UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

Or

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

For the transition period from              to

Commission File Number 001-36295

Egalet Corporation

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

(Title of Class)

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

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

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

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

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

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

Common Stock, $0.001 par value                                 Shares outstanding as of November 8, 2016: 25,189,125

TABLE OF CONTENTS

		Page
	PART I- FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of December 31, 2015 and September 30, 2016 (unaudited)	1
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2015 and 2016	2
	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2015 and 2016	3
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2016	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II- OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
SIGNATURES		42

Unless otherwise indicated or the context otherwise requires, references to the “Company”, “we”, “us” and “our” refer to Egalet Corporation and its subsidiaries. The Egalet logo is our trademark and Egalet is our registered trademark. All other trade names, trademarks and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We have assumed that the reader understands that all such terms are source-indicating. Accordingly, such terms, when first mentioned in this Quarterly Report on Form 10-Q, appear with the trade name, trademark or service mark notice and then throughout the remainder of this Quarterly Report on Form 10-Q without the trade name, trademark or service mark notices for convenience only and should not be construed as being used in a descriptive or generic sense. Unless otherwise indicated, all statistical information provided about our business in this report is as of September 30, 2016.

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PART I

ITEM 1.  FINANCIAL STATEMENTS

Egalet Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

	December 31, 2015		September 30, 2016
			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	46,665	$	46,622
Marketable securities, available for sale		99,042		54,592
Accounts receivable		295		3,890
Related party receivable		57		-
Inventory		1,837		1,487
Prepaid expenses and other current assets		1,295		1,867
Other receivables		1,047		1,287
Total current assets		150,238		109,745
Intangible assets, net		10,380		8,921
Property and equipment, net		7,801		13,584
Deposits and other assets		3,997		1,823
Total assets	$	172,416	$	134,073
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		7,417		5,713
Accrued expenses		7,616		13,933
Deferred revenue		10,128		4,910
Debt - current		3,320		133
Other current liabilities		183		500
Total current liabilities		28,664		25,189
Debt - non-current portion, net		52,442		82,070
Deferred income tax liability		1,084		304
Derivative liability		656		14
Other liabilities		348		941
Total liabilities		83,194		108,518
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock--$0.001 par value; 75,000,000 shares authorized at December 31, 2015 and September 30, 2016;  25,085,554  and 25,189,125 shares issued and outstanding at December 31, 2015 and September 30, 2016, respectively		25		25
Additional paid-in capital		223,784		228,735
Accumulated other comprehensive (loss) income		(41)		603
Accumulated deficit		(134,546)		(203,808)
Total stockholders' equity		89,222		25,555
Total liabilities and stockholders’ equity	$	172,416	$	134,073

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2016		2015		2016
Revenues
Net product sales	$	1,296	$	4,711	$	2,065	$	10,724
Collaboration revenues		—		—		—		100
Related party revenues		390		—		1,361		—
Total revenue		1,686		4,711		3,426		10,824
Cost and Expenses
Cost of sales (excluding amortization of product rights)		349		914		650		2,580
Amortization of product rights		505		502		1,468		1,506
General and administrative		5,515		7,950		16,014		22,802
Sales and marketing		6,283		6,973		11,142		19,455
Research and development		4,602		12,070		19,905		26,886
Total costs and expenses		17,254		28,409		49,179		73,229
Loss from operations		(15,568)		(23,698)		(45,753)		(62,405)
Other (income) expense:
Change in fair value of derivative liability		(592)		11		181		(642)
Interest expense, net		2,380		3,601		5,146		8,225
Other (gain) loss		—		(12)		(2)		54
Loss (gain) on foreign currency exchange		2		(3)		87		—
		1,790		3,597		5,412		7,637
Loss before provision (benefit) for income taxes		(17,358)		(27,295)		(51,165)		(70,042)
Provision (benefit) for income taxes		1		(358)		4		(780)
Net loss	$	(17,359)	$	(26,937)	$	(51,169)	$	(69,262)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.81)	$	(1.10)	$	(2.81)	$	(2.83)
Weighted-average shares outstanding, basic and diluted		21,530,153		24,565,554		18,182,781		24,480,494

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended				Nine months ended
	September 30,				September 30,
	2015		2016		2015		2016
Net loss	$	(17,359)	$	(26,937)	$	(51,169)	$	(69,262)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities		53		(15)		(31)		150
Foreign currency translation adjustments		(65)		123		591		494
Comprehensive loss	$	(17,371)	$	(26,829)	$	(50,609)	$	(68,618)

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2015		2016
Operating activities:
Net loss	$	(51,169)	$	(69,262)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,267		2,747
Change in fair value of derivative liability		181		(642)
Stock based compensation expense		3,715		4,677
Noncash interest and amortization of debt discount		2,668		4,019
Amortization of premium on marketable securities		497		549
Deferred income taxes		4		(780)
Loss on extinguishment of debt				800
Changes in assets and liabilities:
Related party receivable		523		59
Accounts receivable		—		(3,595)
Inventory		(144)		350
Prepaid expenses and other current assets		(1,285)		(572)
Other receivables		(1)		(208)
Deposits and other assets		(1,288)		2,176
Accounts payable		(724)		373
Accrued expenses		2,595		6,304
Deferred revenue		21,415		(5,220)
Other current liabilities		(4)		311
Other liabilities		—		836
Net cash used in operating activities		(20,750)		(57,078)
Investing activities:
Payments for purchase of property and equipment		(704)		(9,074)
Deposits for purchases of property and equipment		(1,177)		—
Purchases of investments		(96,625)		(45,522)
Sales of investments		3,388		8,570
Maturity of investments		798		81,002
Purchase of SPRIX Nasal Spray		(8,128)		—
License of OXAYDO		(5,172)		—
Net cash (used in) provided by investing activities		(107,620)		34,976
Financing activities:
Net proceeds from issuance of common stock		80,865		274
Payments on borrowings		—		(15,856)
Net proceeds from debt and royalty rights		71,496		37,231
Net cash provided by financing activities		152,361		21,649
Effect of foreign currency translation on cash and cash equivalents		429		410
Net increase (decrease) in cash and cash equivalents		24,420		(43)
Cash at beginning of period		52,738		46,665
Cash at end of period	$	77,158	$	46,622
Supplemental disclosures of cash flow information:
Non-cash financing activities:
Issuance of warrants	$	329	$	—
Cash interest payments	$	2,546	$	3,564
Liability for contractual payment associated with OXAYDO License	$	2,500	$	—

See accompanying notes to unaudited consolidated financial statements.

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Egalet Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Organization and Description of the Business

Organization and Business Overview

Egalet Corporation (the “Company”) is a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain and other conditions. The Company was founded around its proprietary Guardian™ Technology that can be applied broadly across different classes of pharmaceutical products. Using this technology, the Company has two late-stage product candidates; ARYMO™ ER, an abuse-deterrent (“AD”), extended-release (“ER”) oral morphine formulation, and Egalet-002, an AD, ER, oral oxycodone formulation, which is in a Phase 3 program (the Company’s “lead product candidates”). Both lead product candidates are being developed 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. The Company’s Guardian Technology also can be used to develop combination products that include multiple active pharmaceutical ingredients (“APIs”) with similar or different release profiles and offers the Company a number of long‑term growth opportunities. In January 2015, the Company acquired SPRIX® (ketorolac tromethamine) Nasal Spray and in-licensed OXAYDO® (oxycodone HCI, USP) tablets for oral use only—“CII”,—both of which are approved by the Food and Drug Administration (“FDA”) (the Company’s “approved products”).  The Company has patents and filed patent applications to protect its inventions covering both the Guardian Technology and its products.

2. Summary of Significant Accounting Policies and Basis of Accounting

Basis of Presentation

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

The accompanying consolidated financial information at September 30, 2016 and the three and nine months ended September 30, 2015 and 2016 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position as of September 30, 2016 and the consolidated results of its operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2015 and 2016. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2015 and 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2015 filed on March 11, 2016 with the SEC.

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies.

Net Product Sales

The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) ASC 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery

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has occurred and risk of loss has passed; and the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.  The Company determines that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements.  The Company determines when title to products and associated risk of loss has passed on to the customer pursuant to contract terms.  The Company assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.  The Company assesses collectability based primarily on the customer’s payment history and creditworthiness.

The Company sells SPRIX Nasal Spray in the U.S. to a single specialty pharmaceutical distributor subject to rights of return. The Company has limited SPRIX Nasal Spray sales history under the current distribution model and pricing, and the Company has determined that at this time it cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of SPRIX Nasal Spray until the right of return no longer exists, which occurs at the earlier of the time SPRIX Nasal Spray units are dispensed through patient prescriptions or expiration of the right of return. Units dispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Company calculates patient prescriptions dispensed using an analysis of third-party information.

The Company sells OXAYDO in the U.S. to several wholesalers, all subject to rights of return. The Company has limited OXAYDO sales history under the current distribution model and pricing, and has determined that at this time it cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of OXAYDO until the right of return no longer exists, which occurs at the earlier of the time OXAYDO units are dispensed through patient prescriptions or expiration of the right of return. Units dispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Company calculates patient prescriptions dispensed using an analysis of third-party information.

Product Sales Allowances

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

Specialty Pharmacy Fees. The Company pays a fee to a certain specialty pharmaceutical distributor of SPRIX Nasal Spray based on a contractually determined rate. The Company accrues the fee on shipment to the respective distributor and recognizes the fee as a reduction of revenue in the same period the related revenue is recognized.

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

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

Patient Assistance Programs. The Company offers patient assistance programs for SPRIX Nasal Spray and OXAYDO to patients, in which patients receive a reduction to the co-pay on their prescriptions. The Company estimates the total amount that will be redeemed based on the quantity of product shipped and recognizes the amount as a reduction of revenue in the same period the related revenue is recognized.

