction with Collegium required the execution of a definitive termination agreement between us and Meda embodying those significant milestone and royalty-sharing terms and certain other provisions. Meda continues to commercialize ONSOLIS^® under the brand name BREAKYL^™ in the E.U.

Efforts to extend our supply agreement with our ONSOLIS^® manufacturer Aveva were unsuccessful and the agreement expired. However, we have secured an alternate supplier and are in the process of qualifying the supplier to manufacturer ONSOLIS^® for the U.S. market. Based on our current estimates, we believe that we will submit the necessary documentation to FDA for qualification of the new manufacturer by the end of 2017.

Results of Operations

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

Product Sales. We recognized $8.1 million and $2.0 million in product sales during the three months ended September 30, 2017 and 2016, respectively. The increase is principally due to the reacquisition of BELBUCA^® in January 2017.

Product Royalty Revenues. We recognized $1.4 million and $1.1 million in product royalty revenue during the three months ended September 30, 2017 and 2016, respectively. Of the aforementioned amounts, $0.9 million and $0.4 million, respectively, can be attributed to royalties on net sales of BREAKYL^™ under our license agreement with Meda. We recognized $0.5 million and $0.4 million in PAINKYL^™ royalty revenue in each of the respective three months ended September 30, 2017 and 2016, under our license agreement with TTY. For the three months ended September 30, 2016, we recognized $0.3 million from net sales of BELBUCA^® under our license agreement with Endo. The revenue increase is principally due to higher BREAKYL^™ royalty revenue during the three months ended September 30, 2017 as compared to September 30, 2016.

Research and Development Reimbursements. We recognized $0.5 million of reimbursable revenue during each of the three months ended September 30, 2017 and 2016, respectively, related to our license agreement with Collegium.

Contract Revenues. We recognized $1.2 million in contract revenue during the three months ended September 30, 2017 upon execution of our license agreement with Purdue. There was no such contract revenue during the corresponding three months of 2016.

Cost of Sales. We incurred $4.4 million and $2.3 million in cost of sales during the three months ended September 30, 2017 and 2016, respectively. Cost of sales during the three months ended September 30, 2017 was related primarily to BELBUCA^® and BUNAVAIL^®, which included $2.8 million of product cost, royalties paid and depreciation, and $0.7 million of fair value of the inventory purchased related to the BELBUCA^® reacquisition. Additionally, we paid a total of $0.4 million in quarterly minimum royalty payments to CDC. Cost of sales during the three months ended September 30, 2017 also included $0.3 million and $0.2 million related to BREAKYL^™ and PAINKYL^™, respectively. Cost of sales during the three months ended September 30, 2016 was $1.6 million for BUNAVAIL^®, which included product cost, royalties paid, lower of cost or market adjustment, and depreciation. Additionally, we incurred a total of $0.4 million in quarterly minimum payments and royalty payments to CDC. Cost of sales during the three months ended September 30, 2016 also included $0.2 million and $0.06 million related to BREAKYL™ and PAINKYL™, respectively.

Selling, General and Administrative Expenses. During the three months ended September 30, 2017 and 2016, general and administrative expenses totaled $14.9 million and $12.1 million, respectively. Selling, general and administrative costs include

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commercialization costs for BELBUCA^® and BUNAVAIL^®, legal, accounting and management wages, and consulting and professional fees, travel costs, amortization and stock compensation expenses. During the normal course of business, we accrue additional expenses for certain legal matters from time to time, including legal matters related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet.

During the three months ended September 30, 2017 and 2016, selling, general and administrative expenses included $3.7 million and $3.6 million of stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors. The increase in current period expenses is principally attributed to BELBUCA commercial support. Also included in the three months ended September 30, 2017 is amortization expense of $1.1 million for the intangible related to the BELBUCA^® reacquisition.

