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 RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 9, 2017,~~May 10, 2018, there were ~~55,491,463~~59,288,804 shares of company Common Stock issued and ~~55,475,972~~59,273,313 shares of company Common Stock outstanding.


								March 31,			December 31,
	June 30, 2017			December 31, 2016				2018			2017
ASSETS							ASSETS
Current assets:
Cash	$	27,508		$	32,019			$	12,090		$	21,195
Accounts receivable, net		7,753			3,569				8,123			8,852
Inventory, net		6,564			3,368				5,441			6,091
Prepaid expenses and other current assets		2,657			4,136				2,828			3,610

Total current assets		44,482			43,092				28,482			39,748

Property and equipment, net		4,437			4,230				3,621			3,778
Goodwill		2,715			2,715				2,715			2,715
BELBUCA^® license and distribution rights intangible		42,750			—
BELBUCA^® license and distribution rights intangible asset, net									39,375			40,500
Other intangible assets, net		1,800			2,285				1,196			1,360

Total assets	$	96,184		$	52,322			$	75,389		$	88,101

LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	30,613		$	18,174			$	20,335		$	26,149
Deferred revenue, current		—			1,716

Total current liabilities		30,613			19,890				20,335			26,149

Notes payable, less current maturities, net		35,251			29,272
Deferred revenue, long-term		—			20,000
Notes payable, net									48,285			47,660
Other long-term liabilities		4,050			825				5,415			5,415

Total liabilities		69,914			69,987				74,035			79,224

Commitments and contingencies (Notes 11 and 15)
Commitments and contingencies (Note 14)

Stockholders’ equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized; 2,093,155 shares of Series ANon-Voting Convertible Preferred Stock outstanding at both June 30, 2017 and December 31, 2016, respectively.		2			2
Common Stock, $.001 par value; 75,000,000 shares authorized; 55,491,463 and 54,133,511 shares issued; 55,475,972 and 54,118,020 shares outstanding at June 30, 2017 and December 31, 2016, respectively.		55			54
Preferred Stock, $.001 par value; 5,000,000 shares authorized; 2,093,155 shares of Series ANon-Voting Convertible Preferred Stock outstanding at both March 31, 2018 and December 31, 2017, respectively									2			2
Common Stock, $.001 par value; 75,000,000 shares authorized; 58,646,522 and 55,904,072 shares issued; 58,631,031 and 55,888,581 shares outstanding at March 31, 2018 and December 31, 2017, respectively									59			56
Additionalpaid-in capital		303,155			292,667				316,970			313,922
Treasury stock, at cost, 15,491 shares		(47	)		(47	)			(47	)		(47	)
Accumulated deficit		(276,895	)		(310,341	)			(315,630	)		(305,056	)

Total stockholders’ equity (deficit)		26,270			(17,665	)
Total stockholders’ equity									1,354			8,877

Total liabilities and stockholders’ equity	$	96,184		$	52,322			$	75,389		$	88,101


	Six months ended June 30,						Three months ended March 31,
	2017			2016			2018			2017
Operating activities:
Net income (loss)	$	33,446		$	(35,219	)
Net (loss) income							$	(10,709	)	$	48,325
Adjustments to reconcile net (loss) income to net cash flows from operating activities
Depreciation		226			212			230			111
Accretion of debt discount and loan costs		1,491			198			625			1,040
Amortization of intangible assets		2,735			485			1,289			1,369
Derivative liability		—			114
(Benefit) provision for inventory obsolescence								(66	)		153
Stock-based compensation expense		6,000			7,457			2,921			3,070
Deferred income taxes		(15,972	)		—			—			(15,972	)
Bargain purchase gain		(27,336	)		—			—			(27,336	)
Changes in assets and liabilities:
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(4,183	)		80			864			(2,662	)
Inventories, net of effect of acquisition		2,660			(1,868	)
Inventories								716			480
Prepaid expenses and other assets		1,034			321			782			194
Accounts payable and accrued expenses, net of effect of acquisition		4,904			(441	)
Accounts payable and accrued expenses								(3,413	)		3,942
Deferred revenue		(21,716	)		90			—			(21,716	)

Net cash flows from operating activities		(16,711	)		(28,571	)
Net cash flows used in operating activities								(6,761	)		(9,002	)

Investing activities:
BELBUCA^® acquisition								(1,951	)		—
Purchase of equipment		(2	)		(249	)		(73	)		—

Net cash flows from investing activities		(2	)		(249	)
Net cash flows used in investing activities								(2,024	)		—

Financing activities:
Proceeds from notes payable		45,000			—			—			45,000
Payment of notes payable		(30,000	)		—
Proceeds from exercise of stock options								130			—
Payment on note payable								—			(30,000	)
Payment of deferred financing fees		(2,798	)		—			(450	)		(2,798	)
Equity financing costs		—			40
Proceeds from exercise of stock options		—			225
Proceeds from issuance of common stock		—			2,459

Net cash flows from financing activities		12,202			2,724
Net cash flows (used in) provided by financing activities								(320	)		12,202

Net change in cash and cash equivalents		(4,511	)		(26,096	)		(9,105	)		3,200
Cash and cash equivalents at beginning of year		32,019			83,560
Cash and cash equivalents at beginning of period								21,195			32,019

Cash and cash equivalents at end of period	$	27,508		$	57,464		$	12,090		$	35,219

Cash paid for interest	$	2,373		$	1,358		$	1,880		$	946

The Company recorded the fair value of an accumulated total of 1,640,198 shares of common stock issued to officers who retired from the Company during the three months ended March 31, 2018 totaling approximately $4.3 million to expense in accordance with accounting principles generally accepted in the United States (“GAAP”).

The Company recorded the fair value of the bargain purchase price of the BELBUCA^® acquisition totaling $27.3 million to income during the ~~six~~three months ended ~~June 30,~~March 31, 2017 in accordance with ~~accounting principles generally accepted in the United States (“GAAP”)~~GAAP (see note 7, Business Combinations and Asset Acquisitions).

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

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

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of these financial statements. The condensed consolidated balance sheet at December 31, ~~2016~~2017 has been derived from the Company’s audited consolidated financial statements included in its annual report on Form10-K for the year ended December 31, ~~2016.~~2017. Certain footnote disclosures normally included in financial statements prepared in accordance with ~~accounting principles generally accepted in the United States (“GAAP”)~~GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report onForm 10-K for the year ended December 31, ~~2016.~~2017.

Operating results for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2017~~March 31, 2018 are not necessarily indicative of results for the full year or any other future periods.

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

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

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

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

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

On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete, inventory that has a cost basis in excess of the expected net realizable value and inventory that is in excess of expected demand based upon projected product sales. The Company ~~recorded~~reserved $0.2 million infor inventory ~~allowances~~obsolescence as of ~~June 30, 2017. There were no allowances recorded as of~~both March 31, 2018 and December 31, ~~2016.~~2017.

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

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

As discussed further below in Recent accounting pronouncements-adopted, effective January 1, 2018 the Company adopted Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with Customers” (“Topic 606”) and began recognizing revenue under the new accounting guidance on that date. Under the new accounting guidance, the Company recognizes revenue on product sales when control of the promised goods is transferred to its customers in an amount that reflects the consideration expected to be received in exchange for transferring those goods. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. When determining whether the customer has obtained control of the goods, the Company considers any future performance obligations. Generally, there is no post-shipment obligations on product sold.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s product sales contracts have a single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company’s performance obligations are satisfied at a point in time.

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

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

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

~~Product~~~~Returns~~~~-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an18-month~~ ~~period that begins six months prior to and ends twelve months subsequent to expiration of the products.~~

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

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

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

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

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

Product returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an18-month period that begins six months prior to and ends twelve months after expiration of the products. The accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

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

Price adjustments and chargebacks-The Company’s estimates of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Company’s listed prices of its products. If the sales mix to third-party payers is different from the Company’s estimates, the Company will pay higher or lower total price adjustments and/or chargebacks than it had estimated.

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

Prompt payment discounts-The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within a specified number days after the invoice date, depending on the agreement with the customer.

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

~~For~~ BELBUCA^®and BUNAVAIL^®~~, cost of sales~~. It includes raw materials, production costs at the Company’s three contract manufacturing sites, quality testing directly related to the products, and depreciation on equipment that the Company has purchased to produce BELBUCA^®and BUNAVAIL^®. It also includes any batches not meeting specifications and raw material yield ~~losses. Yield~~ losses ~~and batches not meeting specifications~~which are expensed as incurred. ~~Prior to January 1, 2017, cost~~Cost of sales ~~was recognized as actual product was sold through~~also includes royalty expenses that the Company owes to third parties.

Certain amounts were reclassified between Provision for inventory obsolescence, Accounts receivable, Inventories and Accounts payable and accrued expenses in the ~~end user. Beginning January 1,~~Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 ~~cost of sales is recognized when sold~~ to conform to current year presentation. These reclassifications had no effect on the ~~wholesaler~~previously reported net cash flows from ~~our distribution center.~~operations, activities or net losses.

In ~~May 2014,~~ the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update2014-09,~~ ~~“Revenue from Contracts with Customers,” which supersedes~~first quarter of 2018, the ~~revenue recognition requirements of Accounting Standards Codification (“ASC”)~~Company adopted Topic ~~605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout~~606. Under the ~~ASC. The new~~ standard, ~~is principles-based and provides a five step model to determine when and how~~ revenue is ~~recognized. The core principle of the new standard is that revenue should be~~ recognized when a ~~company transfers~~customer obtains control of promised goods or services ~~to customers~~ in an amount that reflects the consideration ~~to which~~ the ~~Company~~entity expects to ~~be entitled~~receive in exchange for those goods or services. ~~The new~~In addition, the standard ~~also~~ requires disclosure of ~~qualitative and quantitative information surrounding~~ the nature, amount, ~~nature,~~ timing, and uncertainty of ~~revenues~~revenue and cash flows arising from contracts with customers. ~~In July 2015,~~The Company applied the ~~FASB agreed to defer~~five-step method outlined in the effective date of the standard from January 1, 2017 to January 1, 2018, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In April 2016, the FASB issued ASU~~2016-10,~~ ~~“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU2016-10~~ ~~clarifies the implementation guidance on identifying performance obligations. These ASUs apply~~ to all ~~companies that enter into contracts with customers to transfer goods or services. These two ASUs are effective for public entities for interim~~revenue streams and ~~annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but~~elected the modified retrospective implementation method. The additional disclosures required by Topic 606 have been included in Note 2.

Recent accounting pronouncements-issued, not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently in the process of evaluating the impact that this new ASU will have on its condensed consolidated financial statements.yet adopted

The FASB’s new leases standard, ASU2016-02 Leases (Topic 842), was issued on February 25, 2016. ASU2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of

expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The ~~leasing~~new standard ~~will be~~requires a modified-retrospective approach to adoption and is effective for ~~calendaryear-end~~ ~~public companies~~interim and annual periods beginning after December 15, 2018. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all companies and organizations upon issuance of the standard. For calendar~~year-end~~ ~~public companies, this means an adoption date of~~on January 1, 2019 ~~and retrospective application~~but may be adopted earlier. The Company expects to ~~previously issued annual and interim financial~~adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its condensed consolidated statements ~~for 2018 and 2017. Lessees with a large portfolio~~ of ~~leases are likely to see a significant increase in balance sheet~~operations, but the Company does expect that upon adoption, this standard will impact the carrying value of its assets and ~~liabilities.~~liabilities on its condensed consolidated balance sheets as a result of the requirement to recordright-of-use assets and corresponding lease obligations for current operating leases. In addition, the standard will require that the Company update its systems, processes and controls it uses to track, record and account for its lease portfolio.

Effective January 1, 2018, the Company adopted Topic 606. The Company elected to apply the standard and all related ASUs using the modified retrospective method beginning January 1, 2018. The Company applied this guidance only to those contracts that were not completed at the date of adoption. As a result of adoption, the cumulative impact to the Company’s retained earnings at January 1, 2018 was $0.1 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard on its existing contracts to be immaterial to the Company’s net income on an ongoing basis, however additional disclosures have been added in accordance with the ASU.