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Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements toEmployee Share-Based Payment Accounting, which provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company in the first quarter of 2017 and will be applied either prospectively, retrospectively or using a modified retrospective transition approach depending on the area covered in this update. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

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

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued, and to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for the Company for annual reporting periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company is currently evaluating the impact that the standard will have on the financial statements, and has not yet determined what effect, if any, the impact of adoption will be.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is evaluating ASU 2014-09 and has not yet determined what, if any, effect ASU 2014-09 will have on its results of operations or financial condition.

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3. Investments

Marketable Securities

Marketable securities consisted of the following at December 31, 2015: 

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	99,189	$	—	$	(147)	$	99,042
Total	$	99,189	$	—	$	(147)	$	99,042

Marketable securities consisted of the following as of September 30, 2016:

(in thousands)	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate notes and bonds	$	54,590	$	15	$	(13)	$	54,592
Total	$	54,590	$	15	$	(13)	$	54,592

The fair value of marketable securities as of September 30, 2016 with a maturity of less than one year is $41.6 million.  The fair value of marketable securities with a maturity of greater than one year is $13.0 million.

At September 30, 2016, the Company held 10 marketable securities that were in a continuous loss position for less than one year.  The unrealized losses are the result of current economic and market conditions and the Company has determined that no other than temporary impairment exists at September 30, 2016.

4. Inventory

Inventory is stated at the lower of cost or market using actual cost net of reserve for excess and obsolete inventory. The following represents the components of inventory at December 31, 2015 and September 30, 2016:

	December 31,		September 30,
(in thousands)	2015		2016
Raw materials	$	589	$	768
Work in process		349		—
Finished goods		230		569
Deferred cost of sales		669		150
Total	$	1,837	$	1,487

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

5. Intangible Assets

The following represents the balance of the intangible assets at December 31, 2015:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,552	$	(1,055)	$	6,497	6.00
SPRIX Nasal Spray product rights		4,620		(903)		3,717	4.00
IP R&D		166		—		166	Indefinite
Total	$	12,338	$	(1,958)	$	10,380

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The following represents the balance of the intangible assets at September 30, 2016:

	Gross				Net		Remaining Useful
	Intangible		Accumulated		Intangible		Life
(in thousands)	Assets		Amortization		Assets		(in years)
OXAYDO product rights	$	7,601	$	(1,875)	$	5,726	5.25
SPRIX Nasal Spray product rights		4,620		(1,596)		3,024	3.25
IP R&D		171		—		171	Indefinite
Total	$	12,392	$	(3,471)	$	8,921

There was no impairment to intangible assets in the three and nine months ended September 30, 2015 or September 30, 2016.

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

In January 2015, the Company entered into a Collaboration and License Agreement with Acura to commercialize OXAYDO™ (oxycodone hydrochloride) tablets containing Acura’s  Aversion® Technology (the “OXAYDO License Agreement”). The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO.  The Company also incurred transaction costs of $172,000 associated with the OXAYDO License Agreement.  Refer to Note 11 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and nine months ended September 30, 2015, the Company recognized amortization expense of $274,000 and $797,000, respectively, related to the OXAYDO product rights intangible asset.  During the three and nine months ended September 30, 2016,  the Company recognized amortization expense of $271,000 and $813,000, respectively, related to the OXAYDO product rights intangible asset.

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

In January 2015, the Company entered into and consummated the transactions contemplated by the Purchase Agreement with Luitpold (the “SPRIX Purchase Agreement”).  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million. The Company recorded an intangible asset of $4.6 million related to this transaction.  Refer to Note 11 — Acquisitions and License and Collaboration Agreements for additional details.

During the three and nine months ended September 30, 2015, the Company recognized amortization expense of $231,000 and $672,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.  During the three and nine months ended September 30, 2016, the Company recognized amortization expense of $231,000 and $693,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.

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

In connection with the acquisition of Egalet A/S, the Company recognized an IP R&D asset related to the drug delivery platform specifically designed to help deter physical abuse of pain medications. The IP R&D is considered an indefinite-lived intangible asset and is assessed for impairment annually or more frequently if impairment indicators exist. As of December 31, 2015 and September 30, 2016, the carrying value of IP R&D was $166,000, and $171,000, respectively.  The change in value was entirely due to fluctuation in foreign currency exchange rates. 

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6. Long-Term Debt

Hercules Loan and Security Agreement

In January 2015, the Company entered into the Loan and Security Agreement, which was subsequently amended in December 2015 (as amended, the “Loan Agreement”), with Hercules Technology Growth Capital, Inc. (“Hercules”) and certain other lenders, pursuant to which the Company borrowed $15.0 million under a term loan.  The term loan bears an interest rate per annum equal to the greater of either (i) 9.40% plus the prime rate as reported in The Wall Street Journal minus 3.25% or (ii) 9.40%.  Under the Loan Agreement, the Company made interest only payments through July 1, 2016, with the potential for the interest only period to be extended to January 1, 2017, subject to the FDA’s acceptance of the Company’s new drug application for its product candidate ARYMO ER, the Company’s receipt of at least $5.0 million of product revenue for any consecutive three month period prior to June 30, 2016 and there being no event of default under the Loan Agreement.  The Company did not receive at least $5.0 million of product revenue in a consecutive three month period prior to June 30, 2016, and as a result began repaying the principal balance on July 1, 2016.   In connection with the Loan Agreement, the Company granted a security interest in substantially all of its assets, excluding intellectual property and certain new drug applications and related approvals, as collateral for the obligations under the Loan Agreement.

On August 31, 2016, the Company repaid all outstanding obligations under the Loan Agreement with the proceeds of the 13% Notes (as defined below).  As a result of the repayment, the Company recorded debt extinguishment costs of $800,000 during the three and nine months ended September 30, 2016 which is classified as interest expense on the Company’s Consolidated Statement of Operations. 

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

In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2015.

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

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

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

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

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

· upon the occurrence of specified corporate events.

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

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

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

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

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

The liability component of the 5.50% Notes on the date of issuance was computed as $41.6 million, including the value of the embedded interest make-whole derivative of $0.9 million and the carrying value of the 5.50% Notes of

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$40.6 million. Accordingly, the equity component on the date of issuance was $19.4 million.  The discount on the 5.50% Notes is being amortized to interest expense over the term of the 5.50% Notes, using the effective interest method. 

The conversion criteria for the 5.50% Notes have not been met at September 30, 2016.  Should the 5.50% Notes become convertible, management will determine whether the intent is to settle in cash which would result in the liability component of the convertible notes being classified as a current liability and the equity component being presented as redeemable equity if the liability is considered current.

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

The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s balance sheet at December 31, 2015 and September 30, 2016:

(in thousands)	December 31, 2015		September 30, 2016
Gross proceeds	$	61,000	$	61,000
Unamortized debt discount		(19,734)		(16,252)
Carrying value	$	41,266	$	44,748

On September 28, 2016, in connection with the issuance of the 13% Notes, the Company and its subsidiaries entered into Supplemental Indentures with the trustee for the 5.50% Notes pursuant to which the Company’s subsidiaries became guarantors under the indenture guaranteeing the 5.50% Notes.

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

On August 31, 2016, the Company completed the initial closing (the “Initial Closing”) of its offering (the “Offering”) of up to $80.0 million aggregate principal amount of its 13% senior secured notes (the “13% Notes”) and entered into an indenture (the “Indenture”) governing the Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”).

The Company issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing, and will issue an additional $40.0 million aggregate principal amount of the Notes if the Company obtains approval from the FDA of its product candidate ARYMO™ ER on or before June 30, 2017, so long as no event of default under the Indenture has occurred and is continuing.  Net proceeds from the Initial Closing were $37.2 million, after deducting the estimated Offering expenses payable by the Company in connection with the Initial Closing. The Notes were sold only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The Company has used and will use the net proceeds from the 13% Notes and the Royalty Rights (as defined below) to repay all outstanding obligations to Hercules under the Loan Agreement with Hercules, to support the approval and planned commercialization of ARYMO ER, to support the development of Egalet-002 and for general corporate purposes.

Interest on the 13% Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on March 20 and September 20 of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, the Company will also pay an installment of principal of the Notes pursuant to a straight-line fixed amortization schedule. However, if approval of ARYMO ER is obtained from the FDA on or before June 30, 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018, the Company will pay an installment of principal on the Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of OXAYDO, SPRIX Nasal Spray, ARYMO ER and Egalet-002 for the

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two consecutive fiscal quarterly period most recently ended, less the amount of interest payable on the Notes on such Payment Date.

The Notes are senior secured obligations of the Company and will be equal in right of payment to all existing and future pari passu indebtedness of the Company (including the Company’s outstanding 5.50% convertible senior notes due 2020), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, will have the benefit of a security interest in the Notes collateral and will be junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred, which includes intellectual property (“IP”), from time to time in accordance with the Indenture. The stated maturity date of the 13% Notes is March 20, 2020, unless ARYMO ER is approved by the FDA on or before June 30, 2017, in which case the stated maturity date of the Notes will be September 30, 2033. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the Indenture), holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 101.00% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.

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

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

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

The Indenture governing the 13% Notes contains customary events of default with respect to the 13% Notes (including the Company’s failure to make any payment of principal or interest on the 13% Notes when due and payable), and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 13% Notes by notice to the Company and the Trustee, may (subject to the provisions of the Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 13% Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the Indenture, will be due and payable

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immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the Indenture), the 13% Notes will automatically become due and payable.

 In connection with the Offering on August 31, 2016, the Company entered into royalty rights agreements with each of the Purchasers pursuant to which the Company sold to such Purchasers the right to receive, in the aggregate, a payment equal to 1.5% of the aggregate net sales of OXAYDO and SPRIX Nasal Spray from the Initial Closing through December 31, 2019, inclusive (the “Royalty Rights”).  However, if approval of ARYMO ER is obtained from the FDA on or before June 30, 2017, the Royalty Rights will continue through December 31, 2020 and the Company will also enter into separate royalty rights agreements with each of the Purchasers pursuant to which the Company will sell to such Purchasers the right to receive 1.5% of the aggregate net sales of ARYMO ER payable from the date of first sale of ARYMO ER through December 31, 2020, inclusive.  The royalty rights agreements also include other terms and conditions customary in agreements of this type.