Interest expense. During the three months ended September 30, 2017, we had net interest expense of $1.9 million, consisting of $1.4 million of scheduled interest payments, $0.3 million of related amortization of discount and loan costs and $0.2 million of warrant interest expense, all related to the February 2017 CRG Term Loan Agreement. During the three months ended September 30, 2016, we had net interest expense of $0.8 million, consisting of $0.7 million of scheduled interest payments and $0.01 million of related amortization of discount, all related to the July 2013 secured loan facility from MidCap.

Derivative gain. Our derivative liability consists of free standing warrants measured at their fair market value, using the Black-Scholes model. During the three months ended September 30, 2017, we had no derivative gain or loss. For the corresponding period of 2016, our stock price increased by $0.34. This was the largest component of the Black-Scholes change. However, due to volatility, our derivative liability decreased, resulting in a $0.01 million derivative gain.

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

Product Sales. We recognized $23.8 million and $6.2 million in product sales during the nine months ended September 30, 2017 and 2016, respectively. The increase is principally due to the reacquisition of BELBUCA^® in January 2017 and $1.7 million additional current year BUNAVAIL^® revenue recorded as a result of changing to the sell-in method as of January 1, 2017.

Product Royalty Revenues. We recognized $3.7 million and $2.4 million in product royalty revenue during the nine months ended September 30, 2017 and 2016, respectively. Of the aforementioned amounts, $2.1 million and $1.3 million, respectively, can be attributed to royalty revenue from BREAKYL^™ under our license agreement with Meda. We recognized $0.7 million and $0.3 million, respectively, in milestones related to our agreement with Endo during the nine months ended September 30, 2017 and 2016. We recognized $0.9 million in each of the nine months ended September 30, 2017 and 2016 in PAINKYL^™ royalty revenue under our license agreement with TTY. The royalty revenue increase compared to the prior year is primarily from higher sales of BREAKYL^™ during the nine months ended September 30, 2017.

Research and Development Reimbursements. We recognized $0.8 million and $0.5 million of reimbursable revenue during the nine months ended September 30, 2017 and 2016, respectively. Higher research and development reimbursements during the nine months ended September 30, 2017 can be attributed to reimbursements related to our license agreement with Collegium.

Contract Revenues. We recognized $21.2 million of contract revenue during the nine months ended September 30, 2017. Of the aforementioned amount, $20.0 million recognized in 2017 was received in November 2015 as part of the payment from Endo for the BELBUCA^® NDA approval. This amount was deferred upon receipt because it was contingently refundable to Endo if a third party generic product was introduced in the U.S. during the patent extension period from 2020 to 2027. However, we entered into a Termination Agreement with Endo on December 7, 2016 which terminated the BELBUCA^® license to Endo effective January 6, 2017 and such deferred revenue was recognized. We also recognized $1.2 million in contract revenue during the nine months ended September 30, 2017 related to our license agreement with Purdue. For the first nine months of 2016 we recognized $2.5 million in contract revenue upon execution of our license agreement with Collegium.

Cost of Sales. We incurred $14.3 million and $9.0 million in cost of sales during the nine months ended September 30, 2017 and 2016, respectively. Cost of sales during the nine months ended September 30, 2017 was $9.5 million for both BELBUCA^® and BUNAVAIL^®. Such product costs include manufacturing, royalties and depreciation and $2.8 million of fair value of the inventory purchased related to the BELBUCA^® reacquisition. Additionally, we paid a total of $1.1 million in quarterly minimum and royalty payments to CDC. Cost of sales during the nine months ended September 30, 2017 also includes $0.7 million and $0.2 million related to BREAKYL^™ and PAINKYL^™, respectively. Cost of sales during the nine months ended September 30, 2016 was $5.3 million for BUNAVAIL^®. Such product costs include manufacturing, royalties, lower of cost or market adjustment and depreciation. Additionally, we paid a total of $3.0 million in royalty payments to CDC and to Meda related to the aforementioned existing agreements. Cost of sales during the nine months ended September 30, 2016 also includes $0.5 million and $0.1 million related to BREAKYL^™ and PAINKYL^™, respectively.