The Company does not anticipate any significant changes in the timing or amount of revenue recognized for the Company’s product sales and relatedgross-to-net adjustments under ASC 606. The Company’s net product sales continue to be recognized when delivery has occurred, and itsgross-to-net adjustments are estimated and recorded in the accounting period related to when sales occur in the manner fundamentally consistent with the Company’s prior accounting methodology.

Under the new standard, timing for recognition of certain contract revenue may be accelerated such that a portion of revenue will be estimated and recognized in revenue earlier than the previous accounting standards. During the three months ended March 31, 2018, the Company recorded milestone revenue for contracts that are not due until between years 2020-2023. This financing component is recorded as a cumulative effect adjustment and the receivables were discounted for time value of money.

The ~~Company is currently in the process of evaluating the impact that this new leasing ASU will have on its condensed consolidated financial statements.~~

~~In January 2017, the FASB issued ASU2017-01, Business~~ Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a screen to determine when an integrated set of assets and activities (a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The new guidance will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company is evaluating the impact of the adoption of the new guidance on its condensed consolidated financial statements.

~~In January 2017, the FASB issued ASU Update No.2017-04, Intangibles—Goodwill~~ and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including~~in-process~~ research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1. Under this new guidance if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASU does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This ASU will be applied prospectively and is effective for annual and interim impairment test performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently in the process of evaluating the impact of adoption of ASC 606 on the ~~ASU on its~~Company’s condensed consolidated ~~financial statements.~~balance sheet and condensed consolidated statement of operations as of and for the three months ended March 31, 2018 follows (in thousands):

The cumulative effect of the changes made to the Company’s condensed consolidated balance sheet from the modified retrospective adoption of ASC 606 was as follows (in thousands):

The beginning and ending balances of the Company’s accounts receivables with customers from contracts during the periods presented is as follows (in thousands):

At ~~June 30, 2017,~~March 31, 2018, the Company had cash of approximately ~~$27.5~~$12.1 million. The Company used ~~$4.5~~$6.8 million of cash in operations during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 and had stockholders’ equity of ~~$26.3~~$1.4 million, versus stockholders’ ~~deficit~~equity of ~~$17.7~~$8.9 million at December 31, ~~2016.~~2017. The Company expects that it has sufficient cash to manage the business as currently planned into the second ~~half~~quarter of ~~2018. This~~2019, which assumes either access to an additional $15 million of loan proceeds through the Company’s term loan with CRG Servicing LLC (“CRG”) if the Company satisfies the third draw requirements (see note 10), and/or further assumes the Company’s ability to access to the equity markets if the Company chooses (or a combination of both debt and equity, if available) that would provide sufficient capital necessary to support the continued commercialization of BELBUCA^® and BUNAVAIL^®.

Additionally, beginning April 2018, the Company has the ability to access to its previously established“at-the-market” offering program utilizing the universal shelf registration for up to $40 million of Common Stock. The Company’s cash on hand estimation therefore assumes the availability of the foregoing capital sources and further assumes that the Company does not ~~accelerate the development of existing, or acquire other drug development opportunities or~~ otherwise face unexpected events, costs or contingencies, any of which could affect the Company’s cash ~~requirements.~~requirements from time to time.

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


						March 31,			December 31,
	June 30, 2017			December 31, 2016		2018			2017
Raw materials & supplies	$	1,854		$	978	$	1,100		$	1,338
Work-in-process		2,308			1,660		3,663			3,135
Finished goods		2,555			730		855			1,861
Finished good reserve		(153	)		—
Obsolescence reserve							(177	)		(243	)

Total inventories	$	6,564		$	3,368	$	5,441		$	6,091

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


					March 31,		December 31,
	June 30, 2017		December 31, 2016		2018		2017
Accounts payable	$	9,486	$	9,397	$	9,712	$	12,236
Accrued price adjustments		2,220		592
Accrued rebates						6,133		5,648
Accrued compensation and benefits						1,768		3,472
Accrued acquisition costs						583		2,311
Accrued returns		1,022		—		622		915
Accrued acquisition consideration		6,368		—
Accrued rebates		5,843		3,842
Accrued chargebacks		106		10
Accrued compensation and benefits		2,245		2,052
Accrued royalties		661		518		526		488
Accrued clinical trial costs		372		615		274		234
Accrued legal costs		1,299		490
Accrued manufacturing costs		200		200
Accrued sales and marketing costs		—		193
Accrued legal						164		216
Accrued other		791		265		553		629

Total accounts payable and accrued expenses	$	30,613	$	18,174
Total accounts payable and accrued liabilities					$	20,335	$	26,149

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


							March 31,			December 31,
	June 30, 2017			December 31, 2016			2018			2017
Machinery & equipment	$	4,906		$	4,476		$	5,495		$	5,428
Computer equipment & software		466			464			405			399
Office furniture & equipment		202			202			169			169
Leasehold improvements		53			53			44			44
Idle equipment		1,486			1,486			766			766

Total		7,113			6,681			6,879			6,806
Less accumulated depreciation		(2,676	)		(2,451	)

Total property, plant & equipment, net	$	4,437		$	4,230
Less accumulated depreciation and amortization								(3,258	)		(3,028	)

Total property and equipment, net							$	3,621		$	3,778

Depreciation expense for the six month periods ended June 30, 2017 and June 30, 2016, was approximately $0.2 million for each period. Depreciation expense for the three month periods ended June 30, 2017 and June 30, 2016, was approximately $0.1 million for each period.

Depreciation and amortization expense was approximately $0.2 million and $0.1 million for the three month periods ended March 31, 2018 and 2017, respectively.

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

In August 2006 and September 2007, the Company entered into certain agreements with Meda AB (“Meda”) a subsidiary of Mylan N.V., a Swedish company to develop and commercialize the Company’s ONSOLIS^® product, a drug treatment for breakthrough cancer pain delivered utilizing the Company’s BEMA^® technology. The agreements related to the United States, Mexico and Canada (“Meda U.S. Agreements”) and to certain countries in Europe (“Meda EU Agreements”). They carry license terms that commenced on the date of first commercial sale in each respective territory and end on the earlier of the entrance of a generic product to the market or upon expiration date of the last to expire Orange Book listed patents which currently is July 23, 2027.

On March 12, 2012, the Company announced the postponement of the U.S. relaunch of ONSOLIS^® following the initiation of the class-wide Risk Evaluation and Mitigation Strategy (“REMS”) until the product formulation could be modified to address two appearance-related issues. Such appearance-related issues involved the formation of microscopic crystals and a fading of the color in the mucoadhesive layer, and as previously reported the Company has since worked with FDA to reformulate ONSOLIS^® to address these issues. In August 2015, the Company announced the FDA approval of the new formulation. The Company identified a new supplier and requested guidance from the FDA on specific requirements for obtaining approval to supply product from this new vendor. Based on the Company’s current estimates, the Company will be able to submit the necessary documentation to the FDA for qualification of the new manufacturer during 2018.

On January 27, 2015, the Company announced that it had entered into an assignment and revenue sharing agreement with Meda ~~AB (“Meda”), a subsidiary of Mylan N.V.,~~ to return to the Company the marketing authorization for ONSOLIS^® in the U.S. and the right to seek marketing authorizations for ONSOLIS^® in Canada and Mexico. Following the return of the U.S. marketing authorization from Meda, the Company submitted a prior approval supplement for the new formulation to the U.S. Food and Drug Administration (“FDA”) in March 2015, which was approved in August 2016. In connection with the return to the Company by Meda of the U.S. marketing authorization in January 2015, the remaining U.S.-related deferred revenue of $1.0 million was recorded as contract revenue during the year ended December 31, 2015. There was no remaining U.S.-related contract revenue to record during the year ended December 31, 2016. On February 27, 2016, the Company entered into an extension of the assignment and revenue sharing agreement to extend the period until December 31, 2016, which terminated on May 11, 2016 upon the signing of the Termination and Revenue Sharing Agreement ~~(“the Agreement”~~(the “Agreement”).

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

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

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

Under the terms of the License Agreement, Collegium ~~will be~~was responsible for the manufacturing, distribution, marketing and sales of ONSOLIS^® in the U.S. However, on December 8, 2017, the Company received therequired 90-day notice from Collegium regarding termination of the License Agreement and the effective date of termination was March 8, 2018. The Company is ~~obligated to use commercially reasonable efforts to continue the transfer of manufacturing to the anticipated manufacturer for ONSOLIS~~^® ~~and to submit a corresponding Prior Approval Supplement (the “Supplement”) to the FDA with respect to the current NDA~~assessing its commercial options for ONSOLIS^®. ~~Following approval of the Supplement, the NDA and manufacturing responsibility for ONSOLIS~~^® (including the manufacturing relationship with the Company’s manufacturer, subject to the Company entering into an appropriate agreement with such manufacturer that is acceptable and assignable to Collegium) will be transferred to Collegium.

The License Agreement also contains customary termination provisions that include a right by either party to terminate upon the other party’s uncured material breach, insolvency or bankruptcy, as well as in the event a certain commercial milestone is not met.

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

In January 2012, the Company entered into a License and Development Agreement with Endo Pharmaceuticals, Inc. (“Endo”) pursuant to which the Company granted Endo an exclusive commercial world-wide license to develop, manufacture, market and sell the Company’s BELBUCA^® product and to complete U.S. development of such product candidate for purposes of seeking FDA approval (the “Endo Agreement”). BELBUCA^® is for the management of pain severe enough to require daily,around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. The FDA approved BELBUCA^® in October 2015.

~~Pursuant~~However, due to the Company and Endo ~~Agreement,~~entering into a termination agreement effective January 6, 2017 (the “Termination Agreement”) which terminated the BELBUCA^® license to Endo, the Company ~~has received the following payments:~~

On December 7, 2016, the Company and Endo entered into the Termination Agreement to terminate Endo’s licensing rights for BELBUCA^®. The transaction closed on January 6, 2017. At the closing date, the Company purchased from Endo the following net assets (the “net assets”): (i) current BELBUCA^® product inventory andwork-in-progress, (ii) material manufacturing contracts related to BELBUCA^®^, (iii) BELBUCA^®-related domain names and trademarks (including the BELBUCA^® trademark), (iv) BELBUCA^® -related manufacturing equipment, and(v) all pre-approval regulatory submissions, including any Investigational New Drug Applications and New Drug Applications, regulatory approvals and post-approval regulatory submissions concerning BELBUCA^®. The purchase price for the net assets (the “Asset Purchase Price”) was equal to the sum of: (i) the aggregate book value of the portion of the transferred product inventory forecasted to be used or sold by the Company, (ii) the aggregate book valueof work-in-progress inventory, and (iii) the assumption of any assumed liabilities. Together with the Asset Purchase Price, pursuant to the terms of the Termination Agreement, the Company ~~will also pay~~paid to Endo a fee in the amount of $5 million in consideration for (i) Endo’s agreement not to compete for a period of two years from the closing date of the termination agreement and (ii) Endo’s waiver of its right to sell product for twelve months following the closing of the termination agreement.

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

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

The BELBUCA^® acquisition was accounted for as a business combination in accordance with ASC No. 805,BusinessCombinations which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The purchase price allocation is preliminary with respect to taxes and certain accruals and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. The Company believes the estimates used ~~are~~were reasonable and the significant effects of the BELBUCA^® acquisition ~~are~~were properly reflected. ~~However, the estimates are subject to change as additional information becomes available and is assessed by the Company.~~

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

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

The fair value of the equipment was determined by consultations with a third-party equipment vendor, which considered replacement cost and equipment condition. The equipment will be depreciated over seven years based on its estimated remaining useful life.

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

As a result of the business combination, the Company recognized a deferred tax liability of $16.0 million. This deferred tax liability was netted against its deferred tax assets as of ~~June 30,~~March 31, 2017. Because a full valuation allowance has been provided against the Company’s deferred tax assets as it is considered more likely than not that they will not be utilized, the Company released a corresponding amount of its valuation allowance during the ~~six~~three months ended ~~June 30,~~March 31, 2017 and recognized a $16.0 million tax benefit in the accompanying condensed consolidated statement of operations.