The Company incurred fees and legal expenses of $2.8 million in connection with the issuance of the 13% Notes, which have been recorded as a discount on the debt in the consolidated balance sheets and are amortized using the effective interest method. The Company calculated an effective interest rate of 17.7% upon origination of the 13% Notes based on its best estimate of future cash outflows.

The Royalty Rights were determined to be a freestanding element with respect to the 13% Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument.  The Company has Royalty Rights obligations of $3.2 million as of September 30, 2016, which are classified as current and non-current debt in the consolidated balance sheet.

The accounting for the 13% Notes requires the Company to make certain estimates and assumptions about the future net sales of OXAYDO and SPRIX Nasal Spray in the U.S. The estimates of the magnitude and timing of OXAYDO and SPRIX Nasal Spray net sales are subject to significant variability due to the recent product launch and the extended time period associated with the financing transaction, and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company gains experience marketing OXAYDO and SPRIX Nasal Spray, which may result in future adjustments to the portion of the debt that is classified as a current liability, the amortization of debt issuance costs and discount as well as the accretion of the interest expense. Any such adjustments could be material.  The fair value of the Royalty Rights associated with certain net product sales was estimated to be $3.2 million using a probability-weighted present value analysis.

The following table summarizes how the issuance of the 13% Notes is reflected in the Company’s balance sheet at December 31, 2015 and September 30, 2016:

(in thousands)	December 31, 2015		September 30, 2016
Gross proceeds	$	—	$	40,000
Unamortized debt discount		—		(5,751)
Carrying value	$	—	$	34,249

Current and non-current debt on the Company’s consolidated balance sheet at September 30, 2016 includes the carrying value of the 5.50% Notes and the 13% Notes, as well as $3.2 million for the Royalty Rights issued in connection with the debt. 

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7. Fair Value Measurements

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

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

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

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

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

(in thousands)	Fair Value Measurements as of December 31, 2015
							Balance as of
							December 31,
	Level 1		Level 2		Level 3		2015
Assets
Cash equivalents (money market funds)	$	29,992	$	—	$	—	$	29,992
Marketable securities, available-for-sale		—		99,042		—		99,042
Total assets	$	29,992	$	99,042	$	—	$	129,034
Liabilities
Interest make-whole derivative	$	—	$	—	$	656	$	656
Total liabilities	$	—	$	—	$	656	$	656

(in thousands)	Fair Value Measurements as of September 30, 2016
							Balance as of
							September 30,
	Level 1		Level 2		Level 3		2016
Assets
Cash equivalents (money market funds)	$	15,317	$	—	$	—	$	15,317
Marketable securities, available-for-sale		—		54,592		—		54,592
Total assets	$	15,317	$	54,592	$	—	$	69,909
Liabilities
Interest make-whole derivative	$	—	$	—	$	14	$	14
Total liabilities	$	—	$	—	$	14	$	14

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

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equal to 2%. The Company has determined that this feature is an embedded derivative and have recognized the fair value of this derivative as a liability in the Company’s consolidated balance sheet, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.  The fair value of this embedded derivative was determined based on a binomial tree lattice model.

The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the September 30, 2016:

(in thousands)						Fair Value
		December 31,				Change in		September 30, 2016
		2015		Additions		2016
Interest make-whole derivative		656	$	—	$	(642)	$	14
Total liabilities	$	656	$	—	$	(642)	$	14

As of September 30, 2016, the fair value of the 5.50% Notes was estimated utilizing the binomial lattice tree model.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value measurement was based on several factors including:

· Credit spread at the valuation date

· Discount yield as of the valuation date

The fair value and carrying value of the Company’s 5.50% Notes at September 30, 2016 was as follows:

(in thousands)	Fair Value		Carrying Value		Face Value
5.50% Notes due April 1, 2020	$	50,161	$	44,748	$	61,000

The fair value of the Company’s 13% Notes approximates its carrying value of $34.2 million as the interest rate is reflective of the interest rates on debt the Company could currently obtain with similar terms and conditions and thus represents a Level 2 measurement within the fair value hierarchy.

8. Net Loss Per Common Share

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

(in thousands, except share and per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2016		2015		2016
Basic and diluted net loss per common share calculation:
Net loss	$	(17,359)	$	(26,937)	$	(51,169)	$	(69,262)
Weighted average common stock outstanding		21,530,153		24,565,554		18,182,781		24,480,494
Net loss per share of common stock—basic and diluted	$	(0.81)	$	(1.10)	$	(2.81)	$	(2.83)

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The following outstanding securities for the three and nine months ended September 30, 2015 and 2016 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti-dilutive:

	September 30,
	2015	2016
Options outstanding	1,219,721	2,141,072
Unvested restricted stock awards	693,572	574,191
Common shares issuable upon conversion of the 5.50% Notes	4,102,360	4,102,360
Total	6,015,653	6,817,623

9. Stock-based Compensation

2013 Stock-Based Incentive Compensation Plan

In November 2013, the Company adopted its 2013 Stock-Based Incentive Compensation Plan (as amended the “2013 Plan”).  Pursuant to the 2013 Plan, the compensation committee (the “Compensation Committee) of the Company’s board of directors is authorized to grant equity-based incentive awards to the Company’s board of directors, executive officers and other employees and service providers, including officers, employees and service providers of its subsidiaries and affiliates. The number of shares of the Company’s common stock initially reserved for issuance under the 2013 Plan was 1,680,000, in the form of restricted stock and stock options.  Share increases of 2,000,000 and 2,600,000 to the number of shares originally reserved for issuance under the 2013 Plan were authorized by the Company’s stockholders in June 2014 and June 2016, respectively.  The amount, terms of grants and exercisability provisions are determined by the Compensation Committee, and in certain circumstances pursuant to delegated authority, the Company’s chief executive officer and the Company’s chief financial officer. The term of the options may be up to 10 years, and options are exercisable in cash or as otherwise determined by the Compensation Committee. All options vest over time as stipulated in the individual award agreements.

Shares Available for Future Grant Under the 2013 Plan

As of September 30, 2016, the Company has reserved the following shares to be granted under the 2013 plan:

Shares initially reserved under the 2013 Plan	1,680,000
Authorized increase to the 2013 Plan	4,600,000
Common stock options granted	(2,493,357)
Restricted stock awards granted	(1,543,660)
Stock options and awards forfeited	345,137
Remaining shares available for future grant	2,588,120

Shares Reserved for Future Issuance Under Equity Compensation Plans

As of September 30, 2016 the Company has reserved the following shares of common stock for issuance:

Stock options outstanding	2,141,072
Shares available for future grant under the 2013 Plan	2,588,120
Employee stock purchase plan	727,497
Shares reserved for future issuance	5,456,689

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

	Three Months Ended				Nine Months Ended
(in thousands)	September 30,				September 30,
	2015		2016		2015		2016
General and administrative	$	988	$	1,448	$	2,796	$	3,854
Sales and marketing		72		115		144		250
Research and development		235		246		775		573
Total stock based compensation expense	$	1,295	$	1,809	$	3,715	$	4,677
	Three Months Ended				Nine Months Ended
(in thousands)	September 30,				September 30,
	2015		2016		2015		2016
Stock options and restricted stock	$	1,295	$	1,780	$	3,715	$	4,595
Employee stock purchase plan		—		29		—		82
Total stock-based compensation expense	$	1,295	$	1,809	$	3,715	$	4,677

Stock Options Granted under the 2013 Stock-Based Incentive Plan

	Options Outstanding
				Weighted-average
				Remaining
	Number of	Weighted-Average		Contractual
	Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2015	1,755,808	$	8.93
Granted	660,764		8.39
Exercised	(30,000)		5.18
Forfeited	(233,000)		8.02
Cancelled	(12,500)		12.20
Outstanding at September 30, 2016	2,141,072	$	8.89	8.79
Vested or expected to vest at September 30, 2016	2,023,338	$	8.89	8.78
Exercisable at September 30, 2016	310,563	$	9.48	8.19

The intrinsic value of the 2,141,072 options outstanding as of September 30, 2016 was $1.3 million, based on a per share price of $7.61, the Company’s closing stock price on that date, and a weighted-average exercise price of $8.89 per share. 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes model requires the Company to make certain estimates and assumptions, including estimating the fair value of the Company’s common stock, assumptions related to the expected price volatility of the Company’s common stock, the period during which the options will be outstanding, the rate of return on risk-free investments and the expected dividend yield for the Company’s common stock.

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The per-share weighted-average grant date fair value of the options granted to employees during the nine months ended September 30, 2016 was estimated at $4.15 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2016
Risk-free interest rate	1.42	%
Expected term of options (in years)	6.11
Expected volatility	69.40	%
Dividend yield	—

The weighted-average valuation assumptions were determined as follows:

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

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

· Expected stock price volatility: The Company estimated the expected volatility based on actual historical volatility of the stock price of similar companies with publicly-traded equity securities. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The companies were selected based on their enterprise value, risk profiles, position within the industry and with historical share price information sufficient to meet the expected term of the associated award. A decrease in the expected volatility would have decreased the fair value of the underlying instrument.

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

As of September 30, 2016, there was $8.0 million of total unrecognized compensation expense, related to unvested options granted under the 2013 Plan, which will be recognized over the weighted-average remaining period of 2.74 years.

Restricted Stock

A summary of the status of the Company’s restricted stock awards at September 30, 2016 and of changes in restricted stock awards outstanding under the 2013 Plan for the nine months ended September 30, 2016 is as follows:

		Weighted-average
	Number of	Grant Date Fair
	Shares	Value per Share
Unvested at December 31, 2015	679,866	$	11.19
Granted	72,500	$	6.11
Forfeited	(21,432)	$	5.18
Vested restricted stock awards	(156,743)	$	11.53
Unvested at September 30, 2016	574,191	$	10.70

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

As of September 30, 2016, there was $2.9 million of total unrecognized compensation expense, related to restricted stock under the 2013 Plan, which will be recognized over the weighted-average remaining period of 1.49 years.