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Selling, General and Administrative Expenses. During the nine months ended September 30, 2017 and 2016, general and administrative expenses totaled $44.1 million and $37.7 million, respectively. Selling, general and administrative costs include commercialization costs for BELBUCA^® and BUNAVAIL^®, management wages and stock-based compensation, legal, accounting and other professional fees, travel costs, and the amortization of our intangible assets including the license and distribution rights from the reacquisition of BELBUCA^® as noted above. During the normal course of business, we accrue additional expenses for certain legal matters from time to time, including legal matters related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet. The increase in selling, general and administrative expenses during 2017 can be primarily attributed to BELBUCA^® commercial support and $3.4 million of amortization expense related to the BELBUCA^® license and distribution rights intangible. No such amortization expense was incurred in the prior year.

During the nine months ended September 30, 2017 and 2016, selling, general and administrative expenses included $8.9 million and $9.5 million of stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors.

Interest expense. During the nine months ended September 30, 2017, we had net interest expense of $6.7 million, consisting of $2.9 million of scheduled interest payments and $0.8 million of related amortization of discount and loan costs and $0.4 million of warrant interest expense all related to the February 2017 CRG Term Loan Agreement. In addition, we had remaining $0.9 million of scheduled interest payments and $1.4 million of related amortization of discount, loan costs and loan pay off and $0.2 million of warrant interest expense all related to the July 2013 secured loan facility from MidCap, which was paid off with the CRG term loan. During the nine months ended September 30, 2016, we had net interest expense of $2.5 million, consisting of $2.2 million of scheduled interest payments, $0.2 million of related amortization of discount and loan costs and $0.1 million in warrant interest expense, all related to the July 2013 secured loan facility from MidCap.

Derivative gain. Our derivative liability consists of free standing warrants measured at their fair market value, using the Black-Scholes model. During the nine months ended September 30, 2017, we sustained no derivative gain or loss. For the corresponding period last year, our stock price decreased by $2.09. This was the largest component of the Black-Scholes change. As a result, our derivative liability also decreased, resulting in a $0.04 million derivative gain.

Revenues

The following table summarizes net product sales for the three and nine month periods ended September 30 in thousands:

Expenditures for Research and Development Programs

Our research and development expenditures for our approved products and product candidates as of September 30 are as follows in thousands:

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Liquidity and Capital Resources

Since inception, we have financed our operations principally from the sale of equity securities, proceeds from short-term borrowings or convertible notes, funded research arrangements and revenue generated as a result of our license and development agreements. We intend to finance our commercialization, research and development and working capital needs from existing cash, royalty revenue, earnings from the commercialization of BELBUCA^® and BUNAVAIL^®, our term loan with CRG (assuming we achieve the conditions for additional funding under such loan), potential new sources of debt and equity financing, existing and new licensing and commercial partnership agreements and, potentially, through the exercise of outstanding common stock options and warrants to purchase common stock.

At September 30, 2017, we had cash and cash equivalents of approximately $19.7 million. We used $12.3 million of cash during the nine months ended September 30, 2017 and had stockholders’ equity of $18.9 million at September 30, 2017, versus stockholders’ deficit of $17.7 million at December 31, 2016. We have access to additional capital from the CRG loan of $15 million as well as equity markets if we choose or a combination of both that would provide sufficient capital to extend our runway through the end of 2018 and beyond. This assumes that we do not accelerate the development of other opportunities available to us, engage in an extraordinary transaction or otherwise face unexpected events, costs or contingencies, any of which could affect our cash requirements.

Additional capital will be required to support our commercialization activities for BELBUCA^® and BUNAVAIL^®, our planned development of buprenorphine depot injection, the reformulation project for and anticipated commercial relaunch of ONSOLIS^® and general working capital. Based on product development timelines and agreements with our development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding.