~~The~~During the three months ended March 31, 2017, the Company recorded the asset acquisition as a bargain purchase gain of $27.3 million in the accompanying condensed consolidated statement of operations.

On July 12, 2017, the Company, along with Purdue Pharma, an Ontario limited partnership (“Purdue”), announced that they had executed an exclusive agreement granting to Purdue the licensing, distribution, marketing and sale rights related to BELBUCA^® in Canada. Financial terms of ~~acquisition~~the Purdue agreement include: (i) total upfront and other cash milestone payments (relating to marketing authorization transfer and certain other marketing- and sales-related milestones) of up to an aggregate of CAD 4.5 million, including approximately CAD 1.5 million (0.5 million CAD and 1.0 million CAD received August 2017 and October 2017, respectfully); (ii) a low double digit percent royalty payable quarterly by Purdue to the Company based on Canadian net sales of BELBUCA^®, which

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

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

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

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

royalty rate is subject to adjustment in certain circumstances; (iii) an annual royalty fee commencing a period of time after the commercial launch of BELBUCA^® in Canada, which fee is creditable against royalties payable by Purdue and subject to reduction in certain circumstances; and (iv) payment by Purdue of certain costs incurred to obtain and transfer the marketing authorization for BELBUCA^® in Canada, a portion of which will be reimbursed by the Company as a reduction of royalties payable by Purdue.

On January 30, 2018, the Company and Purdue announced that BELBUCA^® is now commercially available in Canada. The first commercial sale of BELBUCA^® in Canada triggered a milestone payment to the Company from Purdue in the amount of CAD 1 million (US $0.8 million), which the Company received and recognized as revenue in March 2018.

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

~~In February,~~During the three months ended March ~~and June 2017,~~31, 2018, the Company received cumulative payments of ~~$0.2~~$0.4 million ~~$0.03 million and $0.1 million, respectively,~~ from TTY, which related to royalties based on product purchased in Taiwan by TTY of PAINKYL^™, which is recorded in the accompanying condensed consolidated ~~statements~~statement of ~~operations for~~operations. There were no payments received during the three ~~and six~~ months ended ~~June 30,~~March 31, 2017.

In February 2016 and June 2016, the Company received separate payments of $0.24 million each from TTY which is recorded in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2016.

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

On February 21, 2017, the Company entered into a term loan agreement (the “Term Loan Agreement”) with CRG, ~~Servicing LLC (“CRG”),~~ as administrative agent and collateral agent, and the lenders named in the Term Loan Agreement (the “Lenders”). The Company utilized approximately $29.4 million of the initial loan proceeds under the Term Loan Agreement to repay all of the amounts owed by the Company under the MidCap Credit ~~Agreement. Upon the repayment of all amounts owed by the Company under the MidCap Credit~~ Agreement all commitments under the MidCap Credit Agreement were terminated and all security interests granted by the Company and its subsidiary guarantors under the MidCap Credit Agreement were released (see note 11, Term Loan Agreement (CRG)(“Midcap”). Certain warrants issued to MidCap and its affiliates in May 2016 related to the extension of the interest only period under the MidCap Credit Agreement remain outstanding as of June 30, 2017 and will expire if not earlier exercised in May, 2021. Such warrants are exercisable for 84,986 shares of Common Stock at an exercise price of $3.53 per share. During the ~~six~~three months ended ~~June 30,~~March 31, 2017, $0.7 million of deferred loan costs arising out of the MidCap Credit Agreement were expensed and recorded as interest expense in the accompanying ~~condensed~~ consolidated statement of operations.

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

~~The~~ On December 26, 2017, the Company ~~is utilizing~~was eligible and elected to receive the ~~initial~~Second Draw for gross proceeds ~~under the Term Loan Agreement (after deducting loan origination costs and broker and other fees)~~ of ~~approximately $13.7 million, plus any additional amounts that may be borrowed in the future, for general corporate purposes and working capital.~~$15.0 million.

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

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

lowered over time) and no prepayment fee thereafter. In certain circumstances, including a change of control and certain asset sales or licensing

transactions, ~~the Company is~~we are required to prepay all or a portion of the loan, including the applicable prepayment premium of on the amount of the outstanding principal to be prepaid.

As security for its obligations under the Term Loan Agreement, on the funding date of the initial borrowing, the Company and the Subsidiary Guarantors entered into a security agreement with CRG whereby the Company and the subsidiary guarantors of the Company under the Term Loan Agreement (the “Subsidiary Guarantors”) granted to CRG, as collateral agent for the Lenders, a lien on substantially all of its assets including intellectual property (subject to certain exceptions). The Term Loan Agreement requires the Company to maintain minimum cash and cash equivalents balance and, each year through the end of 2022, to meet a minimum net annual revenue threshold. The Company is in compliance as of June 30, 2017. In the event that the Company does not meet the minimum net annual revenue threshold, then the Company can satisfy the requirement for that year by raising two (2) times the shortfall by way of raising equity or subordinated debt.

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

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

The following table represents future maturities of the CRG obligation as of ~~June 30, 2017:~~March 31, 2018:

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

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

~~The~~However, the following table presents net sales by ~~product (in thousands):~~product:


	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
	2017		2016		2017		2016		2018		2017
BELBUCA^®	$	6,563	$	—	$	11,117	$	—	$	8,024	$	4,555
BUNAVAIL^®		1,323		2,110		4,563		4,212		1,814		3,240

Net product sales	$	7,886	$	2,110	$	15,680	$	4,212	$	9,838	$	7,795

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, a total of ~~807,503~~618,174 options to purchase Common Stock, with an aggregate fair market value of approximately $1.5 million, were granted to Company employees. ~~The options~~Options granted to employees have a term of 10 years from the grant date and vest ratably over a three year period. The fair value of each option is amortized as compensation expense evenly through the vesting period.

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

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

Expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

The ~~weighted average for~~ key assumptions used in determining the fair value of options granted during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 follows:

Option activity during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 was as follows:

As of ~~June 30, 2017,~~March 31, 2018, options exercisable totaled ~~1,921,093.~~1,769,300. There was approximately ~~$10.5~~$4.9 million of unrecognized compensation cost related tonon-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through ~~2020.~~2021.

During the ~~six~~three months ended ~~June 30, 2017, 2,180,000~~March 31, 2018, 1,155,611 RSUs were granted to the Company’s executive officers and employees, with a fair market value of approximately ~~$4.1~~$2.5 million. The fair value of restricted units is determined using quoted market prices of the Common Stock and the number of shares expected to vest. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as ~~amended.~~ amended (the “EIP”).

Of the aforementioned ~~2017~~2018 RSU grants, ~~2,060,000 wereone-half~~292,500 are time-based and~~one-half~~ 292,500 are performance based, ~~and~~ all of which vest over a three-year period. ~~The performance-based~~Performance-based RSUs ~~provide for vesting~~vest if specified predetermined net revenue and operating income goals are achieved with respect to the annual fiscal years ~~2017~~2018 through ~~2019.~~2020. Actual performance relative to the predetermined performance measures are evaluated independently at the end of each fiscal year and the number of awards that will vest will be based upon the percentage of the individual performance measure achieved relative to the predetermined ~~target, which~~target. This allows for partial vesting relative to separate performance ~~ranges. The~~measures.

Pursuant to retirement agreements of certain Company senior staff, the remaining ~~120,000~~570,611 RSUs terminated and immediately were ~~granted to Company employees and vest in full in one year. Cumulatively, these RSUs were granted over the plan allotment~~issued into shares of ~~our 2011 Equity Incentive Plan and will require approval~~Common Stock.

Restricted stock activity during the ~~2017 annual stockholder meeting.~~three months ended March 31, 2018 was as follows:

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

Expected term of warrants granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. ~~The~~A cumulative total of 2,136,020 shares underlying warrants to purchase Common Stock are outstanding as of March 31, 2018 with a weighted average ~~for key assumptions used in determining the fair value~~exercise price of ~~warrants granted during the six months ended June 30, 2017 follows:~~$2.60 per share.

~~Warrant activity~~The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations (in thousands, except share and per share data).

Basic earnings per common share is calculated using the weighted average shares of Common Stock outstanding during the ~~six~~period. Common equivalent shares from stock options, RSUs, warrants and convertible preferred stock using the treasury stock method, are also included in the diluted per share calculations unless the effect of inclusion would be antidilutive. During the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~was as follows:~~outstanding stock options, RSUs, warrants and convertible preferred stock of 10,243,260 and 10,124,619, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect because the outstanding exercise prices were greater than the average market price of the common shares during the relevant periods.

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

Basic earnings per common share is calculated using the weighted average shares of Common Stock outstanding during the period. In addition to the weighted average shares of Common Stock outstanding, common equivalent shares from stock options, RSUs and warrants using the treasury stock method, are included in the diluted per share calculations unless the effect of inclusion would be antidilutive. During the three months ended June 30, 2017 and 2016, outstanding stock options, RSUs and warrants of 10,037,017 and 10,113,296, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect. During the six months ended June 30, 2017 and 2016, outstanding stock options, RSUs and warrants of 7,747,726 and 10,490,874, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect.

~~On November 2, 2010, MonoSol Rx LLC (“MonoSol”) filed an action against the Company and its commercial partners for ONSOLIS~~^® in the Federal District Court of New Jersey (the “DNJ”) for alleged patent infringement and false marking. The Company was formally served in this matter on January 19, 2011. MonoSol claimed that our manufacturing process for ONSOLIS^®, which has never been disclosed publicly and which the Company and its partners maintain as a trade secret, infringes its patent (United States Patent No. 7,824,588) (the “’588 Patent”). Of note, the BEMA^® ~~technology itself was not at issue in the case, nor is BELBUCA~~^® ~~or BUNAVAIL~~^®~~, but rather only the manner in which ONSOLIS~~^®~~, which incorporates the BEMA~~^® ~~technology, is manufactured. Pursuant to its complaint, MonoSol was seeking an unspecified amount of damages, attorney’s fees and an injunction preventing future infringement of MonoSol’s patents.~~

~~Based on the Company’s original assertion that its proprietary manufacturing process for ONSOLIS~~^® does not infringe on patents held by MonoSol, and the denial and subsequent narrowing of the claims on the two reissued patents MonoSol has asserted against the Company while the third has had all claims rejected by the United States Patent and Trademark Office (“USPTO”), the Company remains confident in its original stated position regarding this matter. Thus far, the Company has proven that the “original” MonoSol’s US patent No 7,357,891 (the “’891 Patent”), and No 7,425,292 (the “’292 Patent”) in light of their reissuance with fewer and narrower claims were indeed invalid and the third and final patent, the ’588 patent, was invalid as well with all its claims cancelled. Given the outcomes of the ’292, ’891 and ’588 reexamination proceedings, at a January 22, 2015 status meeting, the Court decided to lift the stay and grant the Company’s request for the case to proceed on an expedited basis with a Motion for Summary Judgment to dismiss the action. On September 25, 2015, the Honorable Freda L. Wolfson granted the Company’s motion for summary judgment and ordered the case closed. The Company was found to be entitled to absolute intervening rights as to both patents in suit, the ’292 and ’891 patents and the Company’s ONSOLIS^® product is not liable for infringing the patents prior to July 3, 2012 and August 21, 2012, respectively. In October 2015, MonoSol appealed the decision of the court to the Federal Circuit. The Company had no reason to believe the outcome would be different and were prepared to vigorously defend the appeal. MonoSol, however, subsequently decided

to withdraw the appeal. On February 25, 2016, MonoSol filed an Unopposed Motion For Voluntary Dismissal Of Appeal, which was granted by the court on February 26, 2016 and the case dismissed. Thus, the district court’s grant of the Summary Judgement of Intervening Rights stands. The possibility exists that MonoSol could file another suit alleging infringement of the ’292 and ’891 patents. The Company continues to believe, however, that ONSOLIS^® ~~and its other products relying on the BEMA~~^® ~~technology, including BUNAVAIL~~^® ~~and BELBUCA~~^®~~, do not infringe any amended, reexamined claim from either patent.~~

On ~~October 29, 2013,~~September 22, 2014, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and ~~MonoSol~~Aquestive Therapeutics, Inc. (“Aquestive”) (collectively, the ~~RB Plaintiffs) filed an action against the Company relating to its BUNAVAIL~~^® ~~product in the United States District Court for the Eastern District of North Carolina (“EDNC”~~“RB Plaintiffs”) ~~for alleged patent infringement. BUNAVAIL~~^® ~~is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL~~^®, which has never been disclosed publicly, infringes its patent (United States Patent No. 8,475,832) (the “’832 Patent”). On May 21, 2014, the Court granted the Company’s motion to dismiss. In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and therefore, the dismissal will stand and the RB Plaintiffs lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the ’832 Patent. If this occurs, based on the Company’s original position that its BUNAVAIL^® product does not infringe the ’832 Patent, the Company would defend the case vigorously (as the Company has done so previously), and the Company anticipates that such claims against them ultimately would be rejected.