Employee Stock Purchase Plan

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

Effective January 1, 2016, employees who elected to participate in the Purchase Plan commenced payroll withholdings that accumulate during six month offering periods:

· January 1, 2016 through June 30, 2016, and

· July 1, 2016 and December 31, 2016

At the end of each offering period, shares of the Company’s common stock may be purchased at 85% of the lower of the fair market value of the Company’s common stock on the first or last day of the respective offering period. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s common stock at the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the purchase date) represents an option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company has estimated the option’s fair value to be $2.49 using the Black-Scholes valuation model and recognized stock-based compensation expense of $29,000 and $82,000 during the three and nine months ended September 30, 2016, respectively.

10. Commitments and Contingencies

Legal Proceedings

As previously reported, in April 2015, Purdue Pharma L.P., Purdue Pharmaceuticals L.P. and The P.F. Laboratories, Inc. (collectively, “Purdue”) commenced a patent infringement lawsuit against the Company and the Company’s OXAYDO product licensor, Acura Pharmaceuticals Inc. (“Acura”) in the U. S. District Court for the District of Delaware (Civ. No. 15-cv-00292 (D. Del.)) alleging the Company’s OXAYDO product infringes Purdue’s U.S. Patent No. 8,389,007 (the “007 Patent”).  In April 2016, Purdue commenced a second patent infringement lawsuit against the Company and Acura in the United States District Court for the District of Delaware (Civ. No. 16-cv-00256-RGA (D. Del.)) alleging the Company’s OXAYDO product infringes Purdue’s newly issued U.S. Patent No. 9,308,171 (the “171 Patent”).  On April 6, 2016, Acura filed a petition for Inter Parties Review (IPR 2016-00849) with the U.S. Patent and Trademark Office (“USPTO”) seeking to invalidate Purdue’s 007 Patent (the “IPR Review”).

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On May 20, 2016, Purdue, on behalf of themselves and certain affiliates, Acura, on behalf of itself and its affiliates and the Company, on behalf of the Company and its affiliates, entered into a settlement agreement (the “Settlement Agreement”) to settle the Actions and the IPR Review. Under the Settlement Agreement the parties agreed to dismiss or withdraw the Actions, request that the USPTO terminate the IPR Review and exchange mutual releases.  On May 24, 2016, the Actions were dismissed and on July 6, 2016, the USPTO terminated IPR Review.  No payments of money were made under the Settlement Agreement.

In addition, the Settlement Agreement provides that Purdue will not challenge, with certain exceptions, the Acura/Egalet Patents with respect to the Purdue Settlement Products (as defined below) and that Purdue provides Acura and/or Egalet certain waivers of non-patent marketing exclusivity with respect to Purdue Settlement Products.  “Egalet Settlement Products”, generally, are certain immediate-release products and extended-release products containing morphine, including OXAYDO and ARYMO ER.

The Settlement Agreement also provides that Acura and Egalet will not, in the future, assert certain Acura and/or Egalet. patents (the “Acura/Egalet Patents”), including ARYMO ER patents, against any Purdue Settlement Products (except generally in an action or interference by Purdue challenging an Acura/Egalet Patent).  Purdue Settlement Products are certain immediate-release and selected extended-release products.  In addition, the Settlement Agreement provides that Acura and Egalet will not challenge, with certain exceptions, the Purdue Patents with respect to the Acura Settlement Products and Egalet Settlement Products and that Acura and Egalet provide Purdue certain waivers of non-patent marketing exclusivity with respect to the Acura Settlement Products and Egalet Settlement Products.  In addition, Purdue has certain rights to exclusively negotiate, under a specified time period, for potential distribution of an authorized generic version of certain Egalet Settlement Products, including, in some circumstances, OXAYDO and ARYMO ER, and other products using Acura’s Aversion® Technology if licensed to Egalet.

11. Acquisitions and License and Collaboration Agreements

License and Collaboration Agreement with Shionogi

In November 2013, the Company entered into a license and collaboration agreement with Shionogi (the “Shionogi Agreement”), granting Shionogi an exclusive, royalty-bearing, worldwide license to develop, manufacture and commercialize abuse-deterrent hydrocodone-based product candidates using certain of the Company’s core technologies. The collaboration allowed Shionogi to develop and commercialize an abuse-deterrent single-agent hydrocodone-based product and up to 20 different abuse-deterrent combination product candidates containing hydrocodone.  In December 2015, the Company received notice from Shionogi that it was terminating the Shionogi Agreement for convenience. 

Under the terms of the Shionogi Agreement, the Company received an upfront payment of $10.0 million in 2013 and payment of $10.0 million in April 2015 upon submission of an Investigational New Drug (“IND”) application by Shionogi. The Company was eligible to receive regulatory milestone payments under the agreement as follows: (i) an additional $50.0 million upon successful achievement of specified regulatory milestones for the first licensed product candidate; (ii) up to $42.5 million upon successful achievement of specified regulatory milestones for a defined combination product candidate; (iii) up to $25.0 million upon successful achievement of specified regulatory milestones for a second product candidate (other than the defined combination product candidate); and (iv) up to $12.5 million upon successful achievement of specified regulatory milestones for further product candidates. In addition, the Company was eligible to receive up to an aggregate of $185.0 million based on successful achievement of specified net sales thresholds of licensed products.

The Company determined that the deliverables under the Shionogi Agreement were: (i) the exclusive, royalty-bearing, worldwide license to its abuse-deterrent hydrocodone-based product candidates using certain of the Company’s core technologies, (ii) the research and development services to be completed by the Company and (iii) the Company’s obligation to serve on a joint committee. The license did not have standalone value to Shionogi and was not separable from the research and development services, because of the uncertainty of Shionogi’s ability to develop the product candidates without the research and development services of the Company during the transfer period and over the term of the agreement.

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Due to the lack of standalone value for the license and research and development services, the upfront and IND payments were recorded as deferred revenue and were being recognized ratably using the straight line method through November 2030, the expected term of the Shionogi Agreement.  As a result of the termination of the Shionogi Agreement, the Company recognized all remaining deferred revenue related to the Shionogi agreement as revenue in the fourth quarter of 2015 as the Company had no further material obligations under the agreement at that time. For the three and nine months ended September 30, 2015, the Company recognized revenue of $262,000 and $433,000, respectively, related to the amortization of deferred revenue.  Additionally, during the three and nine months ended September 30, 2015, the Company recognized revenue of $487,000 and $540,000, respectively, related to certain development costs incurred under Shionogi Agreement.  As a result of the termination of the Shionogi Agreement in December 2015, there was no revenue in 2016 related to the Shionogi Agreement.

Collaboration and License Agreement with Acura

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

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

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

In addition, Acura receives from the Company, a stepped royalty at percentage rates ranging from mid-single digits to double-digits on net sales during a calendar year based on OXAYDO net sales during such year.   In any calendar year in which net sales exceed a specified threshold, Acura will receive a double digit royalty on all OXAYDO net sales in that year. The Company’s royalty payment obligations commence on the first commercial sale of OXAYDO and expire, on a country-by-country basis, upon the expiration of the last to expire valid patent claim covering OXAYDO in such country (or if there are no patent claims in such country, then upon the expiration of the last valid claim in the U.S.).  Royalties will be reduced upon the entry of generic equivalents, as well for payments required to be made by the Company to acquire intellectual property rights to commercialize OXAYDO, with an aggregate minimum floor.

Asset Purchase Agreement with Luitpold

In January 2015, the Company entered into and consummated the transactions contemplated by the SPRIX Purchase Agreement with Luitpold.  Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million.  The Company concurrently purchased an additional $1.1 million of glassware, equipment and API from Luitpold, and subsequent to the execution of the Purchase Agreement, purchased an additional $340,000 of API after closing within two business days of the release of such API from Luitpold’s supplier.

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The Company accounted for the arrangement as a business combination and the purchase price has been allocated to the acquisition date fair values as follows:

	Purchase Price
(in thousands)	Allocation
Inventory	$	3,408
Property, plant & equipment		100
Finite lived intangible-intellectual property		4,620
Net assets acquired	$	8,128

As the SPRIX Purchase Agreement was executed on January 8, 2015, there was no material difference between the Company’s results presented in the Company’s consolidated statement of operations and the pro forma results for the three and nine months ended September 30, 2015.

12. Income Taxes

In accordance with ASC Topic No. 270 “Interim Reporting” and ASC Topic No. 740 “Income Taxes” (Topic No. 740) at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. For the three and nine months ended September 30, 2015 the Company recorded a tax benefit of $1,000 and tax expense of $4,000, respectively.  For the three and nine months ended September 30, 2016 the Company recorded a tax benefit of $358,000 and $780,000, respectively. 

As of December 31, 2015 and September 30, 2016, the Company had a non-current deferred tax liability of $1.1 million and $304,000 respectively. The deferred tax liability relates to the state tax treatment of the 5.50% Notes. The Company maintains a full valuation against all deferred tax assets as management has determined that it is not more likely than not that the Company will realize these future tax benefits.

13. Related-Party Transactions

Related Party Receivables

The Company has derived a portion of its revenue for the three and nine months ended September 30, 2015 from the Shionogi Agreement, who is also an investor in the Company. As of December 31, 2015 the related party receivable with Shionogi was $57,000 and consisted entirely of revenue from development costs incurred under the Shionogi Agreement.  As of September 30, 2016, there was no related party receivable due to the termination of the Shionogi Agreement (See Note 11 – Acquisitions and License and Collaboration Agreements).