Accordingly, we anticipate that we will be required to raise additional capital, which may be available to us through a variety of sources, including:

As a result of our late filing of certain financing information related to our reacquisition of BELBUCA^®, we are unable to utilize our universal shelf registration statement and associated at-the-market offering program until April 2018.

In addition, readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of operations during 2017 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.

If we are unable to attract additional funds on commercially acceptable terms, it may adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.

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Contractual Obligations and Commercial Commitments

Our contractual obligations as of September 30, 2017 are as follows in thousands:

Off-Balance Sheet Arrangements

As of September 30, 2017, we had no off-balance sheet arrangements.

Effects of Inflation

We do not believe that inflation has had a material effect on our financial position or results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with GAAP. For information regarding our critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained in our annual report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”). As of January 1, 2017, we made a change to an accounting estimate in revenue recognition to recognize revenue on the sell-in method.

Foreign currency exchange risk

We currently have and may in the future increased, clinical and commercial manufacturing agreements which are denominated in Euros, CAD or other foreign currencies. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the U.S. dollar, Euro, CAD or other applicable currencies, or by weak economic conditions in Europe, Canada or elsewhere in the world. We are not currently engaged in any foreign currency hedging activities.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our third quarter of 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (and the “Liquidity and Capital Resources” section thereof) and elsewhere may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to our plans, objectives, projections, expectations and intentions and other statements identified by words such as “projects,” “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” or similar expressions. These statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties, including those detailed in our filings with the SEC. Actual results, including, without limitation: (i) actual sales results (including the results of our continuing commercial efforts with BELBUCA^® and BUNAVAIL^®), (ii) the application and availability of corporate funds and our need for future funds, (iii) the timing for completion, and results of, scheduled or additional clinical trials and the FDA’s review and/or approval and commercial activities for our products and product candidates and regulatory filings related to the same or (iv) the results of our ongoing intellectual property litigations and patent office proceedings, may differ significantly from those set forth or anticipated in the forward-looking statements. Such forward-looking statements also involve other factors which may cause our actual results, performance or achievements to materially differ from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary significantly from reporting period to reporting period. Such factors include, among others, those listed under Item 1A of our 2016 Annual Report and other factors detailed from time to time in our other filings with the SEC. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this Quarterly Report. We undertake no obligation to publically update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

PART II. OTHER INFORMATION

Litigation Related To ONSOLIS^®

On November 2, 2010, MonoSol filed an action against us and our commercial partners for ONSOLIS^® in the DNJ for alleged patent infringement and false marking. We were formally served in this matter on January 19, 2011. MonoSol claimed that our manufacturing process for ONSOLIS^®, which has never been disclosed publicly and which we and our partners maintain as a trade secret, infringes on its ’588 Patent. Of note, the BEMA^® technology itself was not at issue in the case, nor is BELBUCA^® or BUNAVAIL^®, but rather only the manner in which ONSOLIS^®, which incorporates the BEMA^® technology, is manufactured. Pursuant to its complaint, MonoSol was seeking an unspecified amount of damages, attorney’s fees and an injunction preventing future infringement of MonoSol’s patents.

We strongly refuted as without merit MonoSol’s assertion of patent infringement, which relates to our confidential, proprietary manufacturing process for ONSOLIS^®. On September 12, 2011, we filed a request for inter partes reexamination in the USPTO of MonoSol’s ’588 Patent demonstrating that all claims of such patent were anticipated by or obvious in the light of prior art references, including several prior art references not previously considered by the USPTO, and thus invalid. On September 16, 2011, we filed a motion for stay pending the outcome of the reexamination proceedings, which subsequently was granted.