~~On September 20, 2014, based upon the Company’s position and belief that its BUNAVAIL~~^® product does not infringe any patents owned by the RB Plaintiffs, the Company proactively filed a declaratory judgment action in the EDNC, requesting the Court to make a determination that its BUNAVAIL^® product does not infringe the RB Plaintiffs’ ’832 Patent, US Patent No. 7,897,080 (“’080 Patent”) and US Patent No. 8,652,378 (“’378 Patent”). With the declaratory judgment, there is an automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden of showing that the stay should be lifted. For the ’832 Patent, the January 15, 2014~~inter~~~~partes~~ review (“IPR”) was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal Circuit affirmed the USPTO’s decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possible for the RB Plaintiffs. The ’832 IPR was finally resolved with the invalidation of claims~~15-19.~~ For the ’080 Patent, all claims have been rejected in an inter partes reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the Patent Trial and Appeal Board (“PTAB”) in a decision dated March 27, 2015. In May 2015, the RB Plaintiffs filed a response after the decision to which we filed comments. In December 2015, the PTAB denied MonoSol’s request to reopen prosecution, but provided MonoSol an opportunity to file a corrected response. MonoSol filed the request in December 2015 and we subsequently filed comments on December 23, 2015. The PTAB issued a communication on July 7, 2016 denying MonoSol’s request to reopen prosecution of the rejections of all claims over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds. MonoSol failed to appeal the final decision and all claims were cancelled in a reexamination certificate issued May 9, 2017. For the ’378 Patent, an IPR was filed on June 1, 2014, but an IPR was not instituted. However, in issuing its November 5, 2014 decision not to institute the IPR, the PTAB construed the claims of the ’378 Patent narrowly. As in prior litigation proceedings, we believe these IPR and the reexamination filings will provide support for maintaining the stay until the IPR and reexamination proceedings conclude. Indeed, given the PTAB’s narrow construction of the claims of the ’378 Patent, we filed a motion to withdraw the ’378 Patent from the case on December 12, 2014. In addition, we also filed a joint motion to continue the stay (with RB Plaintiffs) in the proceedings on the same day. Both the motion to withdraw the ’378 Patent from the proceedings and motion to continue the stay were granted.

~~On September 22, 2014,~~ the RB Plaintiffs filed an action against the Company (and ~~its~~the Company’s commercial partner) relating to ~~its~~the Company’s BUNAVAIL^®product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent

No. 8,765,167 ~~(“’167~~(the “‘167 Patent”). ~~As with prior actions by the RB Plaintiffs, the~~The Company believes this is ~~another~~an anticompetitive attempt by the RB Plaintiffs to distract ~~our~~the Company’s efforts from commercializing BUNAVAIL^®. ~~The Company strongly refutes as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit.~~ On December 12, 2014, the Company filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against ~~our~~

its commercial partner. The Court issued an opinion on July 21, 2015 granting the Company’s motion to transfer the venue to the ~~ENDC~~Eastern District of North Carolina (“ENDC”) but denying ~~its~~the Company’s motion to dismiss the case against the Company’s commercial partner as moot. The Company has also filed a Joint Motion to ~~stay~~Stay the case in North Carolina at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the ‘167 IPRs in the ~~USPTO. The Company will continue to vigorously defend this case in the EDNC.~~United States Patent and Trademark Office (“USPTO”).

In a related matter, on October 28, 2014, the Company filed multiple IPR requests on the ’167 Patent demonstrating that certain claims of such patent were anticipated by or obvious in light of prior art references, including prior art references not previously considered by the USPTO, and thus, invalid. The USPTO instituted three of the four IPR requests and the Company filed a request for rehearing for thenon-instituted IPR. The final decisions finding all claims patentable were issued in March 2016 and the Company filed a Request for Reconsideration in the USPTO in April 2016, which was denied in September 2016 and appealed to Court of Appeals for the Federal Circuit ~~(the “Federal Circuit”~~(Fed. Cir.) in November 2016. The appeal is currently proceeding in the Federal Circuit with final briefing ~~due~~completed August 7, ~~2017. Regardless of~~2017 and oral argument held February 7, 2018. The Company anticipates receiving a final decision from the ~~outcome of the appeal, the Company believes that BUNAVAIL~~^® ~~will be found not to infringe the claims of the ’167 patent.~~Federal Circuit sometime in 2018.

On January 13, 2017, ~~MonoSol~~Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ‘167 patent. In lieu of answering the complaint, the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the ~~EDNC on March 1, 2017 of which briefing on the motions was completed.~~EDNC. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case has been transferred to Delaware District Court. On October 31, 2017 the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on December 1, 2017. The Company anticipates receiving a final decision from the District Court in the 2nd quarter of 2018. The Company strongly refutes as without merit ~~MonoSol’s~~Aquestive’s assertion of patent infringement and will vigorously defend the lawsuit.

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

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

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

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

~~On January 31, 2017, the Company received a notice relating to a Paragraph IV certification from Teva Pharmaceuticals USA (“Teva”) relating to Teva’s ANDA on additional strengths of BUNAVAIL~~^®~~. Teva’s parent company, Teva Pharmaceuticals Ltd.,~~

recently acquired Actavis through an acquisition. On March 16, 2017, the Company brought suit against Teva and its parent company on these additional strengths within 45 days from the receipt of the notice in Delaware. As in the original case brought by Actavis, the Company is again entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference the additional strengths of BUNAVAIL^®~~. The 30 month stay is expected to extend until at least August of 2019.~~

~~Finally, on June 20, 2017, the Court entered orders staying both BUNAVAIL~~^® ~~suits at the request of the parties.~~

We received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents (the ~~“BELBUCA~~^®~~Patents”~~“Patents”) relating specifically to BELBUCA^®. The Paragraph IV certifications ~~relate~~related to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA^®. The ~~BELBUCA~~^®Patents subject to Teva’s certification ~~are~~were the ’019 Patent and the ’866 Patent. Under the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, the Company ~~may, and in this case did, bring~~brought a patent infringement suit in federal district court against Teva USA within 45 days from the date of receipt of the certification notice. ~~The Company~~We filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017, thus ~~the Company is~~we were entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA^®^. The ~~30 month~~30-month stay iswas expected to preempt any final approval by the FDA on Teva’s ANDA Nos. 209704 and 209772 until at least May of 2019 and for Teva’s ANDA No. 209807 until at least June of 2019.

~~The Company has asserted two different patents against~~In February 2018, we announced that we had entered into a settlement agreement with Teva ~~the ’019 Patent and the ’866 Patent. Teva did not contest infringement of the claims of the ’019 Patent and also did not contest infringement of the claims of the ’866 Patent~~ that ~~cover~~resolved our BELBUCA^® patent litigation against Teva pending in ~~its Paragraph IV certifications.~~the U.S. District Court for the District of Delaware. As part of the settlement agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we have granted Teva anon-exclusive license (for which we will receive no current or future payments) that permits Teva to first begin selling the generic version of our BELBUCA^® product in the U.S. on January 23, 2027 or earlier under certain circumstances (including, for example, upon (i) the

delisting of thepatents-in-suit from the U.S. FDA Orange Book, (ii) the granting of a license by us to a third party to launch another generic form of BELBUCA^® at a date prior to January 23, 2027, or (iii) the occurrence of certain conditions regarding BELBUCA^® market share).

On March 15, 2018, the State of Arkansas, and certain counties and cities in that State, filed an action in the Circuit Court of Arkansas, Crittenden County against multiple manufacturers, distributors, retailers, and prescribers of opioid analgesics, including the Company. The Company ~~believes that Teva is unlikely to prevail~~was served with the complaint on ~~its claims~~April 27, 2018. The complaint specifically alleges that the ~~’019~~Company licensed its branded fentanyl buccal soluble film ONSOLIS^® to Collegium, and ~~’866 Patents are invalid, and,~~Collegium is also named as ~~the Company has done~~a defendant in the lawsuit. ONSOLIS^® is not presently sold in the United States and the license agreement with Collegium was terminated prior to Collegium launching ONSOLIS^® in the United States. The lawsuit seeks to recoup the past and prospective public health costs allegedly associated with the abuse of opioids in Arkansas from the defendants and seeks punitive and treble damages, attorneys’ fees, costs and expenses, andpre-and post-judgment interest under a variety of legal theories including negligence/gross negligence, common law public nuisance, civil conspiracy, and violations of Arkansas statutes. The Company denies the allegations in the lawsuit and intends to vigorously defend its intellectual property. Both of the patents carry the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which the Company prevailed, and all claims of the ’019 Patent survived. IPR Petitioner MonoSol’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. MonoSol did not file a timely appeal at the Federal Circuit.

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

On ~~July 12, 2017,~~May 8, 2018, Herm Cukier was appointed Chief Executive Officer and a member of the Board of Directors of the Company. In connection with his appointment, the Company ~~along with Purdue Pharma,~~and Mr. Cukier entered into an ~~Ontario limited partnership (“Purdue”), announced that they had executed~~employment agreement, dated May 2, 2018, for an ~~exclusive agreement granting~~initialtwo-year term, starting on May 8, 2018, automatically renewable forone-year terms, unless either party gives notice ofnon-extension to ~~Purdue~~ the ~~licensing, distribution, marketing and sale rights related~~other party at least 60 days prior to ~~BELBUCA~~^® ~~in Canada. Financial terms~~the end of the ~~Purdue~~applicable term. The employment agreement ~~include:~~provides for the following compensation terms for Mr. Cukier: (i) ~~total upfront and other cash milestone payments (relating to marketing authorization transfer and certain other marketing- and sales-related milestones)~~Base salary of ~~up to an aggregate of CAD 4.5~~$0.57 million including approximately CAD 1.5 million which is expected to be paid to the Company during 2017; (i) a low double digit percent royalty payable quarterly by Purdue to the Company based on Canadian net sales of BELBUCA^®~~, which royalty rate is subject to adjustment in certain negotiated circumstances; (iii)~~per annum, (ii) an annual ~~royalty fee commencing~~cash bonus in an amount no less than fifty-five percent (55%) of the base salary (iii) a ~~period~~signing bonus in the amount of ~~time after~~$0.05 million); (iv) an initial incentive stock option to purchase Eight Hundred Thousand (800,000) shares of the ~~commercial launch of BELBUCA~~^® ~~in Canada, which fee is creditable against royalties payable by Purdue~~Common Stock under the Company’s 2011 EIP; and ~~subject to reduction in certain negotiated circumstances; and (iv) reimbursement by Purdue of certain fees and expenses incurred by~~(v) Two Hundred Thousand (200,000) RSUs under the ~~Company for obtaining and transferring to Purdue the marketing authorization for BELBUCA~~^® ~~in Canada, a portion of which will be credited against royalties payable by Purdue.~~Company’s 2011 EIP.