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

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain, including, but not limited to, risks related to:  whether our product candidates approve regulatory approval, our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; our current and future indebtedness; our ability to obtain additional financing; the level of commercial success of our products and, if approved, our product candidates; the continued development of our commercialization capabilities, including sales and marketing capabilities; our ability to execute on our sales and marketing strategy, including developing relationships with customers, physicians, payors and other constituencies; the difficulties in obtaining and maintaining regulatory approval of our products and product candidates, and any related restrictions, limitations and/or warnings in the product label under any approval we may obtain; the success and timing of our preclinical studies and clinical trials; the accuracy of our estimates of the size and characteristics of the potential markets for our product candidates and our ability to serve those markets; the rate and degree of market acceptance of any of our product candidates; the performance of third parties, including contract research organizations, manufacturers and collaborators; our failure to recruit or retain key scientific or management personnel or to retain our executive officers; regulatory developments in the U.S. and foreign countries; obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology; our ability to operate our business without infringing the intellectual property rights of others; recently enacted and future legislation regarding the healthcare system; the success of competing products that are or become available; and our ability to integrate and grow any businesses or products that we may acquire.

You should refer to the “Risk Factors” section of our most recent Annual Report on Form 10-K as filed with the SEC and which are incorporated herein by reference, for a discussion of additional important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements.  As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, us.  Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

OurBusiness

We are a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain and other conditions. Egalet was founded around our proprietary Guardian™ Technology that can be applied broadly across different classes of pharmaceutical products. Using this technology, we have two late-stage product candidates in development; ARYMO™ ER, an abuse-deterrent (“AD”), extended-release (“ER”) oral morphine formulation, which is under review with the U.S. Food and Drug Administration (“FDA”); and Egalet-002, an AD, ER, oral oxycodone formulation, which is in a Phase 3 program (together our “lead product candidates”). In January 2015, we acquired SPRIX® (ketorolac tromethamine) Nasal Spray and in-licensed OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII—both approved by the FDA (our “approved products”).  In addition, we have other Guardian Technology product candidates, including an AD, ER hydrocodone and an AD stimulant, in our pipeline.  We

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plan to continue to grow through business development and organic development leveraging our proprietary Guardian Technology.

We have completed bioequivalence studies and AD studies that were included in our new drug application (“NDA”) for our lead program ARYMO ER which is under review at the FDA. This product is being developed 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. 

To commercialize SPRIX Nasal Spray and OXAYDO and ultimately our pipeline products candidates, we are using a 71-person specialty sales force targeting approximately 11,500 physicians in the high‑decile of pain medicine prescribers in the U.S. SPRIX Nasal Spray is the first and only approved nasal spray formulation of a nonsteroidal anti-inflammatory drug (“NSAID”), in this case, ketorolac, used for short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. While providing analgesia at the opioid level, SPRIX Nasal Spray does not have issues of misuse or abuse common to opioids or some of the common opioid related side effects. OXAYDO is an immediate-release (“IR”) oral formulation of oxycodone indicated for the management of acute and chronic moderate to severe pain where the use of an opioid analgesic is appropriate. It is the first and only approved IR oxycodone product designed to discourage abuse via the route of snorting. Beyond targeting the high-decile of pain medicine prescribers with our sales force, we have sought to augment our commercial reach in other markets, including through our agreements for SPRIX Nasal Spray with Teva Pharmaceutical Industries Ltd. in the Middle East and with Septodont, Inc. (“Septodont”) focused on dentists in the U.S.

Future growth is expected to come from our pipeline of product candidates developed using our Guardian Technology. Our second late-stage product candidate Egalet-002, an AD, ER, oral oxycodone formulation, also being developed for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate, is in a Phase 3 program. We also will conduct AD studies on Egalet-002 which we expect to be submitted in combination with the Phase 3 data to support an anticipated NDA filing in mid-2017. We are also developing Egalet-003, an AD stimulant product candidate, and Egalet-004, an AD hydrocodone product candidate. In addition, we have completed initial research and development efforts on 13 other potential product candidates. We have developed prototypes, conducted feasibility studies and are exploring additional applications of our technology, both independently and in collaboration with other pharmaceutical companies, for the development of both tailored precision oral drug delivery of single‑agent products and combination products for indications other than pain in which a potential for abuse exists. Our exclusively‑owned product candidates and Guardian Technology are protected by 99 issued and 41 pending patent applications worldwide as well as unpatented know‑how and trade secrets.

Recent Developments

On August 4, 2016, at the joint meeting of the Anesthetic and Analgesic Drug Products Advisory Committee and the Drug Safety and Risk Management Advisory Committee of the FDA (the “Advisory Committees”), the Advisory Committees voted 18 to 1 to recommend approval of ARYMO ER.  In addition, the Advisory Committees voted 16 to 3 that if approved, ARYMO ER should be labeled as an abuse-deterrent product by the oral route of abuse, 18 to 1 that if approved, it should be labeled as an abuse-deterrent product by the nasal route of abuse and 18 to 1 that if approved, it should be labeled as an abuse-deterrent product by the intravenous route of abuse.  The FDA will consider, but is not bound by the Advisory Committees' recommendations as it continues its review of ARYMO ER.  On Oct 13, 2016 the FDA informed us that they would not be able to meet the PDUFA goal date of Oct 14, 2016, but that they are working on the draft prescription drug label for our product and further that they did not believe that we would need to submit any additional information to the agency. We will continue to work with the FDA to complete the ARYMO ER review process.

Financial Operations

Our net losses for the three months ended September 30, 2015 and 2016 were $17.4 million and $26.9 million, respectively, and $51.2 million and $69.3 million for the nine months ended September 30, 2015 and 2016, respectively. We recognized revenues in the three months ended September 30, 2015 and 2016 of $1.7 million and $4.7 million,

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respectively, and $3.4 million and $10.8 million for the nine months ended September 30, 2015 and 2016, respectively.  As of September 30, 2016, we had an accumulated deficit of $203.8 million. We have incurred and expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue the development and clinical trials of, conduct scale-up manufacturing activities, and seek regulatory approval for our product candidates, protect and expand our intellectual property portfolio and hire additional personnel.  Additionally, we expect to continue to incur significant commercialization expenses as we grow our sales, marketing and distribution infrastructure to sell our products in the U.S.

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

Critical Accounting Policies and Significant Judgments and Estimates

We believe there have been no significant changes in our critical accounting policies and significant judgments and estimates as discussed in our audited consolidated financial statements and the notes thereto for the year ended December 31, 2015 filed on March 11, 2016.

Results of Operations

Comparison of the three months ended September 30, 2015 and 2016

(in thousands)	Three Months Ended
	September 30,
	2015		2016		Change
Revenues
Net product sales	$	1,296	$	4,711	$	3,415
Related party revenues		390		—		(390)
Total revenue		1,686		4,711		3,025
Cost and Expenses
Cost of sales (excluding amortization of product rights)		349		914		565
Amortization of product rights		505		502		(3)
General and administrative		5,515		7,950		2,435
Sales and marketing		6,283		6,973		690
Research and development		4,602		12,070		7,468
Total costs and expenses		17,254		28,409		11,155
Loss from operations		(15,568)		(23,698)		(8,130)
Other (income) expense:
Change in fair value of derivative liability		(592)		11		603
Interest expense, net		2,380		3,601		1,221
Other (gain) loss		—		(12)		(12)
Loss (gain) on foreign currency exchange		2		(3)		(5)
		1,790		3,597		1,807
Loss before provision for income taxes		(17,358)		(27,295)		(9,937)
Provision (benefit) for income taxes		1		(358)		(359)
Net loss	$	(17,359)	$	(26,937)	$	(9,578)

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Net Product Sales

Net product sales increased from $1.3 million for the three months ended September 30, 2015 to $4.7 million for the three months ended September 30, 2016.  Net product sales in the three months ended September 30, 2015 consisted entirely of SPRIX Nasal Spray product sales.  Net product sales in the three months ended September 30, 2016 consisted of $3.8 million in SPRIX Nasal Spray product sales and $959,000 in OXAYDO product sales. There were no OXAYDO product sales for the three months ended September 30, 2015.

Related Party Revenues

Related party revenues were $390,000 for the three months ended September 30, 2015.  There were no related party revenues for the three months ended September 30, 2016 as a result of the termination of our collaboration and license agreement (the “Shionogi Agreement”) with Shionogi Limited (“Shionogi”) in December 2015.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding product amortization rights) increased from $349,000 in the three months ended September 30, 2015 to $914,000 for the three months ended September 30, 2016. Cost of sales for the three months ended September 30, 2015 related only to SPRIX Nasal Spray. Cost of sales for the three months ended September 30, 2016 related to both SPRIX Nasal Spray and OXAYDO.

Cost of sales for SPRIX Nasal Spray for the three months ended September 30, 2015 of $349,000 reflects the fair value of finished goods inventory assumed as part of the SPRIX Nasal Spray acquisition. Cost of sales for SPRIX Nasal Spray for the three months ended September 30, 2016 of $726,000 reflected the average cost of inventory produced and dispensed to patients during the three months ended September 30, 2016.

There was no cost of sales for OXAYDO in the three months ended September 30, 2015. Cost of sales for OXAYDO in the three months ended September 30, 2016 of $188,000 reflected the average costs of inventory dispensed to patients.

Amortization of Product Rights

Amortization of product rights decreased from $505,000 for the three months ended September 30, 2015 to $502,000 for the three months ended September 30, 2016.  Amortization of product rights was comprised of $274,000 for the OXAYDO and $231,000 for the SPRIX Nasal Spray intangible assets in the three months ended September 30, 2015, and $271,000 for the OXAYDO and $231,000 for the SPRIX Nasal Spray intangible assets in the three months ended September 30, 2016.

General and Administrative Expenses

General and administrative expenses increased by $2.4 million, or 44.2%, from $5.5 million for the three months ended September 30, 2015 to $8.0 million for the three months ended September 30, 2016.  The increase was attributable to increases in employee salary and benefits of $609,000 and increases in stock based compensation expense of $869,000, due to the growth of our organization. There were also increased professional fees of $1.1 million which included expenses related to the preparation for the August 2016 FDA Advisory Committee meeting.