In November 2011, the USPTO rejected all 191 claims of MonoSol’s ’588 Patent. On January 20, 2012, we filed requests for reexamination before the USPTO of MonoSol’s ’891 Patent and ’292 Patent, the two additional patents asserted by MonoSol, demonstrating that all claims of those two patents were anticipated by or obvious in light of prior art references, including prior art

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references not previously considered by the USPTO, and thus invalid. The USPTO granted the requests for reexamination with respect to MonoSol’s ’292 and ’891 Patents. In its initial office action in each, the USPTO rejected every claim in each patent.

As expected, in the ’891 Patent and ’292 Patent Ex Parte Reexamination proceedings, MonoSol amended the claims several times and made multiple declarations and arguments in an attempt to overcome the rejections made by the USPTO. These amendments, declarations and other statements regarding the claim language significantly narrowed the scope of their claims in these two patents. In the case of the ’891 Patent, not one of the original claims survived reexamination and five separate amendments were filed confirming our position that the patent was invalid. Additionally, we believe that arguments and admissions made by MonoSol prevent it from seeking a broader construction during any subsequent litigation by employing arguments or taking positions that contradict those made during prosecution.

A Reexamination Certificate for MonoSol’s ’891 Patent in its amended form was issued August 21, 2012 (Reexamined Patent No. 7,357,891C1 or the “’891C1 Patent”). A Reexamination Certificate for MonoSol’s ’292 Patent in its amended form was issued on July 3, 2012 (Reexamined Patent No. 7,425,292C1 or the “’292C1 Patent”). These actions by the USPTO confirm the invalidity of the original patents and through the narrowing of the claims in the reissued patents strengthens our original assertion that our products and technologies do not infringe on MonoSol’s original patents.

On June 12, 2013, despite our previously noted success in the prior ex parte reexaminations for the ’292 and ’891 Patents, we filed requests for inter partes reviews (“IPRs”) on the narrowed yet reexamined patents, the ’292C1 and ’891C1 Patents, to challenge their validity and continue to strengthen our position. On November 13, 2013, the USPTO decided not to institute the two IPRs for the ’891 C1 and ’292 C1 Patents. The USPTO’s decision was purely on statutory grounds and based on a technicality (in that the IPRs were not filed within what the UPSTO determined to be the statutory period) rather than substantive grounds. Thus, even though the IPRs were not instituted, the USPTO decision preserves our right to raise the same arguments at a later time (e.g., during litigation). Regardless, our assertion that our products and technologies do not infringe the original ’292 and ’891 Patents and, now, the reexamined ’891 C1 and ’292 C1 Patents remains the same.

Importantly, in the case of MonoSol’s ’588 Patent, at the conclusion of the reexamination proceedings (and its appeals process), on April 17, 2014, the PTAB issued a Decision on Appeal affirming the Examiner’s rejection (and confirming the invalidity) of all the claims of the ’588 Patent. MonoSol did not request a rehearing by the May 17, 2014 due date for making such a request and did not further appeal the Decision to the Federal Court of Appeals by the June 17, 2014 due date for making such an appeal. Subsequently, on August 5, 2014, the USPTO issued a Certificate of Reexamination cancelling the ‘588 Patent claims.

Based on our original assertion that our proprietary manufacturing process for ONSOLIS^® does not infringe on patents held by MonoSol, and the denial and subsequent narrowing of the claims on the two reissued patents MonoSol has asserted against us while the third has had all claims rejected by the USPTO, we remain confident in our original stated position regarding this matter. Thus far, we have proven that the “original” ’292 and ’891 patents in light of their reissuance with fewer and narrower claims were indeed invalid and the third and final patent, the ’588 patent, was invalid as well with all its claims cancelled. Given the outcomes of the ‘292, ‘891 and ‘588 reexamination proceedings, at a January 22, 2015 status meeting, the Court decided to lift the stay and grant our request for the case to proceed on an expedited basis with a Motion for Summary Judgment to dismiss the action. On September 25, 2015, the Honorable Freda L. Wolfson granted our motion for summary judgment and ordered the case closed. We were found to be entitled to absolute intervening rights as to both patents in suit, the ‘292 and ‘891 patents and our ONSOLIS^® product is not liable for infringing the patents prior to July 3, 2012 and August 21, 2012, respectively. In October 2015, MonoSol appealed the decision of the court to the Federal Circuit. We had no reason to believe the outcome would be different and were prepared to vigorously defend the appeal. MonoSol, however, subsequently decided to withdraw the appeal. On February 25, 2016, MonoSol filed an Unopposed Motion For Voluntary Dismissal Of Appeal, which was granted by the court on February 26, 2016 and the case dismissed. Thus, the district court’s grant of the Summary Judgement of Intervening Rights stands. The possibility exists that MonoSol could file another suit alleging infringement of the ‘292 and ’891 patents. We continue to believe, however, that ONSOLIS^® and our other products relying on the BEMA^® technology, including BUNAVAIL^® and BELBUCA^®, do not infringe any amended, reexamined claim from either patent.