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

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

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

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

eighty-five sales representatives and ~~five~~nine regional sales managers. As previously disclosed, the launch has been more challenging because of the increased scrutiny over the prescribing of opioids that is driven by the Centers for Disease Control and Prevention guidelines issued in March 2016. The difference that BELBUCA^® offers over the Schedule II opioids, such as oxycodone, hydrocodone, morphine, etc., include less addiction and abuse potential along with a ceiling effect on respiratory depression. ~~These differences we believe make it the opioid of choice.~~ The approval of BELBUCA^® carries a standard post-approval requirement by the FDA to conduct a study to determine the effect of BELBUCA^® on QT prolongation (i.e. an abnormal lengthening of the heartbeat). Also required is a study assessing the safety and efficacy of BELBUCA^® in pediatric patients and participation in a consortium with other holders of NDAs for long-acting opioids to assess and better understand the risk of abuse, misuse, addiction and overdose with opioids. Prescription sales of BELBUCA have significantly increased since promotion began.

~~Sustained~~Buprenorphine Extended Release~~Buprenorphine~~Injection is in development as an injectable, extended release, microparticle formulation of buprenorphine for the treatment of opioid dependence and chronic pain, the rights to which we secured when we entered into a definitive development and exclusive license option agreement from Evonik in October 2014. In 2015, we completed initial development work and preclinical studies which have resulted in the identification of a formulation we believe is capable of providing 30 days of continuous buprenorphine treatment. During apre-IND meeting with the FDA in November 2015, the FDA requested an additional study to assess the fate of the polymers used in the formulation. In 2016, we completed this study as well as additional preclinical work and other activities to support a planned Phase 1 clinical study. We submitted an Investigational New Drug application ~~(or IND)~~(“IND”) for this product candidate to the FDA in December 2016.

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

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

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

BREAKYL™ in the E.U. However, on December 8, 2017, Collegium provided us the required90-day notice regarding termination of the license and development agreement for ONSOLIS^® between us and Collegium. The license and development agreement for ONSOLIS^® between us and Collegium formally ended on March 8, 2018. We are working with Collegium to transfer the assets back to us and a final resolution of financial matters.

Efforts to extend our supply agreement with our ONSOLIS^® manufacturer Aveva ~~were~~have been unsuccessful and the agreement expired. However, we have ~~secured~~identified an alternate supplier and ~~are~~requested guidance from the FDA on the specifics required for obtaining approval to supply product from this new vendor. This will in ~~the process of qualifying the supplier~~part help us to ~~manufacturer~~better determine when ONSOLIS^® ~~for~~may be available to the ~~U.S. market.~~marketplace and help assist us as we seek a new commercial partnership arrangement. Based on our current estimates, we believe that we will submit the necessary documentation to FDA for qualification of the new manufacturer ~~in the second half of 2017.~~during 2018.

Comparison of the three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

ProductSales. We recognized ~~$7.9~~$9.8 million and ~~$2.1~~$7.8 million in product sales during the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. The increase is ~~principally~~ due to ~~the reacquisition~~increased sales of BELBUCA^® ~~in January 2017.~~

~~Product Royalty~~~~Revenues~~. We recognized $0.6 million and $0.4 million in product royalty revenue during the three months ended June 30, 2017 and 2016, respectively. Of the aforementioned amounts, $0.4 million and $0.2 million, respectively, can be attributed to royalties on netfrom our internal sales ~~of BREAKYL~~^™ ~~under our license agreement with Meda. We recognized $0.2 million in PAINKYL~~^™ ~~royalty revenue in each of the three months ended June 30, 2017 and 2016, respectively, under our license agreement with TTY. The revenue increase is principally due to higher BREAKYL~~^™ ~~royalty revenue during the three months ended June 30, 2017 as compared to June 30, 2016.~~

~~Research and Development Reimbursements~~. We recognized $0.2 million of reimbursable revenue related to our agreement with Collegium during the three months ended June 30, 2017. There was no such revenue recognized during the same period ended June 30, 2016.

~~Contract Revenues~~. We recognized $2.5 million in contract revenue during the three months ended June 30, 2016 upon execution of our license agreement with Collegium. There was no such contract revenue during the three months ended June 30, 2017.

~~Cost~~of~~Sales~~. We incurred $4.2 million and $4.1 million in cost of sales during the three months ended June 30, 2017 and 2016, respectively. Cost of sales during the three months ended June 30, 2017 was related primarily to BELBUCA^® ~~and BUNAVAIL~~^®~~, which included $2.4 million of product cost, royalties paid and depreciation, and $1.1 million of fair value of the inventory purchased related to the BELBUCA~~^® reacquisition. Additionally, we paid a total of $0.4 million in quarterly minimum royalty payments to CDC IV, LLC (“CDC”). Cost of sales during the three months ended June 30, 2017 also included $0.2 million and $0.02 million related to BREAKYL^™ ~~and PAINKYL~~^™~~, respectively. Cost of sales during the three months ended June 30, 2016 was $1.7 million for BUNAVAIL~~^®, which included $1.7 million of product cost, royalties paid, lower of cost or market adjustment, and depreciation. Additionally, we incurred a total of $2.3 million in quarterly minimum and royalty payments to CDC and to Meda under the terms of the Collegium contract. Cost of sales during the three months ended June 30, 2016 also included $0.09 million and $0.04 million related to BREAKYL^™ ~~and PAINKYL~~^™~~, respectively.~~

~~Selling, General and Administrative Expenses~~. During the three months ended June 30, 2017 and 2016, general and administrative expenses totaled $16.0 million and $12.5 million, respectively. Selling, general and administrative costs include commercialization costs for BELBUCA^® ~~and BUNAVAIL~~^®, legal, accounting and management wages, and consulting and professional fees, travel costs, amortization and stock compensation expenses. During the normal course of business, we accrue additional expenses for certain legal matters from time to time, including legal matters related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet.

During the three months ended June 30, 2017 and 2016, selling, general and administrative expenses included $2.5 million and $2.9 million of stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors. Also included in the three months ended June 30, 2017 is amortization expense of $1.1 million for the intangible related to the BELBUCA^® ~~reacquisition.~~

~~Interest expense~~. During the three months ended June 30, 2017, we had net interest expense of $1.9 million, consisting of $1.4 million of scheduled interest payments, $0.3 million of related amortization of discount and loan costs and $0.2 million of warrant interest expense, all related to the February 2017 CRG Term Loan Agreement. During the three months ended June 30, 2016, we had net interest expense of $0.9 million, consisting of $0.7 million of scheduled interest payments, $0.1 million of related amortization of discount and loan costs and $0.1 million of warrant interest expense, all related to the July 2013 secured loan facility from MidCap.

~~Derivative gain~~. Our derivative liability consists of free standing warrants measured at their fair market value, using the Black-Scholes model. During the three months ended June 30, 2016, our stock price decreased by $0.87. This is the largest component of the Black-Scholes change. As a result, our derivative liability also decreased, resulting in a $0.02 million credit to income. There were no derivatives or associated warrants during the three months ended June 30, 2017.

~~Product Sales.~~ ~~We recognized $15.7 million and $4.2 million in product sales during the six months ended June 30, 2017 and 2016, respectively. The increase is principally due to the reacquisition of BELBUCA~~^® ~~in January 2017.~~force. Also included in the aforementioned product sales during the ~~six~~three months ended ~~June 30,~~March 31, 2017 is $1.7 million of revenue recorded as a result of changing to thesell-in method as of January 1, 2017, which related to units of BUNAVAIL^® shipped prior to January 1, 2017.

Product Royalty ~~Revenues~~Revenues.. We recognized ~~$2.3~~$0.4 million and ~~$1.3~~$1.7 million in product royalty revenue during the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. ~~Of the aforementioned amounts, $1.2 million and $0.8 million, respectively, can be attributed to royalty revenue from BREAKYL~~^™ ~~under our license agreement with Meda. We recognized $0.7 million in milestones related to our agreement with Endo during the six months ended June 30, 2017.~~ We recognized $0.4 million ~~in each of the six months ended June 30, 2017~~ and ~~2016~~$0.2 million in PAINKYL^™ product royalty revenue during the three months ended March 31, 2018 and 2017, respectively, under our license agreement with TTY. Also, during the three months ended March 31, 2017, we recognized ~~$0.3~~$0.7 million in ~~ONSOLIS~~product royalty revenue related to BELBUCA^® ~~royalty revenue during~~under our prior agreement with Endo and $0.8 million related to a percentage of net sales of the ~~six months ended June 30, 2016~~BREAKYL™ product under our license agreement with ~~Collegium.~~Meda. The ~~royalty revenue increase results primarily~~decrease is due to the reacquisition BELBUCA^® in January 2017 from ~~higher~~Endo, which net sales ~~of BREAKYL~~^™~~during the six months ended June 30, 2017 as compared to June 30, 2016.~~are now shown under product sales.

Research and Development ~~Reimbursements~~Reimbursements.. We recognized ~~$0.3~~$0.02 million of reimbursable revenue related to our agreement with Collegium during the ~~six~~three months ended ~~June 30,~~March 31, 2017. There was no such reimbursable revenue during the three months ended March 31, 2018. The decrease is due to the program termination by Collegium.

Contract Revenues. We recognized ~~$0.004~~$1.0 million ~~of reimbursable~~as contract revenue in a milestone payment under our license agreement from Purdue related to ~~our agreement with Endo~~BELBUCA^® in Canada during the ~~six~~three months ended ~~June 30, 2016.~~

~~Contract Revenues~~.March 31, 2018. We also recognized $20.0 million of deferred revenue during the ~~six~~three months ended ~~June 30,~~March 31, 2017. The $20.0 million recognized in 2017 was received in November 2015 as partial payment from Endo for the BELBUCA^® NDA ~~approval. This amount~~approval and was deferred ~~upon receipt~~ because it was contingently refundable to Endo if a third party generic product was introduced in the U.S. during the patent extension period from 2020 to 2027. However, we entered into a Termination Agreement with Endo on December 7, 2016 which terminated the BELBUCA^® license to Endo effective January 6, ~~2017 and such deferred revenue was recognized. We recognized $2.5 million in contract revenue during the six months ended June 30, 2016 upon execution of our license agreement with Collegium.~~2017.

Cost of ~~Sales~~Sales.. We incurred ~~$9.8~~$3.4 million and ~~$6.6~~$5.6 million in cost of sales during the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. Cost of sales during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 was ~~$8.5 million for both~~related primarily to BELBUCA^® and BUNAVAIL^®^.~~Such~~, which included $2.9 million of product ~~costs include manufacturing,~~cost, royalties ~~and~~paid, lower of cost or net realized value, depreciation and ~~$2.0 million of fair value of the inventory purchased related to the BELBUCA~~^® ~~reacquisition.~~yield adjustments. Additionally, we paid a total of ~~$0.75~~$0.4 million in quarterly minimum ~~and~~ royalty payments to ~~CDC.~~CDC IV, LLC (“CDC”). Cost of sales during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 also ~~includes $0.4~~included $0.02 million and ~~$0.05~~$0.1 million related to BREAKYL^™ and PAINKYL^™, respectively. Cost of sales during the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 was ~~$3.7 million for~~related primarily to BELBUCA^® and BUNAVAIL^®^. ~~Such~~, which included $4.9 million of product ~~costs include manufacturing,~~cost, royalties paid, lower of cost or ~~market adjustment~~net realized value, and depreciation. Additionally, we paid a total of ~~$2.6~~$0.4 million in quarterly minimum ~~and~~ royalty payments to CDC ~~and Meda.~~IV, LLC (“CDC”). Cost of sales during the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 also ~~includes $0.3~~included $0.2 million and ~~$0.07~~$0.04 million related to BREAKYL^™ and PAINKYL^™, respectively. During the three months ended March 31, 2017, we recognized approximately $1.6 million of expense related to previously deferred BUNAVAIL^® cost of sales as a result of changing from the sell through to the sell in method of recognizing revenue. Additionally, during the three months ended March 31, 2017, we expensed approximately $0.9 million related to the fair value of purchased BELBUCA^® inventory from Endo. We did not record any deferred cost of sales nor fair value adjustments during the three months ended March 31, 2018.