Sales and Marketing Expenses

Sales and marketing expenses increased $690,000 or 11.2%, from $6.3 million in the three months ended September 30, 2015 to $7.0 million for the three months ended September 30, 2016. The increase related to the growth of our commercial operations in the U.S. and the continued sales and marketing support of SPRIX Nasal Spray and OXAYDO.

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Research and Development Expenses

Research and development expenses increased by $7.5 million, or 162.3%, from $4.6 million for the three months ended September 30, 2015 to $12.1 million for the three months ended September 30, 2016.  This increase was driven primarily by increases in our development costs for Egalet-002 and OXAYDO of $5.0 million and $2.1 million, respectively.

Change in fair value of derivative liability

The interest make whole provision of our 5.50% convertible senior notes due April 1, 2020 (the “5.50% Notes”) is subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability.  During the three months ended September 30, 2015 we had a loss of $592,000 as a result of the change in the fair value of our derivative liability, compared to a gain of $11,000 for the three months ended September 30, 2016.  The change in fair value of the derivative liability is due primarily to changes in the value of our common stock during the three months ended September 30, 2015 and 2016.

Interest expense

Interest expense was $2.4 million for the three months ended September 30, 2015, and $3.6 million for the three months ended September 30, 2016.  The increase was driven primarily by $800,000 in debt extinguishment costs related to the repayment in full of the Loan and Security Agreement (as amended, the “Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”) as well as interest expense related to the newly issued 13% Notes.

Loss on Foreign Currency Exchange

For the three months ended September 30, 2015, we recognized a loss on foreign currency exchange of $2,000.  For the three months ended September 30, 2016, we recognized a loss on foreign currency exchange of $3,000. This difference is primarily attributable the change in the average rates of currency in which we transacted during 2015 when compared to 2016.

Provision (benefit) for Income Taxes

We had a provision for income taxes of $1,000 for the three months ended September 30, 2015, and an income tax benefit of $358,000 for the three months ended September 30, 2016. The income tax benefit in the three months ended September 30, 2016 relates to a state tax benefit associated with the 5.50% Notes.

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Comparison of the nine months ended September 30, 2015 and 2016

(in thousands)	Nine months ended
	September 30,
	2015		2016		Change
Revenues
Net product sales	$	2,065	$	10,724	$	8,659
Collaboration revenues		—		100		100
Related party revenues		1,361		—		(1,361)
Total revenue		3,426		10,824		7,398
Cost and Expenses
Cost of sales (excluding amortization of product rights)		650		2,580		1,930
Amortization of product rights		1,468		1,506		38
General and administrative		16,014		22,802		6,788
Sales and marketing		11,142		19,455		8,313
Research and development		19,905		26,886		6,981
Total costs and expenses		49,179		73,229		24,050
Loss from operations		(45,753)		(62,405)		(16,652)
Other (income) expense:
Change in fair value of derivative liability		181		(642)		(823)
Interest expense, net		5,146		8,225		3,079
Other (gain) loss		(2)		54		56
Loss on foreign currency exchange		87		—		(87)
		5,412		7,637		2,225
Loss before provision for income taxes		(51,165)		(70,042)		(18,877)
Provision (benefit) for income taxes		4		(780)		(784)
Net loss	$	(51,169)	$	(69,262)	$	(18,093)

Net Product Sales

Net product sales increased from $2.1 million for the nine months ended September 30, 2015 to $10.7 million for the nine months ended September 30, 2016.  Net product sales for the nine months ended September 30, 2015, consisted entirely of SPRIX Nasal Spray product sales.  Net product sales in the nine months ended September 30, 2016, consisted of $8.6 million in SPRIX Nasal Spray product sales due to increased unit sales and $2.1 million in OXAYDO product sales.

Collaboration Revenues

There were no collaboration revenues for the nine months ended September 30, 2015.  Collaboration revenues were $100,000 for the nine months ended September 30, 2016, and consisted entirely of revenues recognized under our SPRIX Nasal Spray marketing agreement with Septodont. 

Related Party Revenues

Related party revenues were $1.4 million for the nine months ended September 30, 2015 there were no related party revenues for the nine months ended September 30, 2016, as a result of the termination of the Shionogi Agreement in December 2015.

Cost of Sales (excluding Amortization of Product Rights)

Cost of sales (excluding product amortization rights) increased from $650,000 in the nine months ended September 30, 2015 to $2.6 million for the nine months ended September 30, 2016. Cost of sales for the nine months

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ended September 30, 2015 related only to SPRIX Nasal Spray. Cost of sales for the nine months ended September 30, 2016 related to both SPRIX Nasal Spray and OXAYDO.

Cost of sales for SPRIX Nasal Spray for the nine months ended September 30, 2015 of $650,000 reflects the fair value of finished goods inventory assumed as part of the SPRIX Nasal Spray acquisition. Cost of sales for SPRIX Nasal Spray for the nine months ended September 30, 2016 of $2.0 million reflects the fair value of finished goods inventory assumed as part of the SPRIX Nasal Spray acquisition as well as the average cost of inventory subsequently produced and dispensed to patients during the nine months ended September 30, 2016.

There was no cost of sales for OXAYDO in the nine months ended September 30, 2015. Cost of sales for OXAYDO in the nine months ended September 30, 2016 of $522,000 reflects the average costs of inventory dispensed to patients.

Amortization of Product Rights

Amortization of product rights was $1.5 million the nine months ended September 30, 2015.  Amortization of product rights was comprised of $796,000 for the OXAYDO and $672,000 for the SPRIX Nasal Spray intangible assets in the nine months ended September 30, 2015, and $813,000 for the OXAYDO and $693,000 for the SPRIX Nasal Spray intangible assets in the nine months ended September 30, 2016.

General and Administrative Expenses

General and administrative expenses increased by $6.8 million, or 42.4%, from $16.0 million for the nine months ended September 30, 2015 to $22.8 million for the nine months ended September 30, 2016.  This was primarily attributable to increases in employee salary and benefits of $2.7 million due to the growth of our U.S. operations, stock based compensation expense of $1.1 million, and administrative expenses of $1.5 million.  There were also increased professional fees of $2.2 million which included expenses related to the preparation for the August 2016 FDA Advisory Committee meeting. These increases were offset by a decrease in regulatory fees of $498,000.

Sales and Marketing Expenses

Sales and marketing expenses increased $8.3 million, or 42.1%, from $11.1 million in the nine months ended September 30, 2015, to $19.5 million for the nine months ended September 30, 2016.  The increase was attributable to increases in salary, benefits and stock based compensation expense of $847,000 and contract sales force expenses of $5.2 million, which began operations in the third quarter of 2015, and sales and marketing support for SPRIX Nasal Spray and OXAYDO and sales and marketing launch planning for ARYMO ER.

Research and Development Expenses

Research and development expenses increased by $7.0 million, or 35.1%, from $19.9 million for the nine months ended September 30, 2015, to $26.9 million for the nine months ended September 30, 2016. This increase was driven primarily by an increase in our development costs for Egalet-002 and OXAYDO of $6.8 million and $3.8 million, respectively. These increases were offset by a decrease in our development costs for ARYMO ER of $3.2 million.

Change in fair value of derivative liability

The interest make whole provision of the 5.50% Notes is subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability.   During the nine months ended September 30, 2015, we had a loss of $181,000 as a result of the change in the fair value of our derivative liability, as opposed to a gain of $642,000 during the nine months ended September 30, 2016.  The change in fair value of the derivative liability is due the changes in the value of our common stock during the three months ended September 30, 2015 and 2016.

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Interest expense

Interest expense was $5.1 million for the nine months ended September 30, 2015, and $8.2 million for the nine months ended September 30, 2016.  The increase was attributable to the interest expense on the 5.50% Notes, which were issued in April 2015, as well as debt extinguishment costs of $800,000 related to the repayment in full of the Loan Agreement with Hercules.

Loss on Foreign Currency Exchange

For the nine months ended September 30, 2015, we recognized a loss on foreign currency exchange of $87,000.  For the nine months ended September 30, 2016, there was no loss on foreign currency exchange. This difference is primarily attributable the change in the average rates of currency in which we transacted during 2015 when compared to 2016.

Provision (benefit) for Income Taxes

We had a provision for income taxes of $4,000 for the nine months ended September 30, 2015, and an income tax benefit of $780,000 for the nine months ended September 30, 2016. The income tax benefit in the nine months ended September 30, 2016, relates to a state tax benefit associated with the 5.50% Notes.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and generally negative cash flows from our operations. We incurred net losses of $51.2 million and $69.3 million for the nine months ended September 30, 2015 and 2016, respectively. Our operating activities used $20.8 million of cash and $57.1 million of cash during the nine months ended September 30, 2015 and 2016, respectively. At September 30, 2016, we had an accumulated deficit of $203.8 million, a working capital surplus of $84.6 million and cash, cash equivalents and marketable securities totaling $101.2 million.

From our inception through our initial public offering (“IPO”) on February 11, 2014, we received gross proceeds of $31.1 million from the issuance of preferred stock and convertible debt.

In February 2014, 4,200,000 shares of our common stock were sold at an IPO price of $12.00 per share, for aggregate gross proceeds of $50.4 million. In March 2014, in connection with the exercise by the underwriters of a portion of the over-allotment option granted to them in connection with the IPO, 630,000 additional shares of our common stock were sold at the IPO price of $12.00 per share, for aggregate gross proceeds of approximately $7.6 million. In addition, as part of the IPO, we converted all of our convertible preferred stock and related party senior convertible debt into 5,329,451 and 2,585,745 shares of common stock, respectively. Also, Shionogi, our previous collaboration partner, purchased 1,250,000 shares of our common stock in a separate private placement concurrent with the completion of the IPO at a price equal to $12.00 per share, for aggregate gross proceeds of $15.0 million. In addition, the 2013 related party senior convertible debt holders automatically exercised 600,000 warrants for shares of common stock at an exercise price of $0.0083 per share.  The net proceeds we received from the IPO and the private placement, after deducting underwriting discounts and commissions and offering expenses, were approximately $51.5 million and $14.0 million, respectively. 