Litigation Related To BUNAVAIL^®

RB and MonoSol

On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and MonoSol (collectively, the “RB Plaintiffs”) filed an action against us relating to our BUNAVAIL^® product in the United States District Court for the Eastern District of North Carolina for alleged patent infringement. BUNAVAIL^® is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL^®, which has never been disclosed publicly, infringes its ’832 Patent.

On May 21, 2014, the Court granted our motion to dismiss. In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and therefore, the dismissal will stand and the RB Plaintiffs

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lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the ‘832 Patent. If this occurs, based on our original position that our BUNAVAIL^® product does not infringe the ‘832 Patent, we would defend the case vigorously (as we have done so previously), and we anticipate that such claims against us ultimately would be rejected.

On September 20, 2014, based upon our position and belief that our BUNAVAIL^® product does not infringe any patents owned by the RB Plaintiffs, we proactively filed a declaratory judgment action in EDNC, requesting the Court to make a determination that our BUNAVAIL^® product does not infringe the RB Plaintiffs’ ’832 Patent, ’080 Patent and ’378 Patent. With the declaratory judgment, there is an automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden of showing that the stay should be lifted. For the ‘832 Patent, the January 15, 2014 IPR was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal Circuit affirmed the USPTO’s decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possible for the RB Plaintiffs. The ’832 IPR was finally resolved with the invalidation of claims 15-19. For the ’080 Patent, all claims have been rejected in an inter partes reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the PTAB in a decision dated March 27, 2015. In May 2015, the RB Plaintiffs filed a response after the decision to which we filed comments. In December 2015, the PTAB denied MonoSol’s request to reopen prosecution, but provided MonoSol an opportunity to file a corrected response. MonoSol filed the request in December 2015 and we subsequently filed comments on December 23, 2015. The PTAB issued a communication on July 7, 2016 denying MonoSol’s request to reopen prosecution of the rejections of all claims over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds. MonoSol failed to appeal the final decision and all claims were cancelled in a reexamination certificate issued May 9, 2017.

For the ’378 Patent, an IPR was filed on June 1, 2014, but an IPR was not instituted. However, in issuing its November 5, 2014 decision not to institute the IPR, the PTAB construed the claims of the ’378 Patent narrowly. As in prior litigation proceedings, we believe these IPR and the reexamination filings will provide support for maintaining the stay until the IPR and reexamination proceedings conclude. Indeed, given the PTAB’s narrow construction of the claims of the ’378 Patent, we filed a motion to withdraw the ’378 Patent from the case on December 12, 2014. In addition, we also filed a joint motion to continue the stay (with RB Plaintiffs) in the proceedings on the same day. Both the motion to withdraw the ’378 Patent from the proceedings and motion to continue the stay were granted.