Selling, General and Administrative Expenses.~~General~~~~and~~~~Administrative~~~~Expenses~~. During the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ general and administrative expenses totaled ~~$29.2~~$13.5 million and ~~$25.6~~$13.3 million, ~~respectively.~~respectively, which the 2017 amount includes $1.1 million of amortization expense related to the reacquisition of BELBUCA^®. Selling, general and administrative costs include commercialization costs for BELBUCA^® and BUNAVAIL^®, legal, accounting and management wages, and ~~stock-based compensation, legal, accounting~~consulting and ~~other~~ professional fees, travel costs, stock compensation expenses and ~~the~~ amortization of ~~our intangible assets including~~ the license and distribution rights intangible from the reacquisition of BELBUCA^®as~~noted above.~~.

Interest expense, net. During the normal course of business, we accrue additional expenses for certain legal matters from time to time, including legal matters related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet. The increase in selling, general and administrative expenses during 2017 can be primarily attributed to~~one-time~~ ~~costs for the design and printing of BELBUCA~~^® ~~proprietary promotional materials and the expense for educational weekend seminars that occurred from March through June along with the routine speakers program expenses for BELBUCA~~^® ~~writers as well as professional fees incurred for the BELBUCA~~^® ~~reacquisition transaction in January 2017 and $2.25 million of amortization expense related to the BELBUCA~~^®~~license and distribution rights intangible. No such amortization expense was incurred in the prior year.~~

~~During the six~~three months ended June 30, 2017 and 2016, selling, general and administrative expenses included $5.2 million and $5.9 million of stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors.

~~Interest~~~~expense~~. ~~During the six months ended June 30, 2017,~~March 31, 2018, we had net interest expense of ~~$4.8~~$2.5 million, consisting of ~~$1.4~~$1.9 million of scheduled interest payments and ~~$0.5~~$0.6 million of related amortization of discount and loan costs ~~and $0.3 million of warrant interest expense all~~ related to the February 2017 ~~CRG Term Loan Agreement. In addition,~~term loan agreement from CRG. During the three months ended March 31, 2017, we had ~~remaining $0.9~~net interest expense of $2.9 million, consisting of $0.4 million of scheduled interest payments and ~~$1.4~~$0.3 million of related amortization of discount and loan costs related to the February 2017 term loan agreement from CRG. In addition, we had remaining $0.5 million of scheduled interest payments and $1.7 million of related amortization of discount, loan costs and loan pay off ~~and $0.2 million of warrant interest expense all~~ related to the July 2013 secured loan facility from MidCap, which was paid off with the CRG term loan. During the six months ended June 30, 2016, we had net interest expense of $1.7 million, consisting of $1.4 million of scheduled interest payments, $0.2 million of related amortization of discount and loan costs and $0.1 million in warrant interest expense, all related to the July 2013 secured loan facility from MidCap.

The following table summarizes net product sales for the three ~~and six~~ month periods ended ~~June 30~~March 31 in thousands:


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2017			2016			2017			2016			2018			2017
BELBUCA^®	$	6,563		$	—		$	11,117		$	—		$	8,024		$	4,555
% of net product sales		83	%		0	%		71	%		0	%		82	%		58	%
BUNAVAIL^®		1,323			2,110			4,563			4,212			1,814			3,240
% of net product sales		17	%		100	%		29	%		100	%		18	%		42	%

Net product sales	$	7,886		$	2,110		$	15,680		$	4,212		$	9,838		$	7,795

Our research and development expenditures for our approved products and product candidates as of ~~June 30, 2017~~March 31 are as follows in thousands:


	Three Months Ended June 30,					Six Months Ended June 30,				Cumulative through June 30,		Three Months Ended March 31,				Cumulative through March 31,
	2017			2016		2017		2016		2017		2018		2017		2018
BELBUCA^®	$	424		$	—	$	606	$	1	$	638	$	1,752	$	183	$	124,449
BUNAVAIL^®		620			211		1,772		898		6,948		95		1,152		40,980
ONSOLIS^®		559			21		626		88		2,117		431		67		3,485
Buprenorphine Depot Injection		(110	)		280		1,021		1,827		6,711
Buprenorphine ER Injection													206		138		9,991
Clonidine Topical Gel*		96			429		235		1,194		6,780		—		1,131		27,519

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

At ~~June 30, 2017,~~March 31, 2018, we had cash ~~and cash equivalents~~ of approximately ~~$27.5~~$12.1 million. We used ~~$4.5~~$6.8 million of cash in operations during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 and had stockholders’ equity of ~~$26.3~~$1.4 million, ~~at June 30, 2017,~~ versus stockholders’ ~~deficit~~equity of ~~$17.7~~$8.9 million at December 31, ~~2016.~~2017. We ~~believe~~expect that we have sufficient cash to manage the business ~~under our current operating plan~~as currently planned into the second ~~half~~quarter of ~~2018. This~~2019, which assumes either access to an additional $15 million of loan proceeds through our term loan with CRG if we satisfy the third draw requirements, and/or further assumes our ability to access to the equity markets if we choose (or a combination of both debt and equity, if available) that would provide sufficient capital necessary to support the continued commercialization of BELBUCA^® and BUNAVAIL^®. Additionally, beginning April 2018, we have the ability to access to our previously established“at-the-market” offering program utilizing the universal shelf registration for up to $40 million of Common Stock. Our cash on hand estimation therefore assumes the availability of the foregoing capital sources and further assumes that we do not ~~accelerate the development of other opportunities available to us, engage in an extraordinary transaction or~~ otherwise face unexpected events, costs or contingencies, any of which could affect our cash ~~requirements.~~requirements from time to time.

Additional capital will be required to support ~~our~~the continued commercialization ~~activities for~~of our BELBUCA^® and BUNAVAIL^®~~, our planned development of buprenorphine depot injection,~~ products, the reformulation project for and the anticipated commercial relaunch of ONSOLIS^®, the potential continued development of Buprenorphine Extended Release Injection or other products which may be acquired or licensed by us, and for general working ~~capital.~~capital requirements. Based on product development timelines and agreements with our development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding. Additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all, which could leave our company without adequate capital resources.

Also, product development timelines and agreements with our development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding.

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

Readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of operations ~~during 2017~~in 2018 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.

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

Our contractual obligations as of ~~June 30, 2017~~March 31, 2018 are as follows in thousands:


	Payments Due by Period										Payments Due by Period
	Total		Less than 1 year*		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year*		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	1,808	$	336	$	701	$	740	$	31	$	1,556	$	343	$	715	$	498	$	—
Secured loan facility		45,162		—		7,527		30,108		7,527		60,162		—		25,068		35,094		—
Interest on secured loan facility		22,399		5,774		11,204		5,300		121		25,762		7,625		13,684		4,453		—
Minimum royalty expenses**		3,750		1,500		2,250		—		—		2,625		1,500		1,125		—		—

Total contractual cash obligations	$	73,119	$	7,610	$	21,682	$	36,148	$	7,679	$	90,105	$	9,468	$	40,592	$	40,045	$	—

As of ~~June 30, 2017,~~March 31, 2018, we had nooff-balance sheet arrangements.

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

~~Our condensed consolidated financial statements have been prepared in accordance with GAAP.~~ For information regarding our critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained in our annual report on Form10-K for the year ended December 31, ~~2016~~2017 (the ~~“2016~~“2017 Annual Report”)~~. As~~ and Note 1 of ~~January 1, 2017, we made a change to an accounting estimate~~the accompanying condensed consolidated financial statements in revenue recognition to recognize revenue on thesell-in method.

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

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

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

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

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

There were no changes in our internal control over financial reporting during our ~~second~~first quarter of ~~2017~~2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Certain information set forth in this Quarterly Report on Form10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (and the “Liquidity and Capital Resources” section thereof) and elsewhere may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to our plans, objectives, projections, expectations and intentions and other statements identified by words such as “projects,” “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” or similar expressions. These statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties, including those detailed in our filings with the SEC. Actual results, including, without limitation: (i) actual sales results (including the results of our continuing commercial efforts with BELBUCA^® and BUNAVAIL^®), (ii) the application and availability of corporate funds and our need for future funds, (iii) the timing for completion, and results of, scheduled or additional clinical trials and the FDA’s review and/or approval and commercial activities for our products and product candidates and regulatory filings related to the same or (iv) the results of our ongoing intellectual property litigations and patent office proceedings, may differ significantly from those set forth or anticipated in the

forward-looking statements. Such forward-looking statements also involve other factors which may cause our actual results, performance or achievements to materially differ from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary significantly from reporting period to reporting period. Such factors include, among others, those listed under Item 1A of our ~~2016~~2017 Annual Report and other factors detailed from time to time in our other filings with the SEC. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this Quarterly Report. We undertake no obligation to ~~publically~~publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

We are involved from time to time in routine legal matters incidental to our business. Based upon available information, we believe that the resolution of such matters will not have a material adverse effect on our condensed consolidated financial position or results of operations. Except as discussed below, we are not the subject of any pending legal proceedings and, to the knowledge of management, no proceedings are presently contemplated against us by any federal, state or local governmental agency.

~~On November 2,~~In 2010, Aquestive Therapeutics (formerly MonoSol Rx) (“Aquestive”) filed an action against us and our commercial partners for ONSOLIS^® in the Federal District Court of New Jersey (the ~~“DNJ”)~~DNJ) for alleged patent infringement and false marking. ~~We were formally served in this matter on January 19, 2011. MonoSol~~Aquestive claimed that our manufacturing process for ONSOLIS^®, which has never been disclosed publicly and which we and our partners maintain as a trade secret, ~~infringes~~infringed on its ~~patent (United States~~US Patent No. ~~7,824,588)~~7,824,588 (the’588 Patent). Later, two more patents were added to the action, US Patent No. 7,357,891 (the ~~“’588 Patent”). Of note, the BEMA~~^® ~~technology itself was not at issue in the case, nor is BELBUCA~~^® ~~or BUNAVAIL~~^®~~, but rather only the manner in which ONSOLIS~~^®~~, which incorporates the BEMA~~^® ~~technology, is manufactured. Pursuant to its complaint, MonoSol was seeking an unspecified amount of damages, attorney’s fees~~‘891 Patent) and ~~an injunction preventing future infringement of MonoSol’s patents.~~US Patent No. 7,425,292 (the ‘292 Patent).

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

~~In November 2011, the USPTO rejected~~ all 191 claims of MonoSol’s ’588 Patent. On January 20, 2012, we filed requests for reexamination before the USPTO of MonoSol’s US patent No 7,357,891 (the “’891 Patent”), and No 7,425,292 (the “’292 Patent”),

~~the two additional patents asserted by MonoSol, demonstrating that all claims of those two~~three patents were ~~anticipated by~~ substantially narrowed and/or obvious in the light of prior art references, including prior art references not previously considered by the USPTO, and thus invalid. The USPTO granted the requests for reexamination with respect to MonoSol’s ’292 and ’891 Patents. In its initial office action in each, the USPTO rejected every claim in each patent.

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

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

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

Importantly, in the case of MonoSol’s ’588 Patent, at the conclusion of the reexamination proceedings (and its appeals process), on April 17, 2014, the PTAB issued a Decision on Appeal affirming the Examiner’s rejection (and confirming the invalidity) of all the claims of the ’588 Patent. MonoSol did not request a rehearing by the May 17, 2014 due date for making such a request and did not further appeal the Decision to the Federal Court of Appeals by the June 17, 2014 due date for making such an appeal. Subsequently, on August 5, 2014, the USPTO issued a2012. A Certificate of Reexamination cancelling every claim in the ‘588 Patent ~~claims.~~was issued on August 5, 2014.

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

Indivior (formerly RB Pharmaceuticals Ltd.) and Aquestive Therapeutics (formerly MonoSol Rx)

On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and ~~MonoSol~~Aquestive (collectively, the ~~“RB Plaintiffs”)~~RB Plaintiffs) filed an action against us relating to our BUNAVAIL^® product in the United States District Court for the Eastern District of North Carolina (EDNC) for alleged patent infringement. BUNAVAIL^® is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL^®, which has never been disclosed publicly, infringes its ~~patent (United States~~US Patent No. ~~8,475,832)~~8,475,832 (the ~~“’832 Patent”)~~’832 Patent).