In January 2015, we entered into the Loan Agreement with Hercules and certain other lenders, pursuant to which we borrowed $15.0 million under a term loan.  In August 2016, we repaid all outstanding obligations under the Loan Agreement, using the proceeds from the 13% Notes.  Refer to Note 6 — Long-term Debt in the Notes to our Unaudited Consolidated Financial Statements for additional information.

In April and May 2015, we issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes.  Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2015. Refer to Note 6- Long-term debt for additional information.

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In July 2015, we entered into a sale agreement with Cantor Fitzgerald & Co. (“Cantor”) to offer shares of our common stock from time to time through Cantor, as our sales agent for the offer and sale of the shares, in an “at-the-market” offering.  We may offer and sell shares of common stock for an aggregate offering price of up to $30.0 million.  To date, we have not sold any shares pursuant to the agreement.

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

Through December 31, 2015 we financed our operations with the $4.1 million in payments from our collaborative research and development agreements along with aggregate upfront and milestone payments of $20.0 million from Shionogi under the Shionogi Agreement.

In August 2016, we issued $40.0 million in aggregate principal amount of the 13% Notes and will issue another $40.0 million in aggregate principal amount if we obtain approval from the FDA of our product candidate ARYMO ER on or before June 30, 2017, so long as no event of default under the Indenture has occurred and is continuing.  Interest on the 13% Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on March 20and September 20of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, we will also pay an installment of principal on the 13% Notes pursuant to a straight-line fixed amortization schedule. However, if approval of ARYMO ER is obtained from the FDA on or before June 30, 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018 we will pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of OXAYDO (oxycodone HCI, USP) tablets for oral use only – CII, SPRIX Nasal Spray, ARYMO ER and Egalet-002, if approved, for the two consecutive fiscal quarter period most recently ended, less the amount of interest paid on the Notes on such Payment Date.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirements through at least September 30, 2017. 

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2015 and 2016:

(in thousands)	Nine Months Ended
	September 30,
	2015		2016
Net cash provided by (used in):
Operating activities	$	(20,750)	$	(57,078)
Investing activities		(107,620)		34,976
Financing activities		152,361		21,649
Effect of foreign currency translation on cash		429		410
Net increase (decrease) in cash	$	24,420	$	(43)

Cash Flows from Operating Activities

Net cash used in operating activities was $20.8 million for the nine months ended September 30, 2015 and consisted primarily of a net loss of $51.2 million offset by an increase in deferred revenue of $21.4 million generated by the Shionogi milestone received and sales of SPRIX Nasal Spray in the first quarter of 2015, non-cash items consisting of $3.7 million of stock-based compensation expense, $2.3 million of amortization and depreciation expense, and $2.5 million of amortization of debt discount related to the Loan Agreement with Hercules and 5.50% Notes.  Net cash outflows from changes in other operating assets and liabilities were $327,000 primarily due to an increase in deposits and other assets of $1.3 million, a decrease in accounts payable of $724,000 and an increase in prepaid expenses of $707,000.  These were partially offset by an increase in accrued expenses of $2.6 million.

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

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2015 was $107.6 million and consisted of $96.6 million for the purchase of available for sale securities, $8.1 million for the purchase of SPRIX Nasal Spray, $5.2 million for the license of OXAYDO and payments of $1.9 million for deposits and purchases of property and equipment.  These outflows were offset by the sale of investments of $3.4 million and the maturity of investments of $798,000.

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

Cash Flows from Financing Activities

Net cash provided by financing activities was $152.4 million for the nine months ended September 30, 2015, and consisted of the net proceeds from the Loan Agreement with Hercules of $14.7 million, net proceeds from the issuance of the 5.50% Notes of $56.8 million and the net proceeds from the Follow on Offering of $80.8 million.

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

Operating and Capital Expenditure Requirements

We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, laboratory and related supplies, clinical costs, commercial infrastructure development, legal and other regulatory expenses, business development opportunities and general overhead costs. We expect our cash expenditures to increase in the near term as we continue to grow our commercialization efforts around SPRIX Nasal Spray and OXAYDO, and if approved, ARYMO ER, and the clinical development of Egalet-002 and our other product candidates.

Because our product candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.  We may also seek to raise additional financing through the issuance of debt which, if available, may involve agreements that include restrictive covenants limiting our ability to take important actions, such as incurring additional debt, making capital expenditures or declaring

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dividends. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirements through at least September 30, 2017.  However, our future operating and capital requirements will depend on many factors, including:

 the results of our clinical trials;

 the costs, timing and outcome of regulatory reviews;

 the cost of our current commercialization activities for our current products, as well as, if approved for sale in the future, our product candidates, including marketing, sales and distribution costs;

 our ability to establish collaborations or product acquisitions on favorable terms, if at all;

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

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

Please see the “Risk Factors” section of our most recent Annual Report on Form 10-K filed with the SEC on March 11, 2016 for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

The following table represents our contractual obligations and commitments as of September 30, 2016:

(in thousands)	Payments Due By Period
			Less than						More than
	Total		1 year		1 to 3 years		3 to 5 years		5 years
Operating lease obligations (1)	$	3,039	$	637	$	1,081	$	1,090	$	231
Hercules debt (2)		—		—		—		—		—
Senior Secured 13% Notes (3)		53,968		5,373		39,862		8,733
5.50% convertible notes (4)		74,420		3,355		6,710		64,355		—
Other (5)		5		5		1		—		—
Total	$	131,432	$	9,370	$	47,654	$	74,178	$	231

(1) Operating lease obligations reflect our obligation to make payments in connection with the leases for our office space.

(2) On August 31, 2016, we repaid all outstanding obligations under the Loan Agreement with Hercules. 

(3) On August 31, 2016, we completed the initial closing (the “Initial Closing”) of our offering of up to $80.0 million aggregate principal amount of its 13% senior secured notes (the “13% Notes”).  We issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing, and will issue an additional $40.0 million aggregate principal amount of the 13% Notes if we obtain approval from the FDA of our product candidate ARYMO™ ER on or before June 30, 2017.  The above table does not reflect the additional $40.0 million in aggregate principal amount as ARYMO ER is still under review with the FDA.  Interest on the 13% Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on March 20 and September 20 of each year (each, a “Payment Date”)

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commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, we will also pay an installment of principal of the 13% Notes pursuant to a straight-line fixed amortization schedule. However, if approval of ARYMO ER is obtained from the FDA on or before June 30, 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018, we will pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of OXAYDO, SPRIX Nasal Spray, ARYMO ER and Egalet-002 for the two consecutive fiscal quarter period most recently ended, less the amount of interest paid on the 13% Notes on such Payment Date.

(4) On April 1, 2015, we issued, through a private placement, $60.0 million in aggregate principal amount of the 5.50% Notes. On May 6, 2015, we issued an additional $1.0 million in principal amount pursuant to the initial purchasers’ exercise of their 30-day over-allotment for aggregate gross proceeds of $61.0 million.  Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2015.

(5) We have employment agreements with our executive officers that require the funding of a specific level of payments if specified events occur, such as a change in control or termination without cause. However, because of the contingent nature of those payments, they are not presented in the table.

In addition, in the course of normal business operations, we have agreements with contract service providers to assist in the performance of our research and development, commercial and manufacturing activities. We can elect to discontinue the work under these agreements at any time. We could also enter into additional collaborative research, contract research, manufacturing and supplier agreements in the future, which may require upfront payments or long‑term commitments of cash.

Purchase Commitments

Other than described above with respect to the purchase of raw materials, we have no material non‑cancelable purchase commitments with service providers as we have generally contracted on a cancelable purchase order basis.

Employment Agreements

We have entered into employment agreements with our president and chief executive officer, chief financial officer, chief operating officer, chief commercial officer, chief medical officer, general counsel and senior vice president of research and development, that provide for, among other things, salary, bonus and severance payments.

Legal Proceedings

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

Off-Balance Sheet Arrangements

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

JOBS Act

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

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comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of December 31, 2015, and September 30, 2016 we had cash and cash equivalents and marketable securities of $145.7 million and $101.2 million, respectively, consisting of money market funds, certificates of deposit, U.S. government agency securities and corporate debt securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in marketable debt securities. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.

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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, our management, including our CEO and CFO, concluded that as of September 30, 2016 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no significant changes in our internal control over financial reporting identified in connection with the evaluation of such controls that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We are subject to various risks and uncertainties that could have a material impact on our business, financial condition, results of operations and cash flows. The discussion of these risk factors is included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and is updated for the following:

If physicians and patients do not accept and use our approved products or product candidates, we will not achieve sufficient product revenues and our business will suffer.

If our approved products, or any of our product candidates for which we receive regulatory approval, do not achieve broad market acceptance or coverage by third‑party payors, the revenues that we generate from those products will be limited. Coverage and reimbursement of our approved products by third‑party payors is also necessary for commercial success. Acceptance and use of our approved products and product candidates will depend on a number of factors including:

· the timing of market introduction of ARYMO ER, if approved, and our other product candidates, as well as competitive products;

· the ability to obtain abuse-deterrent claims in the labels for our product candidates at all, and broad enough abuse deterrent claims that encompass common forms of abuse to demonstrate a substantial benefit to health care providers and patients;

· the results of any required Phase 4 studies following any product approval to support the continued use of any abuse-deterrent claims; 

· approved indications, warnings and precautions language that may be less desirable than anticipated;

· perceptions by members of the healthcare community, including physicians, about the safety and efficacy of our approved products and our product candidates, and, in particular, the efficacy of our abuse‑deterrent technology in reducing potential risks of unintended use;

· perceptions by physicians regarding the cost benefit of our approved products and product candidates in reducing potential risks of unintended use;

· published studies demonstrating the cost effectiveness of our approved products and product candidates relative to competing products;

· the potential and perceived advantages of our approved products and product candidates over alternative treatments;

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· availability of coverage and adequate reimbursement for our approved products and our product candidates from government and healthcare payors;

· the steps that prescribers and dispensers must take, since our product candidates are controlled substances, as well as the perceived risks based upon their controlled substance status;

· any negative publicity related to our or our competitors’ products that include the same active ingredient as our approved products and product candidates;

· the prevalence and severity of adverse side effects, including limitations or warnings contained in a product’s U.S. Food and Drug Administration (“FDA”) approved product labeling;

· our ability to implement a Risk Evaluation and Mitigation Strategy (“REMS”) prior to the distribution of any product candidate requiring a REMS; and

· effectiveness of marketing and distribution efforts by us and other licensees and distributors.