On September 22, 2014, the RB Plaintiffs filed an action against us (and our commercial partner) relating to our BUNAVAIL^® product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its ’167 Patent. As with prior actions by the RB Plaintiffs, we believe this is another anticompetitive attempt by the RB Plaintiffs to distract our efforts from commercializing BUNAVAIL^®. We strongly refute as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit. On December 12, 2014, we filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against our commercial partner. The Court issued an opinion on July 21, 2015 granting our motion to transfer the venue to the ENDC but denying our motion to dismiss the case against our commercial partner as moot. We have also filed a Joint Motion to Stay the case in North Carolina at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the ’167 Patent IPRs in the USPTO. We will continue to vigorously defend this case in the EDNC.

In a related matter, on October 28, 2014, we filed multiple IPR requests on the ’167 Patent demonstrating that certain claims of such patent were anticipated by or obvious in light of prior art references, including prior art references not previously considered by the USPTO, and thus, invalid. The USPTO instituted three of the four IPR requests and we filed a request for rehearing for the non-instituted IPR. The final decisions finding all claims patentable were issued in March 2016 and we filed a Request for Reconsideration in the USPTO in April 2016, which was denied in September 2016 and appealed to Court of Appeals for the Federal Circuit in November 2016. The appeal is currently proceeding in the Federal Circuit with final briefing completed August 7, 2017 and oral argument pending. Regardless of the outcome of the appeal, we believe that BUNAVAIL^® will be found not to infringe the claims of the ’167 patent.

On January 22, 2014, MonoSol filed a Petition for IPR on the ’019 Patent. The Petition asserted that the claims of the ’019 Patent are alleged to be unpatentable over certain prior art references. The IPR was instituted on August 6, 2014. An oral hearing was held in April 2015 and a decision upholding all seven claims was issued August 5, 2015. In September 2015, MonoSol requested that the PTAB rehear the IPR. On December 19, 2016, the PTAB issued a final decision denying MonoSol’s request for rehearing. MonoSol did not file a notice of appeal to the Federal Circuit by February 20, 2017, therefore, PTAB’s decision upholding all claims of our ’019 Patent will be final and unappealable.

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On January 13, 2017, MonoSol filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ’167 patent. In lieu of answering the complaint, we filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case has been transferred to Delaware District Court. We strongly refute as without merit MonoSol’s assertion of patent infringement and will vigorously defend the lawsuit.

Litigations related to BUNAVAIL^®

Teva Pharmaceuticals (formerly Actavis)

On February 8, 2016, we received a notice relating to a Paragraph IV certification from Actavis seeking to find invalid the BUNAVAIL^® Patents relating specifically to BUNAVAIL^®. The Paragraph IV certification relates to the ANDA filed by Actavis with the FDA for a generic formulation of BUNAVAIL^®. The BUNAVAIL^® Patents subject to Actavis’ certification are the ’019 Patent, the ’866 Patent and the ’177 Patent. Under the Food Drug and Cosmetic Act, as amended by the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, we may, and in this case did, bring a patent infringement suit in federal district court against Actavis within 45 days from the date of receipt of the certification notice. On March 18, 2016, we filed a complaint in Delaware against Actavis, thus we are entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BUNAVAIL^®. The 30 month stay is expected to preempt any final approval by the FDA on Actavis’ ANDA until at least August of 2018.

We asserted three different patents against Actavis, the ’019 Patent, the ’866 Patent, and the ’177 Patent. Actavis did not raise non-infringement positions with regard to the ’019 and the ’866 Patents in its Paragraph IV certification. Actavis did raise a non-infringement position on the ’177 Patent due to its assertion that the backing layer for its generic product does not have a pH within the claimed range claimed in the patent. We asserted in our complaint that Actavis infringed the ’177 Patent either literally or under the doctrine of equivalents.

We believe that Actavis is unlikely to prevail on its claims that the ’019, ’866, and ’177 Patents are invalid, and, as we have done in the past, intend to vigorously defend our intellectual property. Each of the three patents carries the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which we prevailed, and all claims of the ’019 Patent survived. IPR petitioner MonoSol’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. MonoSol did not appeal and the decision is final.