On May 21, 2014, the Court granted our motion to dismiss. In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and therefore, the dismissal will stand and the RB Plaintiffs lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the ‘832 Patent. If this occurs, based on our original position that our BUNAVAIL^® ~~product does not infringe the ‘832 Patent, we would defend the case vigorously (as we have done so previously), and we anticipate that such claims against us ultimately would be rejected.~~

On September 20, 2014, ~~based upon our position and belief that our BUNAVAIL~~^® ~~product does not infringe any patents owned by the RB Plaintiffs,~~ we proactively filed a declaratory judgment action in the United States District Court for the ~~Eastern District of North Carolina (the “EDNC”),~~EDNC requesting the Court to make a determination that our BUNAVAIL^® product does not infringe the ~~RB Plaintiffs’ ’832~~‘832 Patent, US Patent No. 7,897,080 (the ~~“’080 Patent”)~~‘080 Patent) and US Patent No. 8,652,378 (the ~~“’378 Patent”)~~‘378 Patent). ~~With~~We invalidated the ~~declaratory judgment, there is~~‘080 Patent in its entirety in an ~~automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden~~inter partesreexamination proceeding. We invalidated all relevant claims of ~~showing that the stay should be lifted. For~~ the ‘832 Patent ~~the January 15, 2014~~in aninter partesreview (IPR) proceeding. And, in an IPR was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal Circuit affirmed the USPTO’s decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possibleproceeding for the ~~RB Plaintiffs. The ’832 IPR was finally resolved with the invalidation of claims15-19.~~ ~~For the ’080~~‘378 Patent, ~~all claims have been rejected~~ in an~~inter~~~~partes~~ reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the PTAB in a decision dated March 27, 2015. In May 2015, the RB Plaintiffs filed a response after the decision to which we filed comments. In December 2015, the PTAB denied MonoSol’s request to reopen prosecution, but provided MonoSol an opportunity to file a corrected response. MonoSol filed the request in December 2015 and we subsequently filed comments on December 23, 2015. The PTAB issued a communication on July 7, 2016 denying MonoSol’s request to reopen prosecution of the rejections of all claims over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds. MonoSol failed to appeal the final decision and all claims were cancelled in a reexamination certificate issued May 9, 2017.

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

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

On October 28, 2014, we filed multiple IPR ~~requests~~petitions on ~~the ’167 Patent demonstrating that~~ certain claims of ~~such patent were anticipated by or obvious in light of prior art references, including prior art references not previously considered by~~ the ~~USPTO, and thus, invalid.~~’167 Patent. The USPTO instituted three of the four IPR ~~requests~~petitions. The PTAB upheld the claims and ~~we filed a request for rehearing for~~denied collateral estoppel applied to the ~~non-instituted IPR. The final decisions finding all claims patentable were issued~~PTAB decision in March ~~2016 and we filed a Request for Reconsideration in the USPTO in April 2016, which was denied in September 2016 and appealed~~2016. This case is currently on appeal to Court of Appeals for the Federal Circuit. The USPTO intervened with respect to whether collateral estoppel applied to the PTAB. The Federal Circuit ~~(the “Federal Circuit”) in November 2016. The appeal is currently proceeding in~~did not issue an affirmance without opinion after the February 7, 2018 oral argument. As such, we anticipate receiving a decision from the Federal Circuit ~~with final briefing due August 7, 2017. Regardless of the outcome of the appeal, we believe that BUNAVAIL~~^® ~~will be found not to infringe the claims of the ’167 patent.~~sometime in 2018.

On January 22, 2014, ~~MonoSol filed a Petition for~~Aquestive initiated an IPR on USthe ‘019 Patent, ~~No. 7,579,019 (the “’019 Patent”).~~which was instituted. The Petition asserted that the claims of the ’019 Patent are alleged to be unpatentable over certain prior art references. The IPR was instituted on August 6, 2014. An oral hearing was held in April 2015 and a decision upholding all seven claims was issued August 5, 2015. In September 2015, MonoSol requested that the PTAB rehear the IPR. On December 19, 2016, the PTAB issued a final decision denying MonoSol’s request for rehearing. MonoSol did not file a notice of appeal to the Federal Circuit by February 20, 2017, therefore, PTAB’s decision upholdingupheld all claims of our ~~’019~~‘019 Patent ~~will be final~~in 2015 and ~~unappealable.~~this decision was not appealed by Aquestive.

On January 13, 2017, ~~MonoSol~~Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ~~’167 patent.~~‘167 Patent. In lieu of answering the complaint, we filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case has been transferred to Delaware District Court. On October 31, 2017 we filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on December 1, 2017. We anticipate receiving a final decision from the District Court in the 2nd quarter of 2018. We strongly refute as without merit ~~MonoSol’s~~Aquestive’s assertion of patent infringement and will vigorously defend the lawsuit.

On February 8, 2016, we received a notice relating to a Paragraph IV certification from ~~Actavis Laboratories UT, Inc.~~Teva Pharmaceuticals USA (“~~Actavis”~~Teva”) (formerly Actavis) seeking to find invalid three Orange Book listed patents (the ~~“BUNAVAIL~~^® ~~Patents”~~“Patents”) relating specifically to BUNAVAIL^®. The Paragraph IV certification ~~relates~~related to an Abbreviated New Drug Application (the “ANDA”) filed by ~~Actavis~~Teva with the ~~FDA~~U.S Food and Drug Administration (“FDA”) for a generic formulation of BUNAVAIL^®. The ~~BUNAVAIL~~^®Patents subject to ~~Actavis’~~Teva’s certification ~~are U.S.~~were the ’019 Patent, ~~Nos. 7,579,019 (the “’019 Patent”),~~ 8,147,866 (the “’866 Patent”) and 8,703,177 (the “’177 Patent”). Under the Food Drug and Cosmetic Act, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Amendments”), after receipt of a valid Paragraph IV notice, we may, and in this case did, bring a patent infringement suit in federal district court against Actavis within 45 days from the date of receipt of the certification notice.

On March 18, 2016, we ~~filed a complaint in Delaware against Actavis, thus we are entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BUNAVAIL~~^®~~. The 30 month stay is expected to preempt any final approval by the FDA on Actavis’ ANDA until at least August of 2018.~~

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

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

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

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

~~Finally, on~~strengths. On June 20, 2017, the Court entered orders staying both BUNAVAIL^® suits at the request of the parties.

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

We received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents (the ~~“BELBUCA~~^® ~~Patents”~~“Patents”) relating specifically to BELBUCA^®. The Paragraph IV certifications relate to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA^®. The Patents subject to Teva’s certification ~~are U.S.~~were the ’019 Patent ~~Nos. 7,579,019 (the “’019 Patent”)~~ and ~~8,147,866 (the “’866 Patent”). Under~~ the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, we may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of receipt of the certification notice.’866 Patent. We filed complaints in Delaware against Teva on December 22, 2016 and February 3, ~~2017, thus~~2017in which we ~~are entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA~~^®. The 30 month stay is expected to preempt any final approval by the FDA on Teva’s ANDA Nos. 209704 and 209772 until at least May of 2019 and for Teva’s ANDA No. 209807 until at least June of 2019.

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

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

~~A five (5) day bench trial~~On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BELBUCA^® product.

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

In February 2018, we announced that we had entered into a settlement agreement with Teva that resolved our BELBUCA^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the settlement agreement, which is ~~currently scheduled~~subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we have granted Teva anon-exclusive license (for which we will receive no current or future payments) that permits Teva to first begin selling the generic version of our BELBUCA^® product in the U.S. on ~~November 19,~~January 23, 2027 or earlier under certain circumstances (including, for example, upon (i) the delisting of thepatents-in-suit from the U.S. FDA Orange Book, (ii) the granting of a license by us to a third party to launch another generic form of BELBUCA^® at a date prior to January 23, 2027, or (iii) the occurrence of certain conditions regarding BELBUCA^® market share). Other terms of the Agreement are confidential.

~~The following risk factor~~Actions of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.

Activist investors may attempt to effect changes in our strategic direction and how our company is ~~provided regarding~~governed or may seek to acquire control over our ~~loan agreement~~company. Some investors (commonly known as “activist investors”) seek to increase short-term stockholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. Activist campaigns can also seek to change the composition of our board of directors, and campaigns that contest or conflict with ~~CRG:~~

Weour strategic direction could have an adverse effect on our results of operations and financial condition as responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of our board of directors and senior management from the pursuit of our business strategies. In addition, perceived uncertainties as to our future direction that can arise from potential changes to the composition of our board of directors sought by activists may ~~not qualify~~lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. For example, in April 2018, we received a notification from a shareholder indicating that they intend to nominate certain individuals to serve on our Board of Directors for ~~additional lending under~~election at our ~~loan agreement with CRG. If we~~2018 annual meeting of stockholders. These types of actions could divert our management’s attention from our business or cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not ~~have access to such funds, our cash position could become materially impaired.~~

~~Under our loan agreement with CRG, we may qualify for two additional tranches of $15 million each only if we are able to achieve certain minimum net revenue~~necessarily reflect the underlying fundamentals and ~~market capitalization thresholds. There is a risk that we may not achieve one or more of these thresholds for reasons both within and outside~~prospects of our control, and our inability to meet these conditions would deny us access to additional funding from CRG. If we do not have access to additional CRG funding, and if we are unable to secure other sourcesbusiness, all of ~~funding (which may be unavailable on desirable terms, and may not be available at all), our cash position could become materially impaired,~~ which ~~in turn~~ could have a material adverse effect on our company.

Social issues around the abuse of opioids, including law enforcement and other legal concerns over diversion of opioids and regulatory efforts to combat abuse, misuse and addiction, could impact the potential market for BELBUCA^®, BUNAVAIL^® and any product candidates we may develop that contain opioids.

Opioid abuse in the United States is a significant healthcare issue, and our two currently marketed products (BELBUCA^® and BUNAVAIL^®) contain opioids as their active ingredients. Media stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are commonplace. Law enforcement and regulatory agencies have and will likely continue to apply policies and guidelines that seek to limit the availability or use of opioids. In addition, federal, state and local governments have and may enact legislation or executive orders with similar goals. State and local governments have also taken legal action against opioid manufacturers to recoup alleged damages arising out of the opioid crisis. Such efforts have challenged and could inhibit our ability to commercialize BELBUCA^® and BUNAVAIL^® and any product candidates we may develop that contain opioids.

Aggressive enforcement and unfavorable publicity regarding, for example, the use or misuse of oxycodone or other opioid drugs; the limitations of abuse-resistant formulations; the ability of drug abusers to discover previously unknown ways to abuse opioid

drugs; public inquiries and investigations into prescription drug abuse; litigation; or regulatory activity regarding sales, marketing, distribution or storage of opioid drugs could have a material adverse effect on our business. Additionally, there may be continued reluctance of some regulators and third-party payers to pay a premium for abuse-deterrent formulations of opioids or opioids such as BELBUCA^® with less abuse and addiction potential compared to Schedule II opioids. These factors could reduce the potential size of the market for BELBUCA^®, and possibly BUNAVAIL^® and our product candidates and decrease the revenues we are able to generate from their sale.

Efforts by the FDA and other regulatory bodies to combat abuse of opioids may negatively impact the market for BELBUCA^® and BUNAVAIL^®. For example, 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 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 throughstate-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 does not specifically address the use of buprenorphine for chronic pain or make treatment recommendations about the use of abuse-deterrent opioids.

In addition, at least 41 U.S. states and many cities and counties have filed civil suits or instituted other proceedings against opioid manufacturers and wholesalers of opioid drugs seeking damages under various claims for contributing to the opioid crisis. Such litigations could further damage the market for opioid products like BELBUCA^® and BUNAVAIL^®. To the extent our company is named in such lawsuits (such as the lawsuit in Arkansas described under “Legal Proceedings”), we could be required to participate in the settlement of such litigations or the payment of damages, which could divert our management’s attention from our business, deplete our financial resources, and damage our reputation.