Because we expect to rely on sales generated by our products and, if approved, our product candidates to achieve profitability in the future, the failure of either product candidate to find market acceptance would harm our business prospects.

Recently enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates, may reduce the prices we are able to obtain for our approved products and our product candidates and hinder or prevent the commercial success.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post‑approval activities or affect our ability to profitably sell our approved products or any product candidates for which we obtain marketing approval.

The Affordable Care Act, among other things, imposes a significant annual fee on companies that manufacture or import branded prescription drug products. It also contains substantial new provisions intended to, among other things, broaden access to health insurance, reduce or constrain the growth of health care spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, modify the definition of “average manufacturer price” for Medicaid reporting purposes thus affecting manufacturers’ Medicaid drug rebates payable to states and impose additional health policy reforms, any of which could negatively impact our business. A significant number of provisions are not yet, or have only recently become, effective, but the Affordable Care Act is likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Other legislative changes have also been proposed and adopted since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011 resulted in aggregate reductions in Medicare payments to providers of up to 2% per fiscal year, starting in  2013, and, due to the Bipartisan Budget Act of 2015, will remain in effect through 2025 unless additional Congressional action is taken, and the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could impose additional financial pressure on our customers, which could in turn diminish demand for our products or result in pricing pressure on us.  In addition, drug pricing by pharmaceutical companies has recently come under close scrutiny. For example, in November 2015 the U.S. House of Representatives formed an Affordable Drug Pricing Task Force to advance legislation intended to control pharmaceutical drug costs and investigate pharmaceutical drug pricing, and the U.S. Senate has requested information

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from certain pharmaceutical companies in connection with an investigation into pharmaceutical drug pricing practices. If healthcare policies or reforms intended to curb healthcare costs are adopted, or if we experience negative publicity with respect to pricing of our products or the pricing of pharmaceutical drugs generally, the prices that we charge for any approved products may be limited, our commercial opportunity may be limited and/or our revenues from sales of our products may be negatively impacted.

We expect that the Affordable Care Act, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may compromise our ability to generate revenue, attain profitability or commercialize our products.

In addition, state pharmacy laws may permit pharmacists to substitute generic products for branded products if the products are therapeutic equivalents, or may permit pharmacists and pharmacy benefit managers to seek prescriber authorization to substitute generics in place of our product candidates, which could significantly diminish demand for them and significantly impact our ability to successfully commercialize our product candidates and generate revenues.

Social issues around the abuse of opioids, including law enforcement concerns over diversion of opioid and regulatory efforts to combat abuse, could decrease the potential market for OXAYDO and our product candidates.

Media stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are commonplace. Law enforcement and regulatory agencies may apply policies that seek to limit the availability of opioids. Such efforts may inhibit our ability to commercialize OXAYDO and our product candidates. Aggressive enforcement and unfavorable publicity regarding, for example, the use or misuse of oxycodone or other opioid drugs, the limitations of abuse‑resistant formulations, public inquiries and investigations into prescription drug abuse, litigation or regulatory activity, sales, marketing, distribution or storage of our drug products could harm our reputation. Such negative publicity could reduce the potential size of the market for our product candidates and OXAYDO and decrease the revenues and royalties we are able to generate from their sale. Similarly, to the extent opioid abuse becomes less prevalent or less urgent of a public health issue, regulators and third party payers may not be willing to pay a premium for abuse‑ deterrent formulations of opioids.

Additionally, efforts by the FDA and other regulatory bodies to combat abuse of opioids may negatively impact the market for our product candidates. In February 2016, the FDA released an action plan to address the opioid abuse epidemic and reassess the FDA’s approach to opioid medications. The plan identifies FDA’s focus on implementing policies to reverse the opioid abuse epidemic, while maintaining access to effective treatments. The actions set forth in the FDA’s plan include strengthening post marketing study requirements to evaluate the benefit of long-term opioid use, changing the REMS requirements to provide additional funding for physician education courses, releasing a draft guidance setting forth approval standards for generic-abuse deterrent opioid formulations, and seeking input from the FDA’s Scientific Board to broaden the understanding of the public risks of opioid abuse. The FDA’s Scientific Advisory Board met to address these issues on March 1, 2016. The FDA’s plan is part of a broader initiative led by the U.S. Department of Health and Human Services (“HHS”) to address opioid-related overdose, death and dependence. The HHS initiative’s focus is on improving physician’s use of opioids through education and resources to address opioid over-prescribing, increasing use and development of improved delivery systems for naloxone, which can reverse overdose from both prescription opioids and heroin, to reduce overdose-related deaths, and expanding the use of Medication-Assisted Treatment, which couples counseling and behavioral therapies with medication to address substance abuse. Also as part of this initiative, the CDC has launched a state grant program to offer state health departments resources to assist with abuse prevention efforts, including efforts to track opioid prescribing through state-run electronic databases. In March 2016, as part of the HHS initiative, the CDC released a new Guideline for Prescribing Opioids for Chronic Pain. The guideline is intended to assist primary care providers treating adults for chronic pain in outpatient settings.  The guideline provides recommendations to improve communications between doctors and patients about the risks and benefits of opioid therapy for chronic pain, improve the safety and effectiveness of pain treatment, and reduce the risks associated with long-term opioid therapy. The guideline states that no treatment recommendations about the use of abuse-deterrent opioids can be made at this time.  Prior to this action, on September 10, 2013, the FDA

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announced its intention to effect labeling changes to all approved ER and long‑acting opioids. In particular, the FDA intends to update the indication for ER and long‑acting opioids so that ER and long‑acting opioids will be indicated only 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. On April 16, 2014, the FDA updated these indications. Many of these changes could require us to expend additional resources in developing and commercializing our product candidates and OXAYDO to meet additional requirements. Advancements in the development and approval of generic abuse-deterrent opioids could also compete with and potentially impact physician use of our product candidates and cause our product candidates to be less commercially successful. 

Guidelines and recommendations published by various organizations can reduce the use of our approved products and product candidates, if approved.

Government agencies promulgate regulations and guidelines directly applicable to us and to our approved products and product candidates. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the healthcare and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products as the standard of care to be followed by patients and healthcare providers could result in decreased use of our products.

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

Recent Sales of Unregistered Securities

On August 31, 2016, we completed the initial closing (the “Initial Closing”) of our offering (the “Offering”) of up to $40.0 million aggregate principal amount of our 13% senior secured notes (the “13% Notes”) and entered into an indenture (the “Indenture”) governing the Notes with the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee and collateral agent. We will issue an additional $40.0 million aggregate principal amount of the 13% Notes if we obtain approval from the FDA of our product candidate ARYMO ER on or before June 30, 2017, so long as no event of default under the Indenture has occurred or is continuing.  The 13% Notes were sold directly only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof relative to transactions by an issuer not involving any public offering. Morgan Stanley & Co., LLC was the placement agent in connection with the sales of the 13% Notes. We received net proceeds from the Initial Closing of approximately $37.2 million, after deducting the Offering expenses payable by us.

Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

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

Exhibit Number	Description
3.1	Third Amended and Restated Certificate of Incorporation of Egalet Corporation, as amended (incorporated by reference to Exhibit 3.1 to Egalet Corporation’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2015).
3.2	Amended and Restated Bylaws of Egalet Corporation (incorporated by reference to Exhibit 3.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on February 11, 2014).
4.1	Indenture, dated as of August 31, 2016, among the Company, the Guarantors from time to time party thereto and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.1	Form of Purchase Agreement (incorporated by reference to Exhibit 10.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.2	Form of Royalty Rights Agreement (incorporated by reference to Exhibit 10.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.3	Collateral Agreement, dated as of August 31, 2016, among the Company, the Subsidiary Parties from time to time party thereto and U.S. Bank National Association as trustee and collateral agent (incorporated by reference to Exhibit 10.3 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.4	Form of Egalet Corporation Restricted Stock Award Agreement (filed herewith).
10.5	Employment Agreement by and between Egalet Corporation and Patrick M. Shea (filed herewith).
31.1	Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

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SIGNATURES

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

Date: November 8, 2016
	EGALET CORPORATION
	By:	/s/ ROBERT S. RADIE
		Robert S. Radie
		President and Chief Executive Officer

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EXHIBIT INDEX

Exhibit Number	Description
3.1	Third Amended and Restated Certificate of Incorporation of Egalet Corporation, as amended (incorporated by reference to Exhibit 3.1 to Egalet Corporation’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2015).
3.2	Amended and Restated Bylaws of Egalet Corporation (incorporated by reference to Exhibit 3.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on February 11, 2014).
4.1	Indenture, dated as of August 31, 2016, among the Company, the Guarantors from time to time party thereto and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.1	Form of Purchase Agreement (incorporated by reference to Exhibit 10.1 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.2	Form of Royalty Rights Agreement (incorporated by reference to Exhibit 10.2 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.3	Collateral Agreement, dated as of August 31, 2016, among the Company, the Subsidiary Parties from time to time party thereto and U.S. Bank National Association as trustee and collateral agent (incorporated by reference to Exhibit 10.3 to Egalet Corporation’s current report on Form 8‑K filed with the Securities and Exchange Commission on September 1, 2016).
10.4	Form of Egalet Corporation Restricted Stock Award Agreement (filed herewith).
10.5	Employment Agreement by and between Egalet Corporation and Patrick M. Shea (filed herewith).
31.1	Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).