On December 20, 2016, the USPTO issued ’188 Patent, and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product. On February 23, 2017, Actavis sent a Paragraph IV certification adding the ’188 Patent to its ANDA. We amended the complaint to add the ’188 Patent to the current litigation.

On January 31, 2017, we received a notice relating to a Paragraph IV certification from Teva relating to Teva’s ANDA on additional strengths of BUNAVAIL^®. Teva’s parent company, Teva Pharmaceuticals Ltd., recently acquired Actavis through an acquisition. On March 16, 2017, we brought suit against Teva and its parent company on these additional strengths within 45 days from the receipt of the notice in Delaware. As in the original case brought by Actavis, we are again entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference the additional strengths of BUNAVAIL^®. The 30 month stay is expected to extend until at least August of 2019. On June 20, 2017, the Court entered orders staying both BUNAVAIL^® suits at the request of the parties.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product.

On October 12, 2017, we announced that we had entered into a settlement agreement with Teva that resolved our BUNAVAIL^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we have entered into a non-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL^® in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.

Litigations related to BELBUCA^®

We received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid the BELBUCA^® Patents relating specifically to BELBUCA^®. The Paragraph IV certifications relate to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA^®. The Patents subject to Teva’s certification are the ’019 Patent and the ’866 Patent. Under the Hatch-Waxman Amendments, after receipt of a valid Paragraph

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IV notice, we may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of receipt of the certification notice. We filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017, thus we are entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA^®. The 30 month stay is expected to preempt any final approval by the FDA on Teva’s ANDA Nos. 209704 and 209772 until at least May of 2019 and for Teva’s ANDA No. 209807 until at least June of 2019.

We have asserted two different patents against Teva, the ’019 Patent and the ’866 Patent. Teva did not contest infringement of the claims of the ’019 Patent and also did not contest infringement of the claims of the ’866 Patent that cover BELBUCA^® in its Paragraph IV certifications.

We believe that Teva is unlikely to prevail on its claims that the ’019 and ’866 Patents are invalid, and, as we have done in the past, intend to vigorously defend its intellectual property. Both of the patents carry the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which we prevailed, and all claims of the ’019 Patent survived. IPR Petitioner MonoSol’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. MonoSol did not file a timely appeal at the Federal Circuit.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BELBUCA^® product.

A five (5) day bench trial is currently scheduled to begin on November 19, 2018.

On August 28, 2017, the Court entered orders staying both BELBUCA^® suits at the request of the parties. On October 18, 2017, the Court entered orders continuing the stay in both BELBUCA^® suits at the request of the parties.

The following risk factor is provided regarding our President and Chief Executive Officer’s planned retirement in January 2018.

We depend upon key personnel who may terminate their employment with us at any time. Moreover, our current President and Chief Executive Officer is retiring as of January 2018, and we may be unable to fill that key position with a qualified candidate, which could adversely impact our company.

Our ability to achieve our corporate objectives will depend to a significant degree upon the continued services of key management, technical and scientific personnel, particularly our senior executive officers such as our President and Chief Executive Officer Mark Sirgo. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of the services of these or other key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to product development or approval, loss of sales and diversion of management resources. In addition, we depend on our ability to attract and retain other highly skilled personnel, including research scientists. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may be unable to recruit such personnel on a timely basis, if at all, which would negatively impact our development and commercialization programs. Additionally, we do not currently maintain “key person” life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.

In particular, Dr. Sirgo is retiring as our President and Chief Executive Officer in January 2018. We are currently conducting a search for a successor to Dr. Sirgo. Recruiting qualified candidates for such senior executive positions within the specialty pharmaceutical industry is challenging, and we may be unsuccessful in filling that key position with a qualified candidate, or even if we do fill that position, that such candidate will perform according to our expectations. In addition, during the transition to a new President and Chief Executive Officer, we may encounter challenges in our operations which could impact our results of operations.

None.

None.

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Not applicable.

None.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

S-1