We are nearing the limit on our authorized common stock, ~~price.~~which could impact our financing and other activities. Also, additional authorized shares of our common stock and preferred stock available for issuance may adversely affect the market for our common stock.

As of May 10, 2018, there are 58,646,522 shares of common stock issued and 58,631,031 shares of common stock outstanding and there were 2,139,000 shares issued and 2,093,155 outstanding of Series ANon-Voting Convertible Preferred Stock issued and outstanding. We also have 2,504,206 shares of common stock reserved for future issuance under our equity incentive plan, outstanding equity awards and outstanding warrants. Our certificate of incorporation currently provides for 75,000,000 authorized shares of common stock. As such, we are nearing the limit of our authorized common stock, and we will be asking our stockholders to approve an amendment to our certificate of incorporation to increase the number of authorized shares of common stock at our next annual meeting of stockholders. Prior to such meeting, or after if such amendment in not approved, we may be unable to issue common stock for a variety of purposes, including most importantly for financing purposes. This limitation on our ability to issue common stock could have a material adverse effect on our ability to finance and operate our business.

Moreover, and even if our certificate of incorporation is amended to increase our authorized shares of common stock, in the event that any future financing should be in the form of, be convertible into or exchangeable for, equity securities, and upon the exercise of options and warrants, investors would experience dilution, and sales of common stock by stockholders in the market could lower the price of our common stock and the value of our company.

Finally, in addition to the above referenced shares of common stock (which may be issued without stockholder approval), we have 5 million shares of authorized preferred stock, of which 2,139,000 shares have been designated as Series ANon-Voting Convertible Preferred Stock. The remaining 2,290,700 shares of preferred stock remain undesignated shares of preferred stock, the terms of which may be fixed by our board of directors. We have issued preferred stock in the past, and our board of directors has the authority, without stockholder approval, to create and issue one or more additional series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock may have an adverse effect on the holders of common stock.

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


Delaware		35-2089858
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4131 ParkLake Ave., Suite 225, Raleigh, NC		27612
(Address of principal executive offices)		(Zip Code)


		Page
Part I. Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017		1

	Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		2

	Condensed Consolidated Statement of Stockholders’ Equity ~~(Deficit)~~ for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018		3

	Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		4

	Supplemental Cash Flow information for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		5

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2520

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		3125

Item 4.	Controls and Procedures		3125

Cautionary Note on Forward Looking Statements			3225

Part II. Other Information

Item 1.	Legal Proceedings		3226

Item 1A.	Risk Factors		3628

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3630

Item 3.	Defaults upon Senior Securities		3630

Item 4.	Mine Safety Disclosures		3630

Item 5.	Other Information		3630

Item 6.	Exhibits		3730

Signatures			S-1

Certifications


	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues:
Product sales	$	7,886		$	2,110		$	15,680		$	4,212
Product royalty revenues		613			394			2,273			1,328
Research and development reimbursements		245			—			267			4
Contract revenues		—			2,500			20,000			2,500

Total Revenues:		8,744			5,004			38,220			8,044

Cost of sales		4,171			4,094			9,816			6,644

Expenses:
Research and development		1,590			4,008			4,260			9,385
Selling, general and administrative		15,970			12,496			29,227			25,551

Total Expenses:		17,560			16,504			33,487			34,936

Loss from operations		(12,987	)		(15,594	)		(5,083	)		(33,536	)
Interest expense		(1,878	)		(914	)		(4,764	)		(1,691	)
Derivative gain		—			22			—			22
Other expense, net		(14	)		—			(15	)		(14	)
Bargain purchase gain		—			—			27,336			—

(Loss) income before income taxes	$	(14,879	)	$	(16,486	)	$	17,474		$	(35,219	)
Income tax benefit		—			—			15,972			—

Net (loss) income attributable to common stockholders	$	(14,879	)	$	(16,486	)	$	33,446		$	(35,219	)

Basic
Basic (loss) income per share:	$	(0.27	)	$	(0.31	)	$	0.61		$	(0.66	)

Weighted average common stock shares outstanding:		55,388,774			53,594,979			54,949,901			53,412,813

Diluted
Diluted (loss) income per share:	$	(0.27	)	$	(0.31	)	$	0.60		$	(0.66	)

Diluted weighted average common stock shares outstanding:		55,388,774			53,594,979			55,836,769			53,412,813


	Three Months Ended March 31,
	2018			2017
Revenues:
Product sales	$	9,838		$	7,795
Product royalty revenues		440			1,661
Research and development reimbursements		—			22
Contract revenue		1,003			20,000

Total revenues		11,281			29,478

Cost of sales		3,415			5,645

Expenses:
Research and development		2,484			2,671
Selling, general and administrative		13,505			13,259

Total expenses		15,989			15,930

(Loss) income from operations		(8,123	)		7,903

Interest expense, net		(2,505	)		(2,886	)
Bargain purchase gain		—			27,336
Other expense, net		(7	)		—

(Loss) income before income taxes	$	(10,635	)	$	32,353

Income tax (expense) benefit		(74	)		15,972

Net (loss) income attributable to common stockholders	$	(10,709	)	$	48,325

Basic:
Weighted average common stock shares outstanding		58,062,997			54,519,574

Basic (loss) earnings per share	$	(0.18	)	$	0.89

Diluted:
Diluted weighted average common stock shares outstanding		58,062,997			55,431,628

Diluted (loss) earnings per share	$	(0.18	)	$	0.87


	Preferred Stock Series A				Common Stock				Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ (Deficit) Equity
	Shares		Amount		Shares		Amount		Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ (Deficit) Equity
Balances, January 1, 2017		2,093,155	$	2		54,133,511	$	54	$	292,667		$	(47	)	$	(310,341	)	$	(17,665	)
Stock-based compensation		—		—		—		—		6,000			—			—			6,000
Restricted stock awards		—		—		1,357,952		1		(1	)		—			—			—
Issuance of warrants		—		—		—		—		4,489			—			—			4,489
Net income		—		—		—		—		—			—			33,446			33,446

Balances, June 30, 2017		2,093,155	$	2		55,491,463	$	55	$	303,155		$	(47	)	$	(276,895	)	$	26,270


	Preferred Stock Series A				Common Stock				Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount		Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balances, January 1, 2018		2,093,155	$	2		55,904,072	$	56	$	313,922		$	(47	)	$	(305,056	)	$	8,877

Stock-based compensation		—		—		—		—		2,921			—			—			2,921
Stock option exercise		—		—		63,295		—		130			—			—			130
Restricted stock awards		—		—		1,038,957		1		(1	)		—			—			—
Common stock issuance upon retirement		—		—		1,640,198		2		(2	)		—			—			—
Cumulative effect of accounting change		—		—		—		—		—			—			135			135
Net loss		—		—		—		—		—			—			(10,709	)		(10,709	)

Balances, March 31, 2018		2,093,155	$	2		58,646,522	$	59	$	316,970		$	(47	)	$	(315,630	)	$	1,354


	Condensed Consolidated Balance Sheet
	March 31, 2018
	As reported			Balances without adoption of ASC 606			Effect of Adoption
Accounts receivable, net	$	8,123		$	7,798		$	325
Accumulated deficit	$	(315,630	)	$	(315,955	)	$	325

	Condensed Consolidated Statement of Operations
	Three months ended March 31, 2018
	As reported			Balances without adoption of ASC 606			Effect of Adoption
Total revenues	$	11,281		$	11,091		$	190
Net loss attributable to common stockholders	$	(10,709	)	$	(10,899	)	$	190


	Balance at December 31, 2017			Adjustment due to implementation of ASC 606		Balance at January 1, 2018
Accounts receivable, net	$	8,852		$	135	$	8,987
Accumulated deficit	$	(305,056	)	$	135	$	(304,921	)


	Balance at January 1, 2018		Three months ended March 31, 2018			Balance at March 31, 2018
Accounts receivable with customers	$	8,987	$	(864	)	$	8,123


*Asset purchase price:*
Deferred cash consideration to Endo	$	7,536

Total asset purchase price	$	7,536

*Estimated fair value of assets acquired:*
Current BELBUCA^® product inventory andwork-in process	$	5,412
BELBUCA^®-related manufacturing equipment		432
License and distribution rights intangible assets		45,000
Deferred tax liability		(15,972	)

Amount attributable to assets acquired	$	34,872

Bargain purchase gain	$	(27,336	)


(in thousands, except per share data)	December 31, 2016 (unaudited)
Revenue	$	25,010
Net loss	$	(201,769	)
Pro forma net loss per common share
Basic	$	(3.76	)
Diluted	$	(3.76	)


2017	$	—
2018		—
2019		—
2020		15,054
2021		15,054
2022		15,054

Total maturities	$	45,162
Unamortized discount and loan costs		(9,911	)

Total CRG obligation	$	35,251


	Three months ended,				Six months ended,
Stock-based compensation expense	June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Research and Development	$	0.4	$	0.5	$	0.8	$	1.6
Selling, General and Administrative	$	2.5	$	2.9	$	5.2	$	5.9


Expected price volatility		~~78.25% - 78.64%~~60.41%-68.77%
Risk-free interest rate		~~1.82% - 2.01%~~2.05%-2.60%
Weighted average expected life in years		6 years
Dividend yield		—


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2017		3,468,991		$	4.14
Granted in 2017
Officers and Directors		—			—
Others		807,503			1.90
Exercised		—			—
Forfeitures		(1,011,979	)		6.07

Outstanding at June 30, 2017		3,267,515		$	2.99	$	1,277


	Number of shares			Weighted average exercise price per share		Aggregate intrinsic value
Outstanding at January 1, 2018		2,712,954		$	2.98	$	1,190

Granted in 2018:
Employees		618,174			2.50
Exercised		(63,295	)		2.05
Forfeitures		(201,989	)		4.64

Outstanding at March 31, 2018		3,065,844		$	2.80	$	292


	Number of restricted shares			Weighted average fair market value per RSU
Outstanding at January 1, 2018		4,706,895		$	5.20
Granted:
Executive officers		463,129			2.10
Directors		375,305			2.18
Employees		317,177			2.10
Vested		(1,038,957	)		2.35
Forfeitures		(235,110	)		2.52
Conversions		(1,640,198	)		2.68

Outstanding at March 31, 2018		2,948,241		$	3.02


	Number of Restricted Shares			Weighted Average Fair Market Value Per RSU
Outstanding at January 1, 2017		4,584,297		$	7.29
Granted:
Executive officers		1,640,000			1.80
Directors		—			—
Employees		540,000			2.04
Vested		(1,357,952	)		2.04
Forfeitures		(425,676	)		2.84

Outstanding at June 30, 2017		4,980,669		$	5.04

13.
~~Expected price volatility~~		~~78.39%~~
~~Risk-free interest rate~~		~~1.92%~~
~~Weighted average expected life in years~~		~~6 years~~
~~Dividend yield~~		— Earnings per common share:


Number		Description

31.1		Certification of ~~Chief~~Principal Executive Officer Pursuant To Sarbanes-Oxley Section 302 (*)

31.2		Certification of Chief Financial Officer Pursuant To Sarbanes-Oxley Section 302 (*)

32.1		Certification Pursuant To 18 U.S.C. Section 1350 (*)

32.2		Certification Pursuant To 18 U.S.C. Section 1350 (*)

101.ins		XBRL Instance Document

101.sch		XBRL Taxonomy Extension Schema Document

101.cal		XBRL Taxonomy Calculation Linkbase Document

101.def		XBRL Taxonomy Definition Linkbase Document

101.lab		XBRL Taxonomy Label Linkbase Document

101.pre		XBRL Taxonomy Presentation Linkbase Document


	BIODELIVERY SCIENCES INTERNATIONAL, INC.

Date: ~~August 9, 2017~~May 10, 2018

	By:	/s/ ~~Mark A. Sirgo~~Scott M. Plesha
		~~Mark A. Sirgo,~~ President ~~Chief Executive Officer and Vice Chairman~~ (Principal Executive Officer)

Date: ~~August 9, 2017~~May 10, 2018

	By:	/s/ Ernest R. De Paolantonio
		Ernest R. De Paolantonio, Secretary, Treasurer and Chief Financial Officer (Principal Